FairTax logistics question

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Permalink Reply by chiefcook on February 24, 2009 at 9:16pm

The following is from the plain english version of the Fair Tax Act of 2007 under the definitions.

"Produce, provide, render or sell taxable property or services – If a person or business buys taxable property or services for the purpose of using such property or service in the production, provision, rendering, or sale of other taxable property or services in the ordinary course of that business, then that purchase is not subject to the FairTax. This exempts intermediate sales to businesses and prevents the FairTax from cascading and being hidden in the retail price of the final consumption good or service produced by that person or business. Example: If a business were to pay sales tax on the purchase of “inputs,” then, in order to recover its costs, it would have to build the taxes paid on inputs into the retail price of what it sells. This would result in taxing a tax.
The purchases of property or services used for research, experimentation, testing, and development are included as non-taxable business purchases.
Taxable property or services purchased on behalf of an insured person (policyholder) are treated as purchases for business purposes and are not taxed if sales tax was paid on the premium for the insurance contract under which the claim was paid. If the premium for the insurance policy is taxed, it would be double taxation to also charge tax on the benefits paid for by the insurance policy.
Registered seller – any person who is engaged in a trade or business, and who is liable to collect and remit the FairTax, must register as a seller with their state sales tax authority (see SEC. 502). The use of the term “business” in the remainder of this document assumes that the business is a registered seller.
Sales tax"

There is no tax on business to business transactions. When you provide your service to the consumer, you will collect the Fair Tax. You will then on a regular basis (monthly) you will report your sales activity to your local state sales tax collection agency. You will report and submit the Fair Tax collected on your services. You will also report any Fair Tax that you may have paid during the period on your purchases. You will deduct these Fair Tax amounts from the Fair Taxes you collected and forward the difference (less your administrative fee of 1/4 of 1% of the total tax) to the state.

The States will handle the administration of the tax collection process. Presently, the state sales tax does not provide an incentive for the state to go after those that do not report properly. However when you consider the Fair Tax amount and the state sales tax amount there is considerable more dollars involved. The state will be rewarded by being paid for the administrative fees (1/4 of 1% collected) will help fund the operation. Also, over 85% of all sales taxes collected are received from less than 5% of the businesses --major box stores). This means the collection people will have a much lower number of businesses to check upon. Since every business in the state will be registered, those that do not report will be on the top of the list to investigate.

I hope this gives you a good starting point.

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Permalink Reply by Kendall Mickley on February 24, 2009 at 9:24pm

Great - thanks for your help

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Permalink Reply by Pat Conroy on February 24, 2009 at 11:39pm

Determining what is taxable and collecting the FairTax is fairly complicated. But consider what we have now: 66,000 pages of income tax regulations that no one can possibly understand completely. In addition, the FairTax rules are no more complex than the state sales tax rules.

Consider the sales tax in Texas. If I buy a donut, it is taxable. If I buy 6 donuts, they are not taxable. The difference is that 6 donuts are considered groceries. One donut is considered fast food.

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Permalink Reply by Ron Wenrich on February 25, 2009 at 5:00am

Here's one that I don't know how its covered. I'm a consulting forester. In the normal course of business, a consultant will mark and sell timber for a private landowner and sell it to a logger or sawmill. Normally, the forester charges a commission of the sales to the landowner.

The sale of the timber is non-taxable, since its just a step in the processing of forest products. But, the services are to a final customer. How's that collected or is it exempt? Under current law, the landowner has to pay tax on the income, less expenses. If they bought land with timber, then the value at time of purchase can also be deducted. Our state only charges sales tax on goods and not services. So, the services are not charged any tax.

My understanding is that the end consumer is to pay the tax. In this case, the end consumer is the landowner. The logger rarely pays for consulting work, although it can be looked upon as inclusive in the price of the timber.

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Permalink Reply by chiefcook on February 25, 2009 at 7:14am

The sale of the timber from the landowner (tree farmer) to the logging customer is considered a business to business sale. It is not a sale of trees to the ultimate consumer. (the landowner is not buying the trees for retail use). Therefore the service you are providing is to a business and is not subject to the Fair Tax. (You are thinking backwards.) The landowner is not taxed on his income. The end comsumer would be the person that buys the pencil which was made from the tree.!

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