The Fair Tax Act of 2005, Part IX
`SEC. 102. INTERMEDIATE AND EXPORT SALES.
`(a) In General- For purposes of this subtitle–
`(1) BUSINESS AND EXPORT PURPOSES- No tax shall be imposed under section 101 on any taxable property or service purchased for–
`(A) a business purpose in a trade or business, or
`(B) export from the United States for use or consumption outside the United States, if, the purchaser provided the seller with a registration certificate, and the seller was a wholesale seller.
`(2) INVESTMENT PURPOSE- No tax shall be imposed under section 101 on any taxable property or service purchased for an investment purpose and held exclusively for an investment purpose.
`(3) STATE GOVERNMENT FUNCTIONS- No tax shall be imposed under section 101 on State government functions that do not constitute the final consumption of property or services.
`(b) Business Purposes- For purposes of this section, the term `purchased for a business purpose in a trade or business’ means purchased by a person engaged in a trade or business and used in that trade or business–
`(1) for resale,
`(2) to produce, provide, render, or sell taxable property or services, or
`(3) in furtherance of other bona fide business purposes.
`(c) Investment Purposes- For purposes of this section, the term `purchased for an investment purpose’ means property purchased exclusively for purposes of appreciation or the production of income but not entailing more than minor personal efforts.
This section of the bill is a portion that I had not read verbatim so I am going to analyze this for the first time today.
This basically exempts business from taxation even if they export outside the US (unless of course it is a retail export, such as an Internet sale. Those kinds of transactions would be taxable, so we’d be taxing a wealth of purchases coming from overseas to catalog services and web sites).
Investments are exempt from taxation, meaning there is no worry about trading stocks getting taxed (although service fees might have taxes in them).
State Government Functions - This is something new to me, but it seems to be sort of minor. Basically it says if the state government is not the ‘final consumer’ (I assume it would pass a service to regular citizens like garbage disposal or public transportation) then the state owes no tax on that service. Final consumers would pay the tax on such services.
Business purposes is defined to strictly remove the notion of buying or selling things outside of the rules so as to assume tax-free status.
Investment purposes is defined so that real-estate is not considered investment, apparently. This definition seems to include stocks, bonds, venture capital, etc, but not ‘material investments’ such as real estate, jewelry, etc.
This is probably the wrong time to take issue with your statement that investments (and debt instruments) won’t be taxed. They will, big time, but I’ll wait for you to put up Sec. 801-806 before any detailed discussion.
For the uninitiated here, Hank is referring to the fact that financial intermediation services will be taxed under the FairTax.
This means financial services performed by banks and financiers, amongst other things. Put simply, a portion of interest on loans and credit is taxable, and other bank fees are too. This is one of those things that makes some folks nervous.
However, most economists studying sales taxes at the Fed level believe interest rates will fall a lot so this may be a wash effect or a net negative effect on interest rates.
But we digress. Any other comments on this section?