Legal Definitions - classified tax

A classified tax refers to a system where different types or categories of property, income, or transactions are taxed at varying rates or under different rules. Instead of applying a single, uniform tax rate to all items within a broad category, a classified tax system distinguishes between various classifications and assigns specific tax treatments to each.

Here are some examples to illustrate this concept:

• Example 1: Property Tax Classification

  Imagine a city that imposes property taxes. Under a classified tax system, residential homes might be taxed at a rate of 1% of their assessed value, while commercial office buildings are taxed at 2.5%, and undeveloped agricultural land is taxed at a lower rate of 0.5%. This demonstrates a classified tax because different types of property (residential, commercial, agricultural) are placed into distinct categories, and each category is subject to a unique tax rate.

• Example 2: Income Tax Classification

  Consider a country where the income tax system differentiates between various sources of income. For instance, income earned from wages and salaries might be taxed at progressive rates (e.g., 10% for the first $50,000, 20% for the next $50,000), while income derived from long-term capital gains (profits from selling investments held for over a year) is taxed at a flat rate of 15%, and income from dividends (payments from company profits to shareholders) is taxed at 20%. This is a classified tax because different types of income (wages, capital gains, dividends) are classified separately and subjected to different tax rates and rules.

• Example 3: Sales Tax on Goods and Services

  A state might implement a sales tax system where most retail goods are subject to a standard 6% sales tax. However, essential items like groceries and prescription medications are completely exempt from sales tax, while luxury items such as high-end jewelry or private aircraft might be subject to an additional "luxury tax" on top of the standard sales tax, bringing their total tax rate to 10%. This illustrates a classified tax because different categories of goods (essentials, standard retail, luxury items) are classified distinctly and receive varying tax treatments, from exemption to higher rates.