Another form of tax that you will become very familiar with is sales tax. This is the tax that is charged on your purchases, such as if you buy a pack of gum. Sales tax is a state tax and varies from state to state as well as within the state. For example, NY State Sales Tax is 7% and NJ is 3%, but Albany has 8% sales tax while Syracuse has only 7%. Within the state, municipalities have the right to raise the sales tax above the state limit. There are also other rules surrounding sales tax, such as which items are taxed and which are not. For example, in NY gum is taxed, but milk is not. In NJ food is taxed, but clothes are not. As you can see the tax system in this country is quite complex.
In addition to the many types of taxes, there are also discrepancies between individuals and businesses.
We discussed briefly last week how the different business entities were taxed. Hopefully, we can now discuss that in a little more detail. As stated above, individuals must file their income tax before April 15th. If the person has a sole proprietorship, those earnings will be included on their personal income tax form. If a person is part of a partnership, their earnings from the partnership will be included on their personal income tax form. There are no taxes on the partnership as a whole, but on the earnings passed down to the partners. Partnerships are required to file a tax return, but it is only an informational return.
Corporations are a separate legal entity and are subject to corporate tax on taxable income. Corporate tax rates are different than personal tax rates. Corporate earnings are subject to double taxation. What this means is that corporations pay taxes on their earnings and then with after tax income they pay stockholders dividends, which are subject to capital gains tax. The dividends must be reported on the stockholders personal tax form and are taxed at capital gains tax rates. This is what is commonly called double taxation. I'm sure you will hear about this concept again.