How will the Fair Tax Impact you?

Our current tax system is costing us big time in compliance costs. The complexity is legendary and reached a point of absurdity. The most moral and ethical person in the world devoting 100% of their time to calculating the correct tax has no good reason for believing that they have succeeded at their task. It’s time for real reform and that means consideration of the Fair Tax, a national sales tax on consumption to replace the Income, Payroll, and Estate tax system. For information about the proposed Fair Tax Act, go to the Fair Tax Organization website at http://fairtax.org.

How will the adoption of the Fair Tax impact the different parties in society? I have compiled the following list to make it easy to figure out.

All Businesses:
• Corporate Income Tax Returns and 941 go away.
• All individual Income tax returns, including those of the self-employed and related self-employment taxes go away.
• Eliminates the need to hire professionals for tax planning purposes. All decisions, such as whether or not to purchase a piece of equipment or another business, can be made purely on the economic merits without considering the tax impact.
• Will be required to report employee gross pay once a year. This information is used to calculate individual social security eligibility and benefits.
• Exempt from paying the Fair Tax on any of its purchases provided the property is used in the business or is for resale. Failure to show a profit in at least 2 of the last 3 years could result in being reclassified as a hobby rather than a business.
• Must register as a sell with their state sales tax authority.
• May claim reasonable fees do to a direct dispute with the Government unless the Government can establish that its position was substantially justified.
• Must keep records of all purchases that were exempted from the Fair Tax for a period of seven years.
• Must remit the Fair Tax on goods or services given as gifts (i.e. Christmas turkeys, employee discounts) if purchased with an exemption certificate.

Retail & Service Businesses (includes quasi government units such as the USPO and Amtrak that receive payments from private individuals for goods and services):
• Must collect and pay the sales tax.
• Get a fee of .0025 of gross collections for their efforts.
• Liable for the tax unless they retain a copy of the registered seller certificate or other qualification statement issued by their state.
• Credit for sales tax paid on bad debts (assumes the seller elected the accrual basis).
• Insurance companies must report and pay Fair Tax on the amount paid for the service i.e. not the claims portion of the premium.
• Refunds for Fair Tax overpayments must be made within 60 days of the claim.
• Fair Tax return is due on the 15th of the following month.
• Small sellers that collect less $20K tax for the previous 12 months must remit by the 15th of the following month.
• Medium sellers that collect between $20K and $100K in any of the previous 12 months must deposit the collected taxes in a separate bank account each week within 3 business days. Remittance is required by the 15th of the following month.
• Large sellers must deposit all Fair Tax collected in a separate bank account and remit on a weekly basis. Additionally, they must post a bond equal to the greater of $100k or 1.5 times the average monthly tax liability for the last six months.
• Burden of proof regarding exempt sales is on the Government if the seller has the properly completed intermediate sale or export sale certificate.
• Must keep records to include copies of all tax receipts provided to customers, copies of intermediate and export sales records, copies of certificates received from customers.
• Must provide customers with a receipt for each transaction that includes the price without the Fair Tax, the Fair Tax amount and rate, date of sale and the name and registration number of the seller. Exceptions for vending and financial intermediation services.
• Gaming businesses must report the tax based upon their gross receipts rather than when they sell lottery tickets or chips.

Not-for-profit organizations:
• Issued a “Qualification Certificate” by the state.
• Services provided at no charge are exempt from the Fair Tax.
• Products or services sold are taxable.

State Governments and Agencies:
• Can elect to collect the federal tax on behalf of the federal government for a fee.
• Must pay the Fair Tax on all purchases including the gross wages paid their employees. (Because governments normally do not charge for their service directly).

All Individuals:
• All income tax returns go away.
• All withholding and social security taxes go away from pay checks.
• Get a monthly “Prebate” check to reimburse them for the Fair Tax paid on basic living requirements.
• Liable for the tax unless they pay it to the seller and has a receipt with the amount of the tax separately stated.
• Liable for the tax on direct imports.
• Liable for the tax on goods purchased for business use and subsequently converted to private use.
• Up to $1200 per year in payments received by a person not in connection with a business are exempt i.e babysitting jobs.
• First $400 of directly imported goods per year does not have to be reported.
• Can expect an average price increase in the products they buy of between 1 and 2 percent. The tax itself is 23% but economic studies have shown that the average price paid today includes the buildup of income and payroll taxes of 21% which will be eliminated.

Investors:
• Earnings from investments are not taxed.
• Fees related to earnings are taxed.