Indirect Business Taxes: A Definition and Examples for Small Businesses
Indirect business taxes — sometimes also called hidden taxes — are taxes that can be passed to your customers by being built into a higher price. They are not added on top of an item’s price, like sales tax. For example, gasoline tax is built into the price of gas at the pump. The gas producer pays the tax to the state. Import duties are another type of indirect tax, according to The Balance.
In this article, we’ll cover:
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Are Indirect Business Taxes?
Direct taxes are paid directly to the government by the taxpayer, like income taxes and property taxes. Indirect business taxes are taxes that are often built into the price of a good or service. The purchaser may not be aware that tax is included in the price, which is why indirect taxes are sometimes called “hidden taxes.”
Since indirect business taxes are rolled into the price or a good or service, the buyer pays more than they normally would. The price has to be raised to accommodate the indirect tax.
Examples of indirect tax include gasoline tax, which is included in the price of gas at the pump, or in the form of import duties or tariffs on equipment, raw materials, or products to be resold.
Who Pays Indirect Tax?
Small businesses pay indirect taxes if they’re engaged in activities where indirect taxes commonly apply. Here are a list of types of indirect taxes, probably at least one applies to your small business:
- Gasoline taxes and other fuel taxes
- Import duties or tariffs
- Excise taxes on “unnecessary” items like tobacco, alcohol or gambling
- Hotel fees
- VAT taxes in Europe and other non-U.S. countries
- Communication service tax on cable/satellite TV, mobile and phone services (certain states only)
- Stamp taxes (on notary stamps)
What Are Some Examples of Indirect Taxes?
Example #1: Gasoline Tax
Taxes on gasoline are rolled into the price you pay at the pump. The gasoline tax rate is determined by each state. The gas producer incorporates the tax into the consumer price, raising it depending on how high the tax is in a certain state. The producer is the one who pays the tax to the government.
- For example, the gas tax in Texas is 20 cents per gallon. So if gas is $2.80 per gallon at the pump, the price before tax is actually $2.60.
Example #2: Airport Fees
Airport fees are an example of an indirect tax. Fuel taxes are rolled into this fee. So whether you’re a transportation company or you travel a lot for work, you’ll end up paying this indirect tax.
Example #3: Communications Service Tax
Service taxes are decided on a state-by-state basis. Some service taxes may be rolled into the prices of mobile, phone or TV services and some taxes may be added to the consumer’s bill in the form of extra charges.
Example #4: Import Duties or Tariffs
Goods that are imported into the U.S. include import duties or tariffs in the price. The price of these goods to the consumer is raised to accommodate these fees. Small businesses that import items to sell or import raw materials or equipment will have to pay these hidden fees.
People also ask:
- What Is the Difference Between Direct and Indirect Tax?
- What Is an Example of a Direct Tax?
- Are Indirect Business Taxes Included in National Income?
What Is the Difference Between Direct and Indirect Tax?
The definition of a direct tax is a tax that is paid on top of the price of a good or service. Indirect taxes are included in the price of a good or service, which is why they are also called “hidden taxes,” according to The Balance.
Business and income taxes are direct taxes because they are paid after a business owner or individual reports their income, profit or losses. Sales tax is also a direct tax, added on top of the price of a good or service at the time of purchase.
On the other hand, indirect taxes like the gas tax are rolled into the price. The consumer might not even be aware he or she is paying an indirect tax.
What Is an Example of a Direct Tax?
Examples of direct taxes include:
- Personal income tax
- Business income tax
- Estate tax: the tax on the value of what the deceased owned at their death, also called the “wealth tax”
- Capital gains tax: paid by investors at the time they sell an investment for gain
- Sales tax: paid on top of the price of goods and services by the consumer at time of purchase
Are Indirect Business Taxes Included in National Income?
Indirect business taxes are deducted from GDP to find national income.
Gross Domestic Product (GDP) is the market value of total consumption, investment, government and net exports expenses. GDP helps measure a country’s economic performance.
To find national income, you must take total GDP and deduct indirect business taxes and depreciation. National income is the total of all interest income, rent, profit and wages.