Legal Definitions - consumption tax

A consumption tax is a type of tax imposed on the purchase and use of goods and services, rather than on income, wealth, or property. It is typically paid by the end consumer at the point of sale or during the transaction. The economic burden of this tax is generally borne by those who consume the goods or services.

Here are some examples to illustrate how consumption taxes work:

• Example 1: Retail Sales Tax

  Imagine you purchase a new bicycle from a local sports shop. The bicycle is priced at $500. At the checkout, an additional $35 is added to your bill, representing a 7% sales tax. Your total payment is $535.

  Explanation: This scenario demonstrates a consumption tax because the $35 tax is levied directly on the purchase of a good (the bicycle) and is paid by you, the consumer, at the time of the transaction. It's a tax on your act of consuming that product.

• Example 2: Value Added Tax (VAT) or Goods and Services Tax (GST)

  A graphic designer hires a web development company to create a new portfolio website. The web development company charges the designer $2,000 for their services, plus a 10% Goods and Services Tax (GST), bringing the total to $2,200. The web development company collects this GST and remits it to the government.

  Explanation: This is an example of a consumption tax because the GST is applied to the provision of a service (web development) and is ultimately paid by the end consumer of that service (the graphic designer). While collected by the business, the cost is passed on to the person consuming the service.

• Example 3: Excise Tax on Specific Goods

  When you buy a pack of cigarettes, a significant portion of the price is an excise tax specifically levied on tobacco products. For instance, a pack might cost $10, with $3 of that amount being an excise tax intended to discourage smoking and generate revenue for public health initiatives.

  Explanation: This illustrates a consumption tax because the excise tax is applied to the purchase of a specific good (cigarettes) and is paid by the consumer at the point of sale. It's a tax on the consumption of that particular item.