Question

Explain to a business owner who doesn't understand tax, in 3-5 sentences. Give examples and expand where necessary.

Describe the primary types of state and local taxes.

Answer 1

Taxes are considered to be the "cost of living in a society". Taxes are levied by the Governments to meet the common welfare expenditure of society.

There are two types of taxes - direct taxes and indirect taxes.

Direct taxes: If tax is levied directly on the income or wealth of a person, then, it is a direct tax. The person who pays the tax to the Government cannot recover it from somebody else i.e. the burden of a direct tax cannot be shifted. e.g. Income tax and Tax on undisclosed Foreign income and assets.

Indirect Taxes: If tax is levied on the price of a good or service, then, it is an indirect tax. In the case of indirect taxes, the person paying the tax passes on the incidence to another person. e.g. Goods and Services Tax or Customs duty.

The primary types of state and local taxes are:

Property Tax: It is a tax paid on property owned by an individual or legal entity that is imposed by the local government.

Sales Tax: It is a tax paid by the retailer to the government collected from the end consumer.

Corporate income tax: It is a tax paid as a percentage on the operating profit earned to the government.

Excise Tax: It is paid on the purchase of specific goods such as fuel, tobacco, and alcohol.

License Tax: It is a tax paid for acquiring permit for conducting business in an area from the local government.

Customs tax; It is a tax imposed if goods imported from foreign countries.