1940: Sales Tax

The general taxation of sales of tangible personal property at retail, wholesale or manufacturing outlets, (as well as sales of professional and other services, in some instances) is of comparatively recent origin in the fiscal history of the United States. Scarcely a decade has passed since a few of the American states turned to the sales tax as a significant revenue producer. When first adopted, these measures were of an emergency character, arising out of the problems of state finance created by the depression. Today they have become so firmly entrenched in the revenue systems of certain states that their temporary status has been almost entirely forgotten. There are now 22 states that have some form of general sales tax and in 16 of them the receipts from this source constitute one-fifth or more of total state revenues. In West Virginia, the general sales tax provides the state with more than 40 per cent of its revenues, and Illinois, California, and Michigan rely on this source for 30 per cent or more of their taxes. In only one city, namely, New York, is the sales tax of considerable importance as a local revenue measure. Since 1934 it has served there as a special measure to provide funds for local relief work, and has yielded approximately $40,000,000 per year.

Sales taxes take several forms. In their narrowest application they are retail taxes — referring only to sales of commodities not intended for resale. This type is found in the majority of the states, and in New York City. A somewhat broader version of the tax includes in the taxable base all transactions in wholesale and retail channels. Taxes of this type are found in Pennsylvania and North Carolina. The tax becomes still broader in scope when it is imposed upon gross receipts or gross income derived from the sale of goods and services, as is the case in Arizona, Indiana, and New Mexico. In one or two states such as West Virginia, there may be a combination of sales taxes — one law relating to the value of sales at retail and one pertaining to gross income or gross proceeds of all business enterprises. In general, the rates are proportional and range from 1 to 3 per cent with the majority at 2 per cent. In a few instances, specifically indicated enterprises are taxed at higher or lower rates. In some states certain commodities are exempt from the tax — notably food, drugs, and other itemized necessities.

In addition to the general sales tax there is the broad area of sales taxation known as the selective commodity taxes. These are much older and more firmly established, and are among the largest producers of federal and state revenues. They include the bulk of the federal 'miscellaneous internal revenue taxes' as well as the many classes of state excises. Chief among these are the taxes on liquor, tobacco, gasoline, oil, cosmetics, soft drinks, admissions, automobiles and parts, etc.

Taxes imposed on oleomargarine, or on chain stores, represent another form of taxation for which the base is the selling price of merchandise sold. However, in these cases, the rates are relatively high since such taxation is punitive or prohibitory in intent and hence is of little importance from a revenue standpoint. At present, 19 states have special taxes on chain stores — the rates of which are usually graduated with reference to the number of stores.

Closely related to sales taxation and of growing importance in the United States are the so-called 'use taxes.' Designed to serve as checks against sales tax avoidance, they are levied on the storage, use, or consumption of tangible personal property upon which no sales tax has been paid. The rate is usually the same as the sales tax rate. Use taxes are now in effect in 17 states. Some states have also imposed use taxes on certain commodities such as gasoline, tobacco, liquors, cosmetics, and soft drinks. Use taxes do not yield much revenue, nor is that their purpose. Their chief importance lies in the extent to which they may prevent evasion or avoidance of general or selective sales taxes.

No very significant changes were made in the status of general sales taxation during 1940, with the important exception that in Louisiana the general sales tax and the use tax were repealed. In California, the sales of livestock, poultry, newspapers and publications were added to the list of items exempt from the sales and use taxes. In New York City the sales tax was extended to June 30, 1941. Use taxes were enacted in New York City and in Kansas City, Missouri — the latter to function as a complement to the state sales tax. Alabama, Louisiana, South Carolina, and Virginia extended the gasoline tax to the sales of Diesel motor fuels. The cities of Denver, Colorado, and Kansas City, Missouri, enacted municipal cigarette taxes of 1 and 2 cents respectively. The cigarette tax in New York City was permitted to expire. Several states raised the rates on miscellaneous selective commodity taxes. Mississippi and Kentucky adopted chain store taxes with graduated rates determined by the total number of stores, wherever located, in the chain. The Patman national chain store tax measure failed to pass in Congress. See also TAXATION.