Guide To Indirect Business Taxes
As a small business owner, you're responsible for both personal taxes and business-related taxes. There are two main types of taxes: direct and indirect. Just what sets these two groups apart? Indirect and direct taxes primarily differ in how they are paid and who pays them.
Ultimately, all taxes go to the government; they are a form of revenue generation. However, while direct taxes are paid by an individual or entity to the government directly, indirect taxes reach the government indirectly via a third party - usually a business entity like your own.
In this guide, we provide a more detailed explanation of indirect business taxes, explain their importance, and provide examples of common types of indirect business taxes you may have to deal with when running your own business.
What Are Indirect Business Taxes?
Indirect business taxes (IBT) are imposed on goods purchased by consumers. Ultimately, the burden of paying indirect taxes falls on the consumer, not the business selling the product. However, the business still has to collect the tax and transmit it to the government. Value-added taxes (VATs) are one example. This is a type of sales tax that may be imposed on goods as they are produced in the supply chain, thereby increasing the final cost of the product the consumer must pay.
To understand indirect business taxes, you have to differentiate them from direct taxes. All taxes go to the government; however, with direct taxes, the taxpayer (A) remits the tax directly to the government (B). An example of a direct tax is personal income tax. Direct taxes are variable and adapted to a person's ability to pay. For example, the more you earn, the more income tax you pay. Property taxes are another example - the more valuable your property, the more property tax you pay.
With indirect taxes, the taxpayer remits the tax to a third party (C), who then takes that tax and remits it to the government. In the United States tax system, taxes are collected by the Internal Revenue Service (IRS) at the federal and state levels. Types of indirect business taxes include excise tax, value-added tax, gas tax, final goods and services tax (GST), and customs tax. Indirect taxes are set at a standard rate and don't factor income into the tax rate calculation.
Many businesses build indirect taxes into the price of the raw materials, goods, or services they sell. For this reason, indirect taxes are sometimes also referred to as "hidden taxes." The person buying the goods or services may not realize that these indirect taxes are rolled into the price of the good or service they're purchasing. For example, you won't always know what value-added taxes have been levied on a product as it passes through the supply chain before it reaches you.
Although all taxes serve to generate revenue for governments, indirect taxes don't contribute to a country's gross domestic product (GDP). A nation's GDP is a measurement of its economic strength. It refers to the market value of national consumption of goods and services, net exports, investments, and government expenses. To find a country's national income, you subtract depreciation and indirect business taxes from the total GDP. The national income is thus the total income from wages, profits, rent, and interest.
What Are Examples of Indirect Business Taxes?
We've talked about VAT so far because it's a fairly universal and easy-to-understand example of an indirect tax. However, this is only one type of indirect tax. Below, we detail some additional examples.
You pay an excise duty to use or buy a product. Excise taxes are a type of consumption tax and are sometimes referred to as "sin taxes" because they are frequently applied to products traditionally deemed "sinful" (e.g., alcohol, tobacco, and gambling goods). Excise taxes are also applied to gasoline. Excise taxes are passed on to the consumer paying for the product, so the taxpayer is actually the end-user, not the business selling the goods. The retailer "collects" the tax by raising the cost of the goods in question, resulting in a higher price.
Import Duties or Tariffs
Import duties, also referred to as tariffs, are imposed on products when they are brought into the country. Again, it's ultimately the consumer that pays for the import tax. Usually, the price of the goods is increased to pay the relevant tariffs. Countries impose tariffs on each other's products and usually manage what products are taxed and how much they are taxed using free trade agreements. Taxpayers may notice an increase in the cost of products when governments change the agreements impacting these indirect business taxes.
Communications Service Tax
Communications service taxes are applied to services like satellite and cable television and telephone (both cellphone and landline services). Different states regulate communications service taxes differently (some pass the charges directly to the customers).
Changes in technology are also evolving communications taxes. For example, some states are starting to tax digital content like audio, games, software, video, and content delivery mechanisms like digital downloads and on-demand or live-streamed content.
This tax refers to a notary-type rubber stamp - not a postage stamp. Stamp taxes are imposed on documents used for legal purposes, such as transferring assets or property. Many states will include the stamp tax in the cost of the document, making it an indirect tax. A stamp tax might be levied on military commissions, marriage certificates, mortgage documents, and paperwork related to the transfer or sale of property.
Who Pays Indirect Taxes?
Many types of indirect taxes are rolled into the cost of goods or services by the businesses providing them. For example, mobile service providers may include the cost of communications taxes in a person's phone bill. The business collects the taxes from consumers and then transmits the taxes paid to the government. So, while the business is paying the government the money made from indirect business taxes, that money isn't coming out of the business's pocket. The consumer — the end-user of the product or service - is the taxpayer.
Make Your Business Taxes a Breeze
When you're a small business owner, keeping track of the different business taxes you're responsible for can be a headache. It's important to stay on top of these details, however. This ensures you're in legal compliance with relevant state and federal laws and also helps you maintain accurate bookkeeping.
Skynova's accounting software allows you to easily organize and manage income, expenses, sales tax, and payments. By streamlining your everyday administration tasks, we free up time for you to focus on the business tasks you actually enjoy. Take a look at our suite of products for business owners to see how we can support your success.