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A memorandum prepared "by the Treasury at the
request of the Committee on Ways and Means,
Eouse of Representatives

This memorandum describes the principal features of three types of
general sales taxes: (l) a manufacturers1 tax, (2) a wholesale sales
tax, and (3) a retail sales tax. Numerous proposals have been made for
a Federal sales tax. None of these has "been enacted. A legislative
history of the proposals for a Federal sales tax is given in Exhibit 1,
Sales taxes are now "being levied by 22 States (see Exhibit 2) and by
several foreign countries (see Exhibit 3)A.

Tax base

1* Manufacturers1 sales tax: A manufacturers1 sales tax is one
which applies to sales of tangible personal property by manufacturers
and producers. The tax ordinarily applies to finished articles when in
a form packaged and labeled ready for shipment or delivery to final
users and consumers. The tax ordinarily does not apply to services,
although sales of gas and of electrical energy are sometimes included.
2. Wholesale sales tax: A wholesale sales tax is one which applies
to sales at wholesale of tangible personal property when in a form packaged and labeled r^ady for shipment or delivery to final users and
consumers. Like the manufacturers1 sales tax, the wholesale sales tax
ordinarily excludes services, although sales of gas and electrical
energy are sometimes included*
3* Retail sales tax: A retail sales tax: is one which applies to
sales at retail of tangible personal property to final consumers and
industrial users. It ordinarily applies not only to retail sains of
consumers1 goods but also to final sales of finished articles, such as
machinery, equipment and supplies to industrial and commercial users.
In addition, a retail sales tax may apply to various types of services,
such as public utilities, communication, transportation, the operation
of places of amusement and services such as those rendered by hotels,
rooming houses, office buildings and parking lots. Some State retail
sales taxes include none of these services; others include some of them,
while a few include all of them. Generally, personal, professional or
repair services are not subject to the retail sales tax.
Since services are frequently rendered &long with the sale of a
commodity at retail, they are more commonly included in the retail sales
tax than in the manufacturers' or wholesale sales tax*


- 2 -

In this memorandum it is assumed that the retail sales tax applies
to only tangible personal property.
H. Sale price: Under any one of the three types of taxes, the
tax ordinarily applies to the sales price of the article in a finished
form ready for shipment or delivery to the final user or consumer.
The sales price for tax "base purposes usually includes charges for
coverings and containers of whatever nature, and charges incident to
placing the article in condition packed and ready for shipment to the
final user or final consumer.

Persons subject to tax

I. Manufacturers1 sales tax: A manufacturers1 sales tax would "be
paid by manufacturers, producers, and importers, unless the manufactured
articles are specifically exempt. In addition to manufacturers, taxpayers would also include those wholesalers and retailers who do some
2. Wholesale sales tax: A wholesale sales tax \*rould "be paid by
persons making sales at wholesale. Since persons other than wholesalers
sell at wholesale, taxpayers might also include manufacturers, importers,
and retailers.
Betail sales tax; The retail sales tax would be paid by persons
making sales at retail. Taxpayers under a retail sales tax would include
many manufacturers and wholesalers as well as retailers since under our
integrated economic business structure some businesses of all these
types make final sales to users and consumers.


1* Prevention of multiple taxation: In order to avoid multiple
taxation, provision must be made for the exemption of sales at stages
other than that at which the tax is imposed. Under a manufacturers1
sales tax, this requires provision for tax-free sales of articles for
further manufacture. The wholesale sales tax requires, in addition,
the exemption of sales of finished articles intended for resale to
persons other than retailers and final users or consumers. The retail
sales tax also would require the exemption of articles for further
manufacture and articles for resale to persons other than final users
or consumers.
2. Exemption of particular items: As under existing manufacturers1
excises, exemption might also be accorded sales to Federal and State
governments and their agencies> sales for export, sales for shipment to
United States1 Possessions, sales of certain supplies for use on certain
vessels and foreign aircraft, and sales of articles produced by Indians.
In the aggregate, these exemptions would reduce the size of the tax
bases appreciably. Especially important during the war period are sales
to the federal Government.

- 3 -

Articles already subject to excise taxes night or night not "be
exenpted from a general sales tax, irrespective of the forn of the tax*
In addition, other general classes of itens (such as foods, clothing,
and medicines) night "be exenpted. Each exemption, of course, reduces
still further the base of the tax.
The exemption or other favored treatment of specific articles
raises administrative problems of drawing a precise line between
exempted and taxable items. For example, in the administration of the
exemption of foods under some State retail sales taxes, it has been
found necessary to list in detail items of food and the brand names of
many items that are and are not to be regarded as foods. The administrative experience under the Australian wholesale sales tax has been
similar to that under the State retail sales taxes#

Exemption of particular taxpayers

a. Manufacturers1 and wholesale sales taxes: Under the
manufacturers1 and wholesale taxes, it might be found desirable, from
the administrative point of view, to exempt those with annual gross
sales below a specified amount. The 1937 Census of Manufactures data
indicate that under the manufacturers1 tax an exemption of $20,000
probably would reduce the number of taxpayers by 30 percent and the tax
base by not much more tha11 1 percent. The 1935 Census of Business data
indicate that under a wholesale sales tax, such an exemption probably
would reduce the number of taxpayers by about 35 percent and the tax
base by less than 5 percent*
Exempting the small taxpayer, however, makes it difficult to
detect evasion by sellers whose sales are only slightly above the
amount exempt. Furthermore, a substantial part of the cost of administering the tax would not be saved by making exemptions, since it would
be necessary in any event to license or register all sellers, including
those exempt.
b. Retail sales tax: The exemption of small taxpayers might
be found more pressing under the retail form of tax than under the
manufacturers1 or wholesale taxes because of the larger number of retailers. However, such exemption would afford greater opportunities
for tax evasion and greater likelihood of competitive inequalities
than would be true under the manufacturers1 or wholesale taxes where
there would be fewer very small business units.
The 1935 census data indicate that the exemption of retailers with
annual sales of less than $1,000 would reduce the number of taxpayers
under a Federal retail sales tax by about 30 percent and the tax base
by less than 2 percent * A $5,000 exemption would reduce the number of
taxpayers by 50 percent and the tax base not much more than 3 percent.

- 4 -

However, a $5,000 exemption would introduce inequalities among competitors
in certain retail lines. For example, in the candy and confectionerytrade, 65 percent of the independent retail stores accounting for 24 percent of the sales reported sales of less than $5,000 in 1935• A $20,000
retail sales exemption would reduce the number of taxpayers about
SO percent and the tax "base about 17 percent.

Estimates of revenue

Since sales to governments would likely be exempted the vast increase
in purchases "by the Federal Government during war time would reduce the
volume of taxable goods, thereby reducing the volume of goods subject to
the sales tax. This might be offset in part by price rises. At the
same time, in wartime a larger part of consumer expenditures are likely
to be directed towards services instead of commodities, since the demand
for war purposes affects the available supply of commodities more than
it affects the supply of services.
Estimates of the yields of sales taxes at the manufacturers1,
wholesale, and retail levels and at rates of lf 5» ar*d 10 percent are
given in Table 1. These estimates assume a volume of sales at the
expected level of the fiscal year 19^3 and are for a full year of tax
collections after the tax had been in effect long enough to absorb the
initial anticipatory buying as a result of its imposition.
Major interest attaches to items 4 to 9 of Table 1, since the first
three items include taxes on goods sold to governments and to contractors
for use in war production. At the manufacturers' level, a 10 percent
tax yields $2,3^2 million on the "broadest base that excludes sales to
governments and war contractors; and $305 million on the narrowest base
for which an estimate is given. At the wholesale level, a 10 percent
tax yields from $3,059 to $446; and at the retail level, from $4,632 to
The estimates are made on the "basis of sales taxes which would be
limited to sales of tangible personal property when in a form, packaged
and labeled ready for shipment or delivery to final users or consumers•
Personal, professional, or repair services have not been included
in the salos tax base. Sales of the following major industries have
been exempted from the tax base except for such sales of tangible
personal property as they make: The various types of service establishments (including finance, amusement, hotels, etc.), the communication
industry, the transportation, trucking, and warehousing industries,
utilities and extractive industries. Water, electricity, and gas are
not treated as tangible personal property. Sales of finished products
(i. e., not for resale to the same industry) by the extractive industries — agriculture, forestry, fishing, and mining — are exempt except
as they are made directly to the ultimate consumer.

- 5 -

In the base of manufacturers1 sales tax is included the value of
the final sale at the manufacturers1 plant of tangible personal
property as a finished product. In general, any sale by a manufacturer of tangible personal property which is not for resale to other
manufacturers is considered the sale of a finished product; e. g.,
sales to wholesalers, retailers, and ultimate consumers or users*
Also, if the sale is to another manufacturer or processor who is the
ultimate consumer or user, it is taxable* The exemption of manufactured products sold to other processors has been interpreted as applying only to goods that are further processed or are incorporated in
other manufactures, and nqjj as applying to goods like industrial
machinery, fabricated construction materials, certain containers and
wrappings, or office supplies, sold to other industrial users but not
made an integral part of a factory product*
The contents of the base of the tax on sales at wholesale include
the final sale of tangible personal property at wholesale as a finished
product* In general, the base includes all sales by either wholesalers
or manufacturers to ultimate consumers or retailers,
Thfc tax on sales at retail is on the final sale of tangible
personal property to the ultimate consumer or user and is distinguished
from the sale of (a) realty or of (b) intangibles, such as the sales of
service establishments. The ultimate consumer is deemed to be the
purchaser who actually consumes the tangible personal property. "Sales
at retail" is not synonymous with "sales by retailers"; it includes
sales by manufacturers or wholesalers to the ultimate consumer or user*
Whereas sales of tangible personal property by manufacturers to wholesalers or retailers for resale are included in the tax on manufacturers,
such sales are excluded from the tax on sales at retail. Thus, the sale
at retail would include the value added by distributors or the spread
between the values of finished commodities at producers' prices and
their cost to the ultimate consumer.

Tax rates

1. Rates needed to raise the same amount of revenue from the three
types of sales tax: As the revenue estimates given above indicate, a
lower tax rate would be needed to raise a given amount of revenue from a
retail sales tax than from a wholesale or a manufacturers1 sales tax
because of the differences in sales prices at the different stages of
production and distribution. Table 2 presents rates of tax on sales of
tangible personal property at the manufacturers1f wholesale, and retail
levels necessary to yield $1 billion.
The rate needed under a manufacturers1 sales tax is from 1.3 to
2.5 times the rate needed under a retail sales tax, the exact difference
depending on the exemptions granted. The rate needed under a wholesale
sales tax is from 1.2 to 1,8 times the rate needed under a retail sales

Table 1.
Estimated yields of sales taxes on tangible personal property at the manufacturers1,
wholesale, and retail levels, with rates of 1, 5» a n i 10 percent
(In millions of dollars)

1. All sales of finished articles (including industrial and commercial
machinery, equipment and supplies
not resold as part of tangible
personal property)
2. Sane as (l), but exempting sales to
Federal Government and its agencies
3# Same as (2), but exempting sales to
State and local Governments . . .
4. Same as (3) , "but exempting final
sales to contractors for use in
-war production
5. Same as (4), but exempting tangible
personal property subject to
Federal excise taxes . . . . . . .
6 . Same as ( 5 ) , but exempting sales of
foods, (excepting restaurant meals,
etc.) 4
7. Same as (6), but exempting sales of
medicines and drugs
8. Sane as ( 7 ) , but exempting sales of
clothing (i.e. all wearing apparel)
9. Same as (g), but exempting sales of
fuels 1/

. ••• .



3fo «;

iofo »

Sales at

Sales at

; 5$ •I io0


ifo ;
* 5i »; 10io

1,011+ 5,018 9,702



























1,592 3,059











1,721 3,296








86^ 1,691








82lf 1,616















Treasury Department, Division of Research and Statistics




March 14, 1942

Fuels exempted in item 9 exclude bituminous coal, exempted under item 5, and gas and electricity which
are not considered to be tangible personal property.


7 -

Table 2.
Eates of tax on sales of tangible personal property
at the manufacturers1, wholesale and retail
levels necessary to yield $1 billion l/

Bates needed to raise $1 billion
Manufac- : WholeRetail
turers1 : sale
; tax




All sales of finished articles
(including industrial and commercial
machinery, equipment and supplies
not resold as part of tangible
personal property) • . . . . . . . .
Same as (l), but exempting sales to
Federal Government and its agencies
Same as (2), but exempting sales to
State and local Governments . . . *
Same as (3), but exempting final
sales to contractors for use in
war production
. . . •
Same as
but exempting tangible
personal property subject to
Federal excise taxes . .
Same as (5)> but exempting sales of
foods (excepting restaurant meals,
Same as (6), but exempting sales of
Same as ( 7 ) , but exempting sales of
Same as (g), but exempting sales
of fuels
























Treasury Department, Division of Tax Research



March lk9 19^2

Based on Table 1.

1/ The tax rates are based on fiscal 19^+3 sales estimates and assuming a
full yearrs collections after the sales tax has been in effect long
enough to absorb the initial anticipatory buying as a result of its

- g -

2* Effect of the rate on the administration of the tax: In general,
greater administrative problems will be encountered under high than under
low tax rates. High tax rates aggravate inequalities and give taxpayers
a greater incentive to evade the tax. In the initial stages of the tax,,
when a new staff must be trained and a body of experience built up, such
administrative problems are especially difficult *
3. Differential tax rates: The items subject to tax might be
classified according to type of article or price of article and different
rates imposed on different groups. Eor example, the British purchase
tax levies a 33-1/3 percent tax on the wholesale value of luxuries and
articles not normally requiring immediate replacement, and a 16-2/3 percent tax on the wholesale value of non-luxuries which are not subsistence
Any such differential tax rates would contribute to administrative
problems. The setting up of a class of articles subject to a low rate
is an invitation to producers and sellers of closely related articles
to get their articles under the low rate either by law or administrative regulation. The setting of a higher rate on articles selling above
some specified price is an invitation to producers and sellers of such
articles to make their articles subject to the lower rate by cutting
price, by cutting quality, by selling the article in separate pieces, or
by selling the article in combination with other lower priced articles.

Estimates of number of taxpayers

Estimates of the number of taxpayers under manufacturers1, wholesale,
and retail sales taxes which are comparable to the revenue estimates
given above are not available. However, estimates for 1935» the latest
year for which the necessary data were available, are presented in
Table 3 to indicate the relative number of taxpayers under the three
types of sales taxes. These estimates must be viewed as rough approximations, even for 1935* For example, the number of taxpayers under a
manufacturers1 sales tax is unknown since manufacturers with annual sales
of less than $5,000 are not reported by the Census of Manufactures. The
number of small, unreported manufacturers is probably large * Furthermore,
the Census reports manufacturing "establishments" rather than "manufacturers." Manufacturing establishments are more numerous than taxpayers
because an unknown number of manufacturing plants were counted as two or
more "manufacturing establishments."

- 9 -

Table 3*
Estimated number of taxpayers under a manufacturers1,
wholesale, and retail sales tax, 1935

Estimated number
of taxpayers
Manufacturers1 sales tax
Assuming exemption of articles for
further manufacture and of establishments with annual sales of less
than $5,000


Wholesale sales tax
Assuming exemption of articles for
further manufacture and articles
for resale at wholesale, and of
establishments with annual sales of
less than $5,000


Retail sales tax
1* Assuming exemption of articles
for further manufacture


Same as 1 but also exempting
those with annual sales of
less than $5,000


Treasury Department, Division of Tax Research

March ik, 19^2

~ 10 ~

Lack of uniformity in sales tax "bases

For a variety of reasons, any type of general sales tax would not
affect all taxpayers uniformly. The circumstances resulting in unequal
taxation are explained "below.
1. Under a manufacturers1 sales tax: Under a manufacturers1 sales
tax uniform treatment would "be reached most practicably by adjusting all
prices, irrespective of type of business organization, to the sales
price at which manufacturers sell to wholesalers and to industrial users.
Less than 50 percent of manufacturers1 sales in 1935 were made to industrial users and wholesalers. The remainder of the sales by manufacturers
were made to their own wholesale branches, to their own retail stores,
to retailers, and to household consumers, all ef which represent substantially different prices from the prices to wholesalers. Such prices
would need to be adjusted to a uniform price basis, which wouli be
administratively very difficult.
Unless the manufacturers1 sales tax were levied on a uniform price
basis, such as the f.o.b. price to wholesalers of finished articles
finally packaged and labeled ready for shipment and delivery, serious
changes would undoubtedly occur in the forms of business organization
and business transactions as a result of the attempt to minimize taxation. Business organizations would be encouraged to reorganize their
production and distribution functions under separate legal entities.
Where one company existed before the tax was levied several might arise.
It might become advantageous for taxpayers to get under the control of
the same business organization a manufacturing company, a packaging and
labeling company, and a selling company, if the taxpayer could successfully maintain that the transaction prices between subsidiary units
constitute the proper bases of tax. Since such transactions would not
be armTs-length sales, the administrative problems might be very difficult. Other manufacturers might attempt to reduce the tax base by
having the manufacturing done by contractors.
Small taxpayers might not be able (and others might not be willing)
to undertake the apparent legalistic outlets to tax inequality and would
suffer competitive disadvantages.
2. Under a wholesale sales tax: The problems under a wholesale
sales tax are similar to those outlined above for a manufacturers1 tax*
However, sales appear to be more homogeneous at the wholesale level of
sales than at the manufacturers1 level of sales f.o.b. plant.
In 1935» about 75 percent of the sales of wholesale establishments
that reported the distribution of sales by classes of customers were
made either to retailers or to industrial users. These sales represent
the base to which it would be necessary to adjust all other types of
sales under a wholesale sales tax.

- 11 -

3- Uftder the retail sales t&*: The retail sales tax likewise
involves the problem of tax base uniformity encountered under the manufacturers1 and wholesale form of sales taxes, since, for example, sales
of finished articles to industrial users would be taxed as sales at
In 1935, about ^3,000 manufacturers made about $11 billion of sales
(valued at f.o.b. prices for census purposes) to industrial users. These
sales probably were made at prices ranging from f*o.b. plant to doordelivery and some price quotations no doubt would include installation
charges. In the same year, wholesalers reported about $10 billion of
sales to industrial users. For administrative reasons, finished articles
purchased by building contractors, tailors, barber and beauty shops,
repair shops, and other service establishments such as laundries may be
taxed when sold to them, although in many cases such establishments also
sell articles at retail. Thus the retail tax would not attach uniformly
at the point of sale of articles at retail to final consumers but would
include sales at different levels of production and distribution to
industrial users and persons selling taxable finished articles in combination with services. The variations in sales prices of such articles
would reflect the embodiment of different amounts of the production and
distribution functions, and changes in the forms of business organization
and methods of sale might consequently result in the attempt to avoid
unequal taxation.
Retail prices to final consumers vary as regards the elements of
cost included. Unless adjusted, these prices would not constitute a
uniform base for tax purposes. Transportation and delivery, and other
charges for credit, installation, insurance, guarantees and repairs,
enter directly or indirectly into every sales transaction. However,
great variations exist among competitors (whether they be manufacturers,
wholesalers or retailers) in the manner in which these cost elements are
included in or excluded from their sales prices. Unless provision is
made for adjustment of these types of differences from a uniform price
basis, certain taxpayers may have to change their mode of business or
suffer competitive disadvantages.

Effect on consumer prices

Even though levied on all items at a uniform rate, a sales tax of
whatever form is unlikely to affect all prices equally. The possibilities
of multiple taxation and pyramiding are two of the most important factors
leading to an unequal effect of the sales tax on prices.
1. Multiple taxation: The possibility of multiple taxation arises
because it is difficult to define comprehensively "articles for further
manufacture." If the definition exempted only articles that entered as
"physical parts" of finished articles, then all other articles like, for
example, machinery, equipment and office supplies, contributing to the

- 12 -

cost of producing and distributing finished articles would "be taxed once
as finished articles and again as component costs entering into the
sales price of finished articles. Consequently, the accumulated sales
tax on any one finished article and the sales price to the consumer would
"be greater than is indicated by the rate of tax.
2. Pyramiding: The increase in price as a result of a sales tax
may be larger than the sales tax itself if the sellerTs margin is a
relatively fixed percentage of the price at which he purchases goods for
resale. In such a case, if the tax has been paid on the items purchased
for resale, the application of the customary percentage margin will
raise the final price by more than the amount of the tax. The final
users or consumers of taxable articles may, therefore, pay more in increased prices as a consequence of the tax than the Government receives
in revenue. Pyramiding differs from multiple taxation in that the
latter is an accumulation of tax that the Government receives while the
former is a tax-induced addition to a seller's spread or mrrgin that is
not received by the Government.
The available data indicate that distributors1 margins are relatively
rigid and that, consequently, pyramiding is likely to occur. The nearer
to the final consumer a sales tax is imposed the less is the opportunity
for pyramiding to occur. Accordingly, pyramiding is less under a retail
sales tax than under a wholesale sales tax and less under a wholesale
sales tax than under a manufacturers1 sales tax.

Distribution of sales tax burden

The burden of general sales taxes is distributed regressively; that
is, the tax borne by final consumers constitutes a larger percent of a
small income than of a larger income. Persons with small incomes spend a
larger proportion of their incomes than do persons with large incomes.
Furthermore, a larger fraction of their expenditures are in general for
tangible goods afc contrasted to services.
Table k presents rough estimates for 19^2 of the distribution of a
retail sales tax expressed as a percentage of consumer income. This
table does not shov the actual percentage of consumer income taken by
a retail sales tax. It only shows the relative distribution of tax
burden among the several consumer income groups. The table also shows
the greater importance of food in the budgets of the lower income groups
by estimating the difference in the relative distribution of sales tax
burden when foods are exempted.

- 13 Table
Rough estimates of the relative
tax burden for 19^-2, expressed
incomes by income classes,
food exempt

income class


distribution of retail sales
as a percentage of consumer
with food taxed and with
from tax

of incomes
If tax base
included food

taken by tax
If tax base
: excluded food

1.0056 1/


Under $500

500 -


1,000 - 1,250


1,250 - 1,500
1,500 - 1,750
1,750 - 2,000
2,000 - 2,500


2,500 - 3,000
3,000 - Moo
4,ooo - 5,000
5,000 - 10,000

and over

Treasury Department,
Division of Tax Research









March 1U9 19^-2

Based on information obtained from the Office
of Price Administration, Research Division,

1/ At a sa,les tax rate which imposes a burden of ifo of
consumer income on those with incomes of less than





Administrative problems

The administrative problems under a general sales .tax fall into
two general categories: The rapid development of additional administrative personnel and the determination of regulations designed to tax
all articles uniformly.
1. Problems of administrative personnel: A Federal sales tax,
regardless of type, will require the development of a large administrative staff to handle the large number of monthly returns and to audit
the books and records of registrants and taxpayers. These expenses will
tend to be largest in the initial stages of the tax when the staff is
being built up and experience accumulated.
The administrative problems associated with the number of taxpayers
are greatest under a retail sales tax. The tax must be collected in
smaller amounts and from a larger number of taxpayers than the other two
forms of sales tax. On the other hand, the manufacturers1 and wholesale
sales taxes involve serious problems of determining uniform prices for
tax base purposes.
2. Definitions and uniformity of tax base: Under the manufacturers 1
sales tax, many borderline cases would arise over the question of what
constitutes a manufacturers1 sales price. In industries that produced
similar articles in varying stages of completion, equal treatment of
different firms would require that such items as the value of packages
and containers and selling and advertising expenses be uniformly excluded
so as to approximate an f.o.b. price. However, the uniform exclusion of
such charges and expenses from the tax base also introduces difficult
administrative problems. That is, the tax base frequently might have to
be determined by deducting a taxpayers allocated costs and expenses of
packaging and selling the finished articles, or by determining the cost
of producing the unfinished articles and adding thereto an estimated
fair'mark-up for profits. Such determinations could be expected to
raise many points of dispute between taxpayers and the Treasury over such
matters as the proper allocation of costs and expenses between "production" and "distribution" functions. If, in addition, the costs and
expenses of distribution varied greatly among taxpayers producing the
same articles, it might be exceedingly difficult to establish general
Under the wholesale sales tax, the same types of problems would also
be encountered. Here equal treatment of different taxpayers would
require that such items as the value of packages and containers and selling and advertising expenses be uniformly included in the tax base.
However, administrative problems resulting from attempts to achieve a
uniform tax base might be expected to arise less frequently than under a
manufacturers1 sales tax.

- 15 The experience of the States reveals some of the problems involved
in the determination of a uniform tax base under the retail sales tax.
Generally, State retail sales taxes apply to tangible personal property.
Salos that involve both the rendering of services and the transfer of
property present difficulties. Repairing by a garage or shoe repairman,
department store sales of articles that it installs, services rendered
by building contractors, shampoos by barbers, and tailor-made clothing
are examples of cases involving difficult problems of the proper tax
Retail prices often include installation and transportation charges.
Most States specifically allow the deduction of installation charges from
gross sales if records are so kept as to identify such charges. Approximately half of the States allow a deduction for transportation charges
"if such charges are rendered to the purchaser and not to the seller."
Other States permit the exemption of transportation charges when separately billed to the purchaser.
The treatment of trade-ins presents administrative problems under
retail sales taxes. Several of the State sales taxes permit a deduction
of the allowance for trade-ins from the price of the new article and tax
the trade-in when it is sold. Other States tax the full sales price of
original stock and exempt the trade-in when it is sold, regardless of
whether it is sold for cash or whether another item is traded in as partpayment. In order to make sure that deductions allowed for sales of
trade-ins are not in excess of the original valuation of the trade-ins,
special records must be kept of individual transactions.
Installment sales present additional administrative problems. In
order to arrive at uniform bases of taxation, finance and interest
charges should be excluded. Some of the State sales taxes provide
specifically for the exemption of such charges if they are separately
billed and proper records are kept. Questions also arise whether the
tax should be collected on the full selling price at the time the sale is
made or upon the payments as they are received. Open credit accounts
present somewhat similar problems as to the time of payment of tax and the
treatment of worthless accounts.
3. Definition of "articles for further manufacture": The exemption
of "articles for further manufacture" is necessary to avoid multiple
taxation, but it raises difficult problems of definition and interpretation. Limiting tax-free articles to those (l) for use as materials in
the manufacture of or as component parts of a taxable article, (2) for
resale by the vendee for such use by his vendee, and (3) even broadening
the concept to include those articles representing "direct expense,"
does not avoid multiple taxation but merely limits it.

- 16 -

Whatever the line of demarcation between tax-free "articles for
further manufacture" and taxable articles, difficult problems of
administrative interpretation will arise. To mitigate this general
problem it may be necessary to define articles for further manufacture
specifically and, perhaps, also to provide a higher degree of finality
with respect to administrative findings of fact than has heretofore
been permitted the Commissioner of Internal Revenue. Under the
Canadian sales tax, the Minister is "the sole judge as to whether or
not goods are 1partly manufactured goods1 within the meaning" of the Act.
The problem of administering exemption of "articles for further
manufacture;t probably would be as great under a retail sales tax as
under the other two forms of sales tax.
U. Problems of tax amounting to a fraction of a cent: It is difficult to devise a retail sales tax schedule which will permit all kinds
of retail businesses to shift the exact amount of tax. This difficulty
arises from the limited divisibility in the medium of exchange (one cent)
and the small size of many retail sales.
The States have attempted to frame methods of collection whereby
retailers will recover on an average the amount they must pay the State.
State administrators generally have prescribed a schedule for uniformly
adding the tax to prices. Under this schedule or bracket system the
amount to be collected on sales of various sizes is specified. While it
is simple enough in its operation, it does not provide precision. There
necessarily must be discrimination or penny-splitting.
Many of the States minimize effective tax rate variations by providing a taxpaying medium in fractional-cent denominations. Tokens
eliminate most of the inequity in applying the sales tax to small
purchases but they are a source of annoyance and inconvenience to the
taxpayer and create some .danger of counterfeiting. Because of the
nuisance aspects, some States have abandoned their use.
5* Registration and licensing: In administering tax-free sales
under any one of the three forms of sales tax, a system of licenses or
registration probably would be required. The license or registration
methods has the administrative advantage of tending to shift the policing
of exempt articles for further manufacture to the licensees or registrants.
Under a licensing system, manufacturers, wholesalers, and retailers
would be required to take out licenses at a nominal fee and post bonds
in varying amounts, depending on the size of the licenseers probable tax
liability. This method is now used in Canada and Australia.
The voluntary registration system now existing under the manufacturersf excise taxes with respect to certain sales could be expanded for
general sales tax use. The license system appears to have no advantage

- 17 over a registration system for purposes of controlling tax-exempt sales
under a manufacturers1 or wholesale sales tax. If the self-interest of
manufacturers and wholesalers will induce them to apply for certificates
of registration, the requirements and penalties under registration could
"be identical with those under licenses.
Licenses or compulsory registration probably would be a necessary
feature of a retail sales tax.
For enforcement purposes, it would be
necessary to have a census of retailers. The mortality rate of retail
business is high and the administrator must have some method of discovering new businesses and getting returns from discontinuing or bankrupt businesses. Most of the States having general sales taxes require
taxpayers either to register once or to obtain an annual license*

Exhibit 1.
History of Federal general sales tax proposals

The Federal Government has never imposed a general sales
tax but at various periods in our history Congress has given
consideration to such a tax.
Civil War. The first movement for a general sales tax
in the United States occurred during the Civil War. While the
proposal of a general sales tax was rejected by Congress, a
comprehensive system of production and consumption taxes was
191g~1921. After the World War a demand arose for the
repeal of the excess profits tax, reduction of the surtax ra,tes
011 individual incomes, and elimination of the special war excises. The sales tax was brought forth as a possible alternative source of revenue.
Senator Borah introduced a bill in September, I9IS, providing for a transactions tax*/ Thi^jjjroposal was presented
at the hearings before the T?ss|^^Ssmb^S&^So^^tteQ on the
Revenue Act of I9I8, but no action was taken.
During the first session of the 67th Congress, Senator
Smoot introduced a series of sales tax amendments (five in
number) to the Revenue Act of 1921. The first proposal was
a 1$ turnover tax which applied to all sales (or leases) of
goods in excess of an annual turnover of $6,000. When strong
opposition was expressed to the proposal on the floor of the
Senate, Senator Smoot presented a revised bill providing for
a 3manufacturers 1 and producers1 tax. Later in the session
the second Smoot amendment was reintroduced in a modified form
providing for a itfo manufacturersf and producers1 tax. This
proposal was voted on and defeated November 3» 1921. The
following day Senator Smoot proposed a 0.5$ turnover tax which
also was defeated. A third and final proposal for a 31° production tax was defeated three days later, l/
After the failure of the Smoot amendments, the sales tax
issue remained closed for about ten years.


During the second session of the 67th Congress, several
proposals for financing veterans1 compensation by a sales
tax were introduced, but none received serious consideration.

Exhibit 1.

1932. In 1932 the sales tax issue was revived*
Treasury Departments tax recommendations submitted to the
House Ways and Means Committee in January, 1932, expressed
opposition to a general sales tax and favored excise taxes
on selected commodities, if A bill providing for a 2.25$
sales tax introduced by Representative Crisp, Acting Chairman of the Committee on Ways and Means, was considered in
connection with hearings on the Revenue Bill of 1932 and was
reported as part of the Revenue Bill. The Treasury Department withdrew its objection to the sales tax and supported
the Committee1s bill. When the Revenue Bill was considered
in the House on March 2k, 1932, an amendment offered by
Representative Doughton to strike the sales tax was adopted.
Efforts to restore the tax to the Revenue Bill on April 1,
1932 were defeated.
1933^19^1* Amanufacturers1 sales tax was offered
by Senators Reed, Walsh and Byrd as an amendment to the
N.I.R.A. Act, but was defeated on June 9, 1933•
Beginning with the McGroarty bill (the first so-called
"Townsend pension bill") introduced in January, 1935» a
series of bills (more than a. score in number) providing for
sales taxes of broad application, transactions taxes or gross
income taxes, have been proposed as means of financing old
a,ge pensions. Congressional committees have given careful
consideration to certain of these bills in connection with
House and Senate hearings on the Economic Security Bill in
1935 and hearings of the House Select Committee Investigating
Old Age Pension Organization in IST^jrOnp of the bills
(H.R. 6466) introduced b y B ^ t S S ^ S r ^ s in May, 1939 > was
reported by the Ways and Means Committee without recommendation and was defeated when it came to vote on June 1, 1939-

Secretary of the Treasury Mellon appeared before the House
Ways and Means Committee on January 13, 1932, and stated his
reasons for opposing a general sales tax and favoring taxes
on selected commodities: "We la,id a.side aJLl thought of a
genera.l sales or turnover ta.x, not only because generally
speaking* it bears no relation to ability to pay and is regressive in character, but because of the grea.t administra^tive difficulties involved and the almost inevitable pyramiding of the tax in the course of successive sales. The
objections to a general sales tax are not in this respect
applicable to a ta,x on selective articles of the character
heretofore employed in this country and now recommended. *
** We "concluded that our immediate needs could best be met
by utilizing a known general plan with such changes as
might be appropriate in the light of altered conditions
rather than embarking 011 new and untried ventures in taxartion."

Exhibit 2
Types and Rates - January 1, 1§4 2

State Sales Taxes;


\ Type of tax 1/

Rates on retail sales
Use:Tangible: 4 .
: Public:
_ Automo, Restau—
, .n
tax:personal: #
: ment :
: util—:
:property: M l e s :places: r a n t s : ities:


Retail sales
General sales

Ark. 2/

Retail sales
Retail sales
Retail sales
Retail sales
Gross income


Retail sales
Retail sales
Retail sales
Grfcss receipts


Retail sales
New Mex* Gross receipts


N*C. 13/
N. Dak*

General sales
Retail sales
Retail sales
Retail sales


S* Dak.

Retail sales
Retail sales





1/2 2/


2 2/



i y









2 8/


2 12/

1 11/












3 5/



2 4/






Rates on reoeipts from other specific sources

Manufacturing, preparation for sale of agricultural and horticultural products, slaughtering animals for food, sales of
poultry products and stock feed, 1/4$* extracting, processing,
printing and publishing, contractors, advertising, transportation, 1%; hotels and garages, oredit and collection
agencies, 2$.
Printing, 2$.







All income, 1$, except that received from wholesales, and
from display advertising which is taxable at 1/4 of 1$«

Wholesaling, 1/8$; manufacturing, 1/8-1$; contractors, 1$;
extracting, 2-2|$; all other "businesses and professions not
specifically exempted, 2$*
Wholesaling, 1/8$; extracting, 1/2 or 2%; processing and manufacturing, 1/4 or 1/2$; contractors, 2%; transportation, real
estate commissions, factors, agents, brokers, advertising, personal and professional services, 2$*
Wholesaling, 1/20$.








Printing and publishing, transportation (of passengers only),
advertising, 2%.
Transportation (except intrastate movements of freight and
express or street railway fares), 2%.

Exhibit 2
Types and Rates - January 1, 1942

State Sales Taxes:

(Continued - 2)



W* Va*


Type of tax 1/

Retail sales
Gross receipts

Use:Tangible:A .
AutomoRestautax: personal: -biies ; ment : p g ^ g 5 util—
: ities

Retail sales 15/
Gross income

Retail sales

3 12/




Rates on receipts from other specific sources

Wholesalers (except ^olesalers ©f "wheat, oats and barley,
which are 1/100%), extractors, manufacturers, printers and
publishers, 1/4$; all other businesses and professions net
specifically exempted, 1/2%,

65/IOO 65/IOO I.3-5.2 Wholesaler, 195/1000$; extracting, 1*3-7*8$; manufacturing,
39/100$; contractors, 2$; industrial loan companies 1$; all
other businesses not specifically exempted, 1$*




Type of tax; (l) Retail sales — imposed upon sales of tangible personal property at retail or for consumption*
appiift* also to admissions and restaurant and public utility sales»






In most States

(2) General sales — applies to -wholesaling, extractive industries and manufacturing in addition to sales at retail.
(3) Gross reoeipts - includes sales of public services and personal and professional services in addition to transactions and receipts under (l) and (2)*
(4) Gross income - applies, in addition 10 all transactions and receipts under (l), (2), and (3)> to receipts from
non-business actrvities such as "wages aid salaries of employees, interest, rents and dividends®
New automobiles*
Rates in cities or incorporated towns bordering other States same as that in adjoining State*
Rate applies to allpublic utilities except transportation*
Telephone and telegraph services, gas and electricity sales* In Illinois the rates on utilities are imposed under a separate Act*
The 2$ rate is applied to 98$ of gross receipts*
On gas ant electricity only*
Retail* sales of pasteurized milk, 1%*
Automobiles and trucks*
Industrial sales receive a preferential rate of 1$*
Automobiles, trucks or tractors*
Tax applies to rentals as well as sales*
Maximum tax of $15 on a single article.
A special excise tax of 2% is applied to an automobile at the time it is transferred, used or first registered in the State*
Applies not only to sales of tangible property but also to all services except professional and personal services, services, rendered
oy an amplovee to bis employer, and services furnished by corporations subject to the control of the Public Service Commission and
State Road Commission*

Exhibit 2 - (Continued - 3)
State Sales Taxes:

Types and Rates

Januojry 1, 1942
Sales taxes are novr imposed in 22 States* 1/ The most restricted type but the one most
frequently used by the States is the retail sales tax. It is omposed upon sales of tangible
personal property at retail or for consxanption* In most States, however, the retail sales
tax also applies to admissions and restaurant and public utility sales. Retail sales taxes
are now imposed by V] States:

•North Dakota


•South Dakota
West Virginia

A broader form of the tax is that which affeots sales of tangible personal property both
at retail and for resale and in one instance reaches the acts of extracting natural resources
and of manufacturing. Such a tax is teimed a "general sales" tax and is imposed in two

*North Carolina

In the latter only retail and wholesale sales are taxed; the former has the broader application*
A still broader type of tax has the essential elements of the general sales tax but is
extended to include sales of piiblic services and personal and professional services. These
so-called "gross receipts" taxes are imposed in three States:

•New Mexico


The broadest type of sales tax is the "gross inccms" tax which applies, in addition
to all transactions and receipts in the previously mentioned taxes, to receipts from nonbusiness activities such as wages and salaries of employees, interest, rents and dividends*
This type of levy is found in two States:

West Virginia

In both Washington and West Virginia retail sales are taxed twice — in Washington under
the gross receipts tax as well as the retail sales tax, and in West Virginia under the
gross income tax and the retail sales tax*
The rates which apply to retail sales are distributed as follows: 1/2$ in one State,
2$ in 16 States, and 3$ in five States* The rates on receipts from sources other than retail
sales range from 1/100$ to 2—1/2$ under general sales and gross receipts taxes and from
195/1000$ to 7*8$ under gross income taxes*
1/ Not included in this number are the States with so-called "selective" sales taxes limited
in application to certain commodities specifically named, e*g*, tobacco products, beer and
malt* Neither does it include several States which impose low rate taxes on a sales #r
purchases basis upon merchants, manufacturers and other occupational groups*

The use
use tax

tax, a supplementary device to prevent sales tax evasion by out-of-State purchases,
to the use, storage or consumption cf tangible personal property brou^it into the
Such taxes are new in effect in the lG States marked with an asterisk (•)• The
rate in every State is the same as the rate on retail sales*

Treasury Department, Division of Tax Research


14, I942

Exhibit 3.

Type and rate of sales tax at present in effect in
Australia, Canada, and Great Britain






Goods classified according
to the degree of necessity at rates of 20$, 10$,
and 5$



g$ (12$ on furs)

Great Britain


33-1/3$ on wholesale value
of certain luxuries and
articles not normally
requiring immediate replacement.
16-2/3$ on wholesale value
of non-luxuries which are
not subsistence goods, l/

Treasury Department, Division of Tax Research


March 14-, 1942

Items exempt include: food, water, gas,electricity. coal,
petrol, tobacco and drink; children1s clothing and boots and
shoes; farm machinery, and certain medicines. The British
sales tax is imposed in the form of a "purchase tax" on certain goods purchased from registered dealers (generally wholesalers) by unregistered dealers (generally retailers).