Retail Sales Tax Research Articles

The VAT at 100: A Retrospective Survey and Agenda for Future Research

We take stock of what is known about the consequences of actual value-added tax (VAT) systems, nearly 100 years since its conception. We benchmark it to the tax it most often replaced—the retail sales tax (RST). We do this not because we advocate a return to the RST, but because it allows us to evaluate the performance of two tax instruments in actual practice instead of comparing them to their idealized versions, which are never achieved. Doing so highlights different areas of focus than traditional comparisons to the “good” VAT. Like the RST, the VAT is weak at the final stage and technological advances that ameliorate VAT issues could also be applied to the RST. VAT introduces new evasion opportunities not possible in an RST such as invoice mills and carousel fraud. We propose new metrics and a research agenda to evaluate the “health” of the real VAT.

Value of Water Based upon Retail Sales Tax Revenue

In quantifying the benefits of compost amendments to soils for agricultural and urban use in terms of water conservation, there are many difficulties in conveying “value” of water due to the many different aspects of value to individuals and organizations. Perhaps the most universal metric for value is through the net monetary impact of water. Therefore, it is necessary to quantify the benefits by placing a dollar value on the amount of water conserved by amending soils with compost. In most of the literature, the value of water is rarely defined, and when it is the value presented is actually the “cost” of water production or reclamation. However, to truly understand the impacts of water conservation, a fuller vision of the value of water is needed beyond the costs of water. In this paper, the value of water is developed for the Rapid City, South Dakota area. With a value of water established, the benefits of soil compost amendments are calculated by evaluating the reduction of irrigation water needed for comparable crops and the value of the conserved water. In developing a value of water for Rapid City, South Dakota, the direct costs for water production are compared with the retail value of water and the economic activity enabled by a water supply. The average cost of water production for South Dakota cities averaged $0.004 per gallon ($0.001/Liter). The analysis of retail value and economic impact showed that water is valued at $0.71 per gallon ($0.19/Liter) for Rapid City and nine other South Dakota communities when calculated using the community’s retail sales records and economic reports. Efforts to find similar findings for the US were not found. With the value of water established for Rapid City and other South Dakota communities, the value benefits of compost amendments on water conservation are shown in direct monetary terms.

The Role of Digital Platforms in the Collection of VAT/GST and RST and Its Limits

This article examines whether it is appropriate to impose tax liability or collection duty of indirect consumption taxes like value added tax (VAT)/goods and services tax (GST) and retail sales tax (RST) on digital platforms that are not necessarily sellers of the goods or services themselves. This question includes the following considerations. First, is it allowed under international law for a country to impose tax liability on digital platforms just because its residents buy goods and services through them? Second, is it feasible for the country that imposes tax liability on digital platforms to collect taxes even if the platforms have no meaningful physical assets in the territory of the country? Third, under what condition is a country allowed to impose tax liability or collection duty on digital platforms when the tax is supposed to be borne by consumers in the country’s jurisdiction? Fourth, is a putative digital platform a direct seller of goods and services, and accordingly, is it liable to VAT/GST or RST as a supplier? This article presents the following arguments. First, a digital platform may be, in some cases, more properly identified as a party to a transaction with consumers rather than an intermediary for the purposes of private and tax laws. Second, before examining whether a provision that imposes tax liability on digital platforms meets the requirement of a genuine link or nexus under public international law, it is important to investigate whether the nature of the liability is in personam or in rem. Third, it is necessary to make sure that the consumer’s relationship with the digital platform is sufficiently close to justify the tax liability of the platform.

The VAT at 100: A Comprehensive Health Assessment, With a Plan of Care and Suggestions for Diagnostic Tests

This paper takes stock of what is known about the efficacy of actual Value Added Tax (VAT) systems, nearly 100 years since the tax was conceived. Existing VAT systems fall short of the idealized version on many dimensions, some by design and others unintended. Actual VATs might therefore have different equity and efficiency implications than an ideal VAT, although new technologies could bring practice closer to the ideal. Throughout the paper, we find a useful benchmark is the tax that the VAT most often replaced – the Retail Sales Tax (RST). Like the RST, the VAT is weak at the final consumer stage and technological advances that ameliorate VAT issues could also be applied to the RST. In addition, the VAT introduces some new opportunities for evasion not possible in an RST. A research agenda for the VAT should consider the efficiency and equity implications of real-life, imperfect VATs.

Washington’s 'Cutting-Edge' Technology Solution to Combating Sales Tax Fraud: Real-Time Data (Now), Real-Time Remittance in the Future

Globally, consumption tax compliance (value added tax and retail sales tax) has gone digital – digital invoices are becoming mandatory, centralized monitoring of transactions and tax payments are increasingly common, and artificial intelligence is assessing fraud risks in real-time. When tax is collected, it is increasingly being remitted in near-real-time. This is the trajectory for the modern retail sales tax (RST) imposed by most states in the US. While this may appear to be revolutionary to the average American, it is a well-worn path among global nations using the value added tax (VAT). The RST will eventually be following suit. Washington has taken the first step on this journey with the help and cooperation of a small business owner who admitted to using an Electronic Sales Suppression (ESS) device when operating a highly regarded Asian restaurant in Seattle. To address sophisticated tax fraud in the digital age, the Washington State Legislature commissioned a world-wide study, conducted by Gartner, Inc. was delivered April 22, 2019, to the Washington Department of Revenue (DOR) which in turn “... completed [its] review of relevant research into technology trends; Point of Sales (POS) solutions, the ecosystem of integrated retail software solutions, cloud technologies, [and] other underpinning technologies ...” The Gartner research effort was practical, market-driven, and encapsulated in a set of “... scenarios represent[ing] the full set of reasonable solutions for DOR’s consideration, ...” Gartner’s scenarios in the commissioned study were distilled to four. In each instance the scenarios were numbered, characterized with a single word, differentiated by their primary focus, and then made more concrete by identifying (what Gartner considered to be) a representative country for each scenario. • Alternative #1: Foundational – Internal Focus (“Like UK”) (more properly Japan) • Alternative #2: Targeted – External Focus (“Like Netherlands”) • Alternative #3: Broad – External Focus (“Like Belgium”) • Alternative #4: Cutting Edge – External Focus (“Like Fiji”) Unfortunately, the report has major deficiencies. Notably, it makes no reference to an ongoing pilot project conducted by the DOR as a result of a plea agreement in the State of Washington v. Wong, that initially followed an Gartner’s Alternative #2 approach, and then shifted to Gartner’s Alternative #4 to improve data monitoring scope and accuracy. This paper largely corrects the focus and the conclusions of the Gartner report, which (at some cost) completely missed an opportunity to contribute substantively to this field of endeavor. The State of Washington’s pilot program on preventive technology for monitor electronic sale suppression is extraordinary, both in its design and in its implementation. As pilot programs go, this is a uniquely marketplace-driven effort controlled by self-interest and achievement not by fiat. This is not a top-down pilot. It is a DOR hands-off, but outcome-controlled effort that forces the parties (POS providers, third-party security firms, and businesses/taxpayers) to explore the data security options that promise to counter suppression, and select the best. For example, there is no POS manufacturer or standardized file format, no third-party provider of security systems recommended or even suggested by the DOR (not in person, in regulation, nor on a DOR web site). The desired outcome is very clear, but the means each taxpayer will employ to achieve that outcome is not dictated. It is entirely up to the taxpayer to find an acceptable solution, pay for it, present it to the DOR and then convince the authority that this solution solves sales suppression, as the DOR sees it. There is no rule, regulation or other guidance provided by the DOR on what constitutes “a method acceptable to the department.” It is up to the taxpayer to find an acceptable method. In a very real sense, the State of Washington’s electronic monitoring pilot project has been designed, developed, and paid for by Ms. Yu-Ling Wong. Without her sincere efforts to try one solution after another, the State of Washington would not have an electronic monitoring pilot. Washington would not be on the “cutting edge” without her.

The New VAT General Reverse-Charge Mechanism

This short paper discusses the introduction of a general reverse-charge mechanism in the EU VAT system to address missing trader fraud. It argues that this move presents significant disadvantages, the most important of which is that it effectively transforms the VAT into a de facto Retail Sales Tax (RST), by removing the self-enforceability features that characterises it. It concludes that whilst a generalised reverse-charge mechanism may well kill missing trader fraud, in the process it may also give birth to a widespread, more fundamental, VAT compliance problem that will be much harder to either contain, or combat.

Piling On – How Provincial Taxation of Insurance Premiums Costs Consumers

Insurance premiums have been taxed by Canadian governments for so long – some provinces and municipalities collected small levies as early as the late 1800s – that they’ve become a fixture rarely discussed in the literature and the financial press. For many years, insurance premium taxes were collected from insurers as an alternative to taxing their profits. But this practice is now long gone since all Canadian governments tax the corporate income of insurance companies, in addition to premium taxes and other taxes and levies. Most insurance consumers do not know that a provincial insurance premium tax (IPT) ranging from 2 percent to 5 percent is levied on their premiums. In addition, five provinces charge a retail sales tax (RST) ranging from 6 to 15 percent on top of the premium taxes for certain types of insurance. In Quebec and Ontario, the RST rates of respectively 9 and 8 percent generally apply to group life and health insurance, and property and casualty insurance (although Ontario excludes auto insurance). Saskatchewan is the latest province to introduce an RST. Since insurance is a financial service, premiums are exempt from GST/HST. So why do provinces still tax insurance premiums? While IPTs and RSTs on premiums are largely invisible to customers on whom the burden ultimately falls, they generate more than $7 billion of stable and growing provincial government revenues – representing about 7 percent of all provincial taxes collected on goods and services. Premium-based taxes increase the price of insurance products and lower the demand for them. We find that an increase of one percentage point in the provincial IPT rate leads to a 10 percent decrease in the number of life insurance contracts sold. Reduced insurance coverage for natural disasters such as floods and earthquakes, other catastrophes, relief to a deceased's family, or relief of the financial burden of illness and disability may lead to increased cost pressures on government budgets down the road. Canadian governments should revisit and reassess the taxes imposed on insurance products. At a minimum, IPT liabilities should be made creditable against corporate income tax liabilities, partly restoring their original role as a substitute for taxing profits. And provinces that impose an RST on IPTinclusive premiums should lead the way and eliminate this form of double taxation. A more ambitious reform would remodel the patchwork of transaction taxes for insurance services to a comprehensive and broad-based, value-added system, bringing down the insurance industry's high transaction tax burden and ensuring greater comparability with other industries.

Summary of the General Discussion on “The Effect of an Introduction of Retail Sales Tax in China”

June 01 2018 Summary of the General Discussion on “The Effect of an Introduction of Retail Sales Tax in China” Author and Article Information Online Issn: 1536-0083 Print Issn: 1535-3516 © 2018 by the Asian Economic Panel and the Massachusetts Institute of Technology2018Massachusetts Institute of Technology Asian Economic Papers (2018) 17 (2): 24. https://doi.org/10.1162/asep_a_00603 Cite Icon Cite Permissions Share Icon Share Facebook Twitter LinkedIn MailTo Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Search Site Citation Summary of the General Discussion on “The Effect of an Introduction of Retail Sales Tax in China”. Asian Economic Papers 2018; 17 (2): 24. doi: https://doi.org/10.1162/asep_a_00603 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentAll JournalsAsian Economic Papers Search Advanced Search Suresh Narayanan commented that China has a strange value-added tax (VAT) in that it does not zero-rate agricultural products. Therefore, results cannot be generalized. Substituting VAT for business taxes is not heard of. He pointed out that a 5 percent decline in retail sales tax (RST) coupled with a 5 percent increase in VAT will not result in the same amount of government revenue collected because VAT has exemptions and thus the RST has to change more to result in revenue neutrality. The RST has a single collection point only, whereas the VAT has multiple collection points. Li and Liu's model does not take care of this difference in feature. Furthermore, Narayanan asked whether this model applies when there are no labor market frictions. He suggested that the model be extended in this direction. The authors agreed with Narayanan's observation that a decline in VAT and an increase in RST... You do not currently have access to this content.

The Effect of an Introduction of Retail Sales Tax in China

This paper develops a dynamic equilibrium model of overlapping generations to study the effect of an introduction of a retail sales tax (RST) in China. Total government tax revenue is fixed, consumption-type value-added tax (VAT) is reduced in response to the introduction of RST, and an output tax exists. An introduction of RST accompanied by a decrease in VAT increases capital accumulation and welfare in the steady state. In the transition period, an introduction of RST accompanied by a decrease in VAT increases capital accumulation but decreases the current generation's welfare. Simulations based on the data from China show that introducing an 8 percent RST increases capital accumulation by 0.43 percent in the steady state.

Comments by Shaoqing Huang, on The Effect of an Introduction of Retail Sales Tax in China

June 01 2018 Comments by Shaoqing Huang, on The Effect of an Introduction of Retail Sales Tax in China Author and Article Information Online Issn: 1536-0083 Print Issn: 1535-3516 © 2018 by the Asian Economic Panel and the Massachusetts Institute of Technology2018Massachusetts Institute of Technology Asian Economic Papers (2018) 17 (2): 22–23. https://doi.org/10.1162/asep_a_00602 Cite Icon Cite Permissions Share Icon Share Facebook Twitter LinkedIn MailTo Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Search Site Citation Comments by Shaoqing Huang, on The Effect of an Introduction of Retail Sales Tax in China. Asian Economic Papers 2018; 17 (2): 22–23. doi: https://doi.org/10.1162/asep_a_00602 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentAll JournalsAsian Economic Papers Search Advanced Search Shaoqing Huang: This paper revisits the classic question: Are value-added tax (VAT) and retail sales tax (RST) equivalent? Traditionally, the answer is “Yes.” In this paper, however, it is “No!” The innovation in this paper is introducing output tax into the model. In this scenario: (1) a decrease in VAT accompanied by a change in RST increases capital accumulation and the welfare in the steady state; (2) on the transition path, it decreases the current generation's welfare. The contribution of this paper is that it introduces a new mechanism through which RST and VAT have different effects on the economy. That is, they have different effects on capital supply (savings) and capital demand. When output tax is present, the first one dominates. To be concrete, when gamma (the rate of VAT) increases, MC for capital decreases, then capital demand increases; meanwhile, production decreases, then wage bill decreases, furthermore, saving decreases.... You do not currently have access to this content.

Comments by Sarah Daway, on The Effect of an Introduction of Retail Sales Tax in China

June 01 2018 Comments by Sarah Daway, on The Effect of an Introduction of Retail Sales Tax in China Author and Article Information Online Issn: 1536-0083 Print Issn: 1535-3516 © 2018 by the Asian Economic Panel and the Massachusetts Institute of Technology2018Massachusetts Institute of Technology Asian Economic Papers (2018) 17 (2): 21–22. https://doi.org/10.1162/asep_a_00601 Cite Icon Cite Permissions Share Icon Share Facebook Twitter LinkedIn MailTo Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Search Site Citation Comments by Sarah Daway, on The Effect of an Introduction of Retail Sales Tax in China. Asian Economic Papers 2018; 17 (2): 21–22. doi: https://doi.org/10.1162/asep_a_00601 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentAll JournalsAsian Economic Papers Search Advanced Search Sarah Daway: The introduction is still not well-structured/well-motivated and has to be reorganized. It is still unclear why introducing a RST would be more advantageous to China. Is it in terms of ultimately lower administrative costs (after the transitional phase), its anti-consumption bias, something else? This should be more clearly spelled out. Related to the previous comment: The paper should explain more clearly why raising the RST and reducing the VAT results in more capital accumulation. The paper mentions in several places that VAT and RST are equivalent—in what sense, though? VAT and RST can be made equivalent only in terms of the revenues they raise. Otherwise, the RST is essentially a tax on consumption and VAT is a tax on (value-added) production. It is in this sense that raising the RST, which makes consumption relatively more expensive to saving and, ultimately, accumulating capital, would result in higher capital accumulation.... You do not currently have access to this content.

A Hitchhiker's Guide to the OECD's International VAT/GST Guidelines

The OECD’s International VAT/GST Guidelines, which were released in their consolidated form at the OECD’s Global Forum on VAT in Paris in late 2015, are the culmination of nearly two decades of efforts to provide internationally accepted standards for consumption taxation of crossborder trade, particularly trade in services and intangibles. For an American tax journal, however, even one that regularly publishes articles addressed to international taxation, an article on VAT may seem to be an odd choice of a topic. After all, American exceptionalism continues to inform national tax policy, leaving the United States as the only country in the OECD (and among the overwhelming majority of countries worldwide) without a VAT. Nor does the United States have any other general consumption tax as part of its national tax structure. Moreover, even if one takes the liberty of describing the American subnational retail sales tax (RST) as a consumption tax, there are significant structural differences between the American single-stage RST and the multiple-stage collection process that defines the VAT, thus limiting the relevance of many VAT issues to the American consumption tax regime. Finally, and perhaps most fundamentally, there is the perception in international tax circles that the problems associated with income taxes are intellectually more challenging and thus more worthy of attention than those associated with VATs––problems that are often viewed as involving little more than cash-flow management.

‘Hybrid’ forms of taxing consumption: A viable alternative to EU VAT?

In the last decades, VAT/GST systems have proliferated across the globe and have usually replaced any eventual cumulative turnover taxes or retail sales taxes (RST) previously operated in the respective country of adoption. However, the input VAT credit inherent to a VAT/GST facilitates some particular types of tax fraud which are absent in a turnover tax or RST system, especially because the entitlement of the business customer to the tax credit is normally not contingent upon the prior payment of the corresponding VAT/GST liability by the supplier. The ensuing ‘VAT gap’ has fueled the debate in the EU whether VAT should be transformed into a so-called ‘general reverse charge regime’ that would be equivalent to a RST while maintaining the invoice and audit trail of a VAT system . The reform project has gained momentum recently due to a proposal by the Commission which would allow the temporary application of a generalised reverse charge mechanism by Member States that so desire. This article discusses the pros and cons of such a hybrid system.

VAT in a Federal System: Lessons from Canada

For many years it has been argued that the value‐added tax (VAT) is neither desirable nor feasible as a subnational tax. At the same time, the existence of state retail sales taxes (RSTs) has been seen by some to be a major obstacle to introducing a federal VAT in the United States. Canada has demonstrated that both these barriers can be overcome. A federal VAT can work well regardless how (or if) states tax sales. In addition, a federal VAT may make it more feasible for states, if they wish, to introduce their own VATs.

Misconceptions about Value‐Added and Retail Sales Taxes: Are They Barriers to Sensible Tax Policy?

Retail sales and value‐added taxes both aim to tax consumption, but lawmakers, the public, and academics view them differently. Several American states have sought increased retail sales tax (RST) reliance, some have argued for a national RST, but a value‐added tax (VAT) remains anathema. Conversely, international observers strongly reject the RST in favor of the VAT. This paper examines these views from the standpoints of administration, transparency, rate increases, and breadth to see how misconceptions might be involved.

‘Do You Want a Receipt?’ Combating VAT and RST Evasion with Lottery Tickets

Governments both in developed and developing countries are facing the problem of value added tax (VAT) and retail sales tax (RST) evasion. This explains a growing interest in policies alternative to the traditional methods of deterrence. This paper describes the achievements resulting from a zero cost policy against VAT and RST evasion based on rewards. Customers are encouraged to request an invoice by changing the invoice into a lottery ticket, thereby making VAT and RST fraud and evasion more difficult for suppliers. Such a policy has, for example, been introduced in some Asian countries. After having characterized VAT and RST evasion as a special kind of public good situation, a theoretical explanation based on behavioral Economics models of the success empirically registered by this policy will be discussed. Given this theoretical framework, we then introduce an empirical test in order to verify the ex-ante applicability of the policy described in different socio-economic contexts. Finally, we discuss the possible countervailing effects as well as the positive long-term side-effects of the introduction of the policy.

Black Swans: Recapitulative Statements/VIES (VAT) & Use Tax Reciprocity (RST)

There is fundamentally no difference between a value added tax (VAT), and a retail sales tax (RST) when it comes to collecting the tax on cross-border sales. If (under a VAT) a seller is allowed to “zero-rate” cross-border sales, or if (under a RST) a seller is exempt from collecting the tax on cross-border sales, the critical enforcement question is exactly the same – how does the system assure that the buyer will self-assess (and pay) the tax? The simple answer is that the tax administration audits. The more complicated answer notes that the effectiveness of the audit (by the destination jurisdiction) depends heavily on its ability to secure transactional data from the origin jurisdiction. Without a good information exchange mechanism this audit is difficult. The EU’s data-sharing mechanism involves recapitulative statements by origin state sellers and a VAT Information Exchange System (VIES) that shares this information with the destination state. There is a technology-intensive proposal to do the same among the US states, the Use Tax Reciprocity (UTR) system. The EU’s recapitulative statement/VIES network is a classic Black Swan, a program characterized by extraordinary cost overruns, extreme schedule delays, and dramatic shortfalls in realized benefits. Black Swans have an average cost overrun of 200%, and an average schedule overrun of 70%. The UTR has the same problems. Program management professionals from the Harvard, Berkeley and Oxford business schools would suggest that the UTR promoters suffer from “Black Swan blindness.” They need to ask if this major IT project: (1) Can absorb the hit if the project goes over budget by 400%? (2) Can survive if only 25% to 50% of the projected benefits are realized? (3) Can take the hit if 15% of the medium-sized IT projects (secondary projects related to the main project) are also over budget by 200%? Many of the URT’s difficulties can be identified through a “reference class forecasting” study.

Lifting the Burden: Fundamental Tax Reform and U.S. Economic Growth

This paper presents a comprehensive treatment of the cost-of-capital approach for analyzing the economic impact of tax policy. This approach has provided an intellectual impetus for reforms of capital income taxation in the United States and around the world. The most dramatic example is the Tax Reform Act of 1986 in the United States. In this landmark legislation the income tax base was broadened by wholesale elimination of tax preferences for both individuals and corporations. Revenues generated by base broadening were used to finance sharp reductions in tax rates at corporate and individual levels. The cost-of-capital approach presented in this paper shows that important opportunities for tax reform still remain. This approach suggests two avenues for reform. One would retain the income tax base of the existing U.S. tax system, but would equalize tax burdens on all forms of assets as well as average and marginal rates on labor income. Elimination of differences in the tax treatment of all forms of assets would produce gains in efficiency comparable to those from the Tax Reform Act of 1986. Equalization of marginal and average tax rates on labor income would more than double these gains in efficiency. Proposals to replace income by consumption as a tax base were revived in the United States during the 1990's. The Hall-Rabushka Flat Tax proposal would produce efficiency gains comparable to those from equalizing tax burdens on all forms of assets under the income tax. However, a progressive National Retail Sales Tax, collected on personal consumption expenditures at the retail level, would generate gains in efficiency exceeding those from the Flat Tax by more than 50 percent! Equalizing marginal and average rates of taxation on consumption would double the gains from the Flat Tax.

The Impact on Investment of Replacing a Retail Sales Tax with a Value-Added Tax: Evidence from Canadian Experience

Over a decade ago, several Canadian provinces replaced their retail sales taxes with value-added taxes. This paper estimates the effects of this tax substitution on business investment in these provinces. Consistent with standard investment theory, we find that the reform led to significant increases in machinery and equipment investment, at least in the short run. This evidence suggests that such a reform in a U.S. state with a similar retail sales tax may also be expected to result in increases, possibly substantial, in its capital stock.

Structuring a US federal VAT

On 18 and 19 February 2009, the American Tax Policy Institute (ATPI) sponsored a conference in Washington, DC, on "Structuring a Federal VAT: Design and Coordination Issues." The purpose of the conference was to lay the ground for a potential future adoption of a federal VAT in the United States by discussing some of the technical issues related to two broad topics: firstly, how should such a US federal VAT be designed and, secondly, how should it be coordinated with the existing state retail sales taxes (RST). In this article, the author summarized the conference presentations.