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Indirect taxes are charged on goods and services, not on income or profits. These taxes are collected by businesses, such as retailers or producers, who then pass the payments to the government. The cost of these taxes is built into the price of products or services, often going unnoticed by consumers. Indirect taxes include various types, such as sales taxes, excise taxes, sin taxes, property taxes and value-added taxes (VAT).
If you want help managing your tax liability, consider working with a financial advisor today.
Indirect taxes are taxes that the government places on goods and services rather than on income. Instead of being applied directly to your earnings, these taxes are collected by intermediaries like retailers or producers who then send the money to the government.
When you buy something, you’re paying the indirect tax as part of the purchase price, although it’s often not itemized on your receipt, except for when it comes to regular sales taxes. This hidden charge is automatically included in the cost of items you buy.
For example, when you purchase a soda at a store, the price you pay includes an excise tax on the soda. The store collects this tax from you and later pays it to the government. This is how indirect taxes work, subtly included in the prices of goods and services.
Here are eight common examples of indirect taxes that you may find yourself paying at some point or another:
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Sales and use tax: This is a consumption tax imposed by the government on the sale of goods and services. A conventional sales tax is only charged to the final end-user of a good or service.
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Value-added tax (VAT): A VAT is a type of indirect tax that is imposed at different stages of production. The levy is incorporated into the product’s price at each production phase.
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Goods and services tax (GST): This involves placing a tax on the supply of goods and services.
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Excise duties: This tax is levied on certain goods at the time of manufacture rather than sale.
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Custom duties or tariffs: A custom duty tax or tariff is a tax imposed on imports and some exports by the customs authority of a country to raise revenue.
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Environmental and carbon taxes: These taxes are aimed at reducing the carbon emissions for building owners. They’re also called “green levies,” which means they are placed on energy users as part of protecting the environment’s sustainability.
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Telecommunications tax: This includes taxes on communications and telecommunication services such as paging services, dispatch services and even satellite television.
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Fuel tax: This involves taxes levied on fuel companies that are later passed onto the consumer at the register. For example, sales tax and cargo service taxes are combined in the regular retail tax of $0.386 per gallon when you pay for gas at the pump in the state of Florida (according to 2024 data).
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Alcohol and spirits tax: This signifies the taxation on beer, wine and distilled spirits. As with the fuel tax, this varies according to state.
At their core, indirect taxes are designed to be passed along to the final consumer, often included in the price of the product or service. They’re levied by the government on the seller. The seller, in turn, “passes the tax” on to the consumer by including it in the cost of the product or service.
In contrast to indirect taxes, take income taxes. When you file your return at the end of the year, you’ll see how much of your income is withheld for those tax payments. They are collected based on what you’re earning, rather than through the payment of goods and services.
Unlike direct taxes, which are levied based on a taxpayer’s ability to pay, indirect taxes apply uniformly, regardless of an individual’s financial situation. As a result, lower-income individuals bear a larger burden of these taxes relative to their income than higher-income individuals.
Indirect taxes are often considered regressive because everyone, regardless of income, pays the same tax rate on purchases, which means they disproportionately affect lower-income individuals. Since these taxes are levied on goods and services purchased with income that has already been subjected to taxation, it essentially means the same money is taxed twice. This results in a heavier financial burden on lower-income taxpayers, as they end up paying a higher percentage of their income on these taxes when compared with high-income earners.
Indirect taxes are levied on goods and services rather than on income or profits. They’re collected by intermediaries like retailers or producers and passed on to the government. This means the consumer indirectly pays these taxes when purchasing goods or services. While easy to manage, indirect taxes can be burdensome for consumers, particularly for essential products that make it hard to avoid incurring the levies.
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A financial advisor can help optimize your portfolio for taxes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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SmartAsset’s tax return calculator with updated brackets and rates to see how your income, withholdings, deductions and credits will affect your next refund or balance due.
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