an amount that manufacturers pay during or after the production process of their goods instead of when the product is sold.
Turnover Tax Details
Turnover tax is an indirect tax in that it is levied on products before they reach the final consumer. The consumer will then pay more to cover the cost the manufacturer will need to pay the government.
Products can be taxed at any of these stages:
- Extraction or production
- Manufacturing or processing
- Wholesaling or jobbing
The stage at which the turnover tax applies depends on the product in question and the state laws. In some states, manufacturers only need to pay the said tax once a year, whereas you need to pay once a month in others. Others allow manufacturers to pay the tax after finishing production while others\ at a specific production stage.
Turnover Tax Example
Hannah owns a manufacturing plant that produces leather shoes. Per item, she incurs production costs amounting to $30 that go toward dye, raw leather, stitches, and labor. Hannah will need to pay the government a turnover tax during the processing stage for her to brand her product as made of faux leather, vegan leather, or vegetable-tanned leather.
History of Turnover Tax
Turnover tax started in 1930 to unify other taxes. Turnover tax grew in popularity after its inception. The government could now alter recommended retail prices every time there was a need without changing the wholesale industry prices, which set precedence for planning indices. In 1950, the government altered the turnover tax on food so they would be able to pay the ever-changing procurement prices without affecting the politically governed retail prices.
Similarly, the government did the same for fuels that were necessary for household consumption. However, retail prices remained fairly constant from 1954 to 1960 to save administrative effort that went into altering them. This is probably why it ceased being the government's main income.
Significance of Turnover Tax
The turnover tax aims at easing the burden of paying taxes for small and medium-scale enterprises. Since the turnover tax eliminates the need to pay VAT, export duty, and excise tax, manufacturers save both time and money. Also, the turnover tax makes it easier for the government to collect revenue from small and medium enterprises with significant accounts. Otherwise, it would take a long time if they chose to collect income tax from every citizen.
Turnover tax allows for certain items that don't necessarily have low production costs to be cheaply priced—for example, towels, clothing, braille-approved reading material, and so on. By taxing them less, the manufacturers of the items can sell at an affordable price for them to be widely accessible to people of all tax brackets.
Sales Tax vs Turnover Tax
Sales tax is the tax paid to the government for the sale of goods and services. Contrary to popular belief, the final consumer caters to the sale tax and not the retailer or manufacturer.
So let's say you are manufacturing vegetable oil and need $10 for raw materials, labor, and expenses. Then, you go ahead and sell the product to a retailer at $15, who then sells it to a consumer for $25. The retailer will keep a $5 gross margin and pay the government sales tax of $5.
On the other hand, manufacturers cater to turnover tax/multistage sale tax during or after their production. Obviously, they add this amount to the wholesale price of the item.