Do you know what indirect tax is? Indirect tax definition is: A tax that is collected by one party in the supply chain (e.g., a manufacturer or retailer) and transferred to the government is known as an indirect tax. But which is an indirect tax? How does it work in the U.S.?
Indirect taxes are added to the cost of purchasing products or services. The customer bears the burden of paying them. Even if the producer or merchant collects the tax, the consumer pays it through increased pricing.
L&Y Tax Advisor explains which is an indirect tax, how it works, its common examples, and some relevant exceptions in the United States.
How does an Indirect Tax Work?
Direct taxes are paid directly to the government by individuals or companies. However, indirect taxes are gathered by one party and sent to the government.
The customer indirectly bears the cost of indirect tax through increased product costs. Indirect taxes include excise levies on goods like cigarettes, alcohol, and gasoline.
Regressive Nature of an Indirect Tax
Regressive taxes disproportionately impact those with lower incomes. Indirect taxes are commonly seen this way because the tax rate is the same for all taxpayers, irrespective of their income level.
For instance, a television’s import tariff is the same whether the buyer makes $25,000 or $150,000 yearly.
Lower-income customers may bear a greater cost from indirect tax, as it does not consider their financial situation.
Common Indirect Tax Examples
Import taxes are a well-known indirect tax that importers must pay when their goods enter the country. Customers indirectly pay this tax when they buy imported items, even if they are unaware of it.
Indirect taxes also include production-level levies like carbon emission costs transferred to customers. Value-added taxes (VAT) are also possible indirect sales taxes if they are applied at various stages of the production process.
Read: What is a VAT number in the US?
What are Indirect Taxes in the U.S.?
Sales taxes are one type of indirect tax in the United States. These are paid to companies rather than the government directly. Indirect taxes can include import taxes on goods brought into the United States. There is no national sales tax in the United States. However, businesses may increase prices to cover their tax expenses.
The Bottom Line
Knowing which is an indirect tax can help you differentiate it from direct taxes. Regardless of income, indirect taxes are ordinary and impact all customers. The final cost-bearer is the customer through increased product prices, even if businesses get these taxes.
Connect with our tax consultancy services for further assistance.
