Consumption taxes account for approximately one third of total tax revenue collected in OECD countries. They have two common forms: taxes on general consumption (mainly value added taxes and retail sales taxes) and taxes on specific goods and services (mainly excise duties).
Consumption Tax Trends 2024
VAT/GST and Excise, Core Design Features and Trends
1.1.1. Classification of consumption taxes
In the OECD classification, “taxes” are confined to compulsory, unrequited payments to general government. According to the OECD nomenclature, taxes are divided into five broad categories: taxes on income, profits and capital gains (1000); social security contributions (2000); taxes on payroll and workforce (3000); taxes on property (4000); and taxes on goods and services (5000) whose detailed composition is provided in the OECD Revenue Statistics Interpretative Guide (OECD, 2021[1])
Consumption taxes (Category 5100 “Taxes on production, sale, transfer, leasing and delivery of goods and rendering of services”) fall mainly into two sub-categories:
General taxes on goods and services (5110), which includes value added taxes (5111), Sales taxes (5112) and Turnover and other general taxes on goods and services (5113).
Taxes on specific goods and services (5120), consisting primarily of Excises (5121), Customs and import duties (5123) and Taxes on specific services (5126 which includes for example the taxes on insurance premiums and financial services).
Consumption taxes such as VAT, sales taxes and excise duties are often categorised as indirect taxes. They are generally levied on transactions, products or events (OECD Glossary of Tax Terms (OECD, 2022[2])) and collected from businesses in the production and distribution chain, before being passed on to final consumers as part of the purchase price of a good or service. They are not directly imposed on income or wealth but rather on the expenditure that income and wealth finance.
Definition VAT: "Broad-based tax on final consumption by households collected -but not borne- by businesses through a staged process"
Definition Excise: Taxes levied on a limited range of defined goods assessed as a specific charge per unit based on characteristics of the product and imposed at a specific stage of production or distribution.
1.1.2. Structure of this chapter
This chapter first presents internationally comparable data on consumption tax revenues of OECD countries in 1965-2020 (Section 1.2), focusing in particular on the two main consumption tax categories in OECD countries, i.e. value added taxes (Section 1.2.3) and excise duties (Section 1.2.4). This is complemented with a brief overview of the evolution of VAT and excise revenues during the Covid-19 pandemic, outlining the analysis of preliminary data for 2021 presented in the Special Feature of the 2022 edition of Revenue Statistics on The Impact of COVID-19 on OECD Tax Revenues (Section 1.2.6). This chapter finally presents an overview of the main design features of value added taxes (Section 1.3), retail sales taxes (Section 1.4) and excise duties (Section 1.5).
1.2.1. Consumption taxes account for one third of total tax revenue in OECD countries, on average
In 2022, consumption taxes accounted for 29.6% of the total tax revenue in OECD countries on average, representing 9.9% of these countries’ GDP (see Annex 1.A Table 1.A.1). Approximately two thirds of revenue from consumption taxes is attributable to taxes on general consumption (mainly VAT and sales taxes) and one-third to taxes on specific goods and services (mainly excise duties - see Annex 1.A Tables 1.A.2 and 1.A.3).
Note: Percentage of total taxation 2022
Source: OECD, Revenue Statistics 2024 (OECD, 2024[3])
Between 2020 and 2022, the average consumption tax-to-GDP ratio in OECD countries remained stable at 9.9% (10% in 2021). 12 out of 38 OECD countries reported a decrease in their consumption tax-to-GDP ratios during this period, while 22 countries recorded an increase and 4 countries saw no change. Norway and Denmark reported the largest decrease (of 3.7 and 1.5 percentage points respectively) whereas Greece, Colombia and Chile recorded the largest increase (of 2.4, 1.0 and 0.9 percentage points respectively).
The overall share of consumption taxes in total tax revenue decreased to 29.6% in 2022 from 30.1% in 2020 and from 32.1% in 2010 on average. This decline is mainly attributable to the further decreasing importance of taxes on specific goods and services as a share of total taxation in OECD countries, on average (as discussed in Sections 1.2.2. and 1.2.4 below). The share of consumption taxes in total tax revenue decreased in 17 countries between 2020 and 2022, while it increased in 19 countries and no change was recorded in two countries. Norway, Chile, Mexico and Australia reported the largest decrease (of 11.6, 5.9, 4.3 and 2.6 percentage points respectively) whereas Greece, Colombia and Hungary reported the largest increase of 4.5, 3.5, and 2.3 percentage points respectively).
Consumption taxes produce more than 40% of total taxes in 5 OECD countries: Chile, Colombia, Hungary, Latvia and Türkiye. By contrast, they account for less than 20% of total taxes in 3 OECD countries (Japan, Switzerland and the United States).
1.2.2. General consumption taxes generate twice as much tax revenue as specific consumption taxes
Taxes on general consumption include VAT, sales taxes and other general taxes on goods and services. Revenues from these taxes have slightly increased between 2020 and 2022, both as a share of GDP and as a share of total taxation. They increased slightly as a share of GDP (+ 0.3 percentage points) from 6.8% in 2020 to 7.1% on average in 2022, representing 21.4% of total tax revenues in OECD countries on average in 2022, slightly up from 20.8% in 2020.
Their importance varies considerably across OECD countries both as a share of GDP and as a share of total taxation (see Annex 1.A Table 1.A.2). In Australia, Ireland, Switzerland and the United States, taxes on general consumption represent less than 4% of GDP while they represent more than 9% of GDP in Chile, Denmark, Estonia, Finland, Greece, Hungary, Latvia, New Zealand, and Sweden. Taxes on general consumption produce more than 20% of total tax revenue in 21 of the 38 OECD countries. They represent more than 30% of total taxation in Chile, Colombia, Hungary, Latvia, and New Zealand. By contrast, they account for less than 15% of total tax revenues in Australia, Canada, Switzerland, and the United States.
Over the longer term, OECD countries have relied increasingly on taxes on general consumption. Since 1975, the share of these taxes as a percentage of GDP in OECD countries increased considerably from 4.1% to 7.1% in 2022. They produced only 13.3% of total tax revenues in OECD countries in 1975 compared to 21.4% in 2022.
1.2.3. VAT remains the largest source of consumption tax revenues, by far
VAT revenues have slightly increased in OECD countries between 2020 and 2022 on average, reaching their highest level ever at 7.0% as a share of GDP in 2022 (up from 6.7% in 2020) and at 20.8% as a share of total taxation, up from 20.3% in 2019 and 20.7% in 2021 (see Annex 1.A Table 1.A.4). Only 7 OECD countries recorded a drop in VAT revenues as a share of GDP between 2020 and 2022 (Australia, Denmark, New Zealand, Norway, Netherlands, Poland, and Switzerland) while all the others reported an increase, except Canada and Mexico where no change was recorded. Decreases of 0.5 percentage points (p.p.) or more were recorded in Denmark (-0.6 p.p.), Poland (-0.7 p.p.), and Norway (-2.5 p.p.). The largest increases were seen in Germany (+1.0 p.p.), Italy and Latvia (+1.1 p.p.), Greece (+1.2 p.p.) and in Chile (+1.4 p.p.).
Revenues from VAT increased in all OECD countries as a share of total taxes between 2020 and 2022, except in Australia, Chile, Costa Rica, Finland, Israel, New Zealand, Norway and Poland where a decrease was observed. The largest increases were seen in Germany (+2.0 p.p.), Greece (+2.1 p.p.), Portugal (+2.2 p.p.), Italy (+2.4 p.p.), Colombia (+3.0 p.p.), Latvia (+3.7 p.p.), and Türkiye (+4.8 p.p.). Decreases of 1.0 percentage point (p.p.) or more were observed in in Israel (-1.4 p.p.), Chile (-2.1 p.p.), and Norway (-8.3 p.p.).
Value added taxes have been implemented in 37 of the 38 OECD countries, the United States being the only OECD country that does not impose a VAT. In 1975, thirteen of the current OECD member countries had a VAT (see Annex Table 2.A.1 in Chapter 2). Colombia, Greece, Iceland, Japan, Mexico, New Zealand, Portugal, Spain and Türkiye introduced a VAT in the 1980s while Switzerland followed shortly after. Central European economies introduced value added taxes in the late 1980s and early 1990s, often based on the European Union (EU) model in anticipation of their future EU membership. Costa Rica implemented VAT in 2019 and Australia implemented a VAT (“Goods and Services Tax – GST) in 2000.
Over the longer term, revenues from VAT as a percentage of GDP and as a share of total taxation increased between 2005 and 2022, respectively from 6.5% to 7% and from 20.1% to 20.8%. An increase of VAT revenues as a share of GDP was observed in 25 OECD countries between 2005 and 2022, while a decrease was recorded in 11 countries (see Annex 1.A Table 1.A.4). The largest increases were observed during that period in Japan (+2.7 p.p.), Greece (+2.3), Latvia (+2.2 p.p.), Hungary (+1.9 p.p.), Lithuania (+1.5 p.p.), whereas the largest decreases were seen in Ireland (-3.6 p.p.) and Iceland (-2.4 p.p.). The Covid19 pandemic in 2020-2021 has not caused a fall in VAT revenue in OECD countries on average during this period, where it continued to grow both as a percentage of GDP and as a percentage of total taxation.
Source: adapted from OECD, Revenue Statistics 2024 (OECD, 2024[3])
The share of VAT in total tax revenues in OECD countries shows a considerable spread in 2022, ranging from 15% or less in Australia, Canada, Norway, and Switzerland to more than 25% in Chile, Colombia, Estonia, Hungary, Latvia, Lithuania, New Zealand, and Portugal. VAT (GST) produces 30.3% of total tax revenues in New Zealand and 39% in Chile (see Figure 1.3 and Annex 1.A Table 1.A.4). VAT produces 20% or more of total tax revenues in 21 of the 38 OECD countries.
Many factors influence VAT revenue and its importance in countries’ tax mix. Tax policy decisions regarding the balance between the various sources of government revenue obviously play a key role but the efficiency of the tax system to collect VAT revenue effectively is also crucial. The most powerful of the drivers of (changes in) VAT revenues is countries’ capacity to collect the tax on its natural base, i.e. final consumption, as influenced by the application of reduced rates and exemptions and the capacity to combat fraud, evasion and tax planning. The capacity of collecting the VAT on inbound digital supplies also plays a growing role. These efficiency factors, the impact of which is estimated in countries’ VAT Revenue Ratio (see Chapter 2), often play a greater role in countries’ VAT revenues than the level of the standard VAT rate (Michael Keen, 2013[4]).
Source: adapted from OECD, Revenue Statistics 2024 (OECD, 2024[3])
1.2.4. Taxes on specific goods and services now account for less than 10% of total taxes on average
Annex 1.A Table 1.A.3 shows that revenues from taxes on specific goods and services have decreased steadily as a percentage of GDP between 1975 (4.6%) and 2022 (2.8%). The evolution of the share of taxes on specific goods and services in total taxation has followed the same pattern – it has more than halved from 17.7% in 1975 to 8.2% on average in 2022. The share of taxes on specific goods and services in total tax revenues has fallen in all OECD countries since 1975. They now account for less than 10% of total taxes in all OECD countries, except in Greece, Hungary, Latvia, Poland, Portugal, Slovak Republic, Slovenia and Türkiye.
Excise duties currently form the bulk of taxes on specific goods and services, representing 1.9% of GDP on average in 2022, down from 2.3% in 2020. They produced 5.7% of total tax revenues in 2022 on average, down from 7.1% in 2020. Between 2020 and 2022, all OECD countries recorded a drop in revenues from excise duties as a share of GDP, except in Japan, Luxembourg and the United States where no change was recorded. Rather than as a significant revenue raiser, excise duties taxes are increasingly used to influence customer behaviour. This is discussed in further detail in Chapters 3 and 4.
1.2.5. The composition of consumption taxes has fundamentally changed over time
The substantially increased importance of VAT in OECD countries over time has served to counteract the diminishing share of taxes on specific goods and services, such as excise and custom duties, in consumption tax revenues. The share of general consumption taxes (5110), especially its VAT component (5111), in total tax revenue in OECD countries almost doubled between 1965 and 2022 from 11.9% to 21.4% on average (see Figure 1.4 and Annex 1.A Table 1.A.6). By contrast, the share of specific taxes on consumption (5120; mostly on tobacco, alcoholic drinks and fuels, as well as some environment-related taxes) more than halved during that period from 24.3% to 8.2% of total revenues in OECD countries on average. The overall share of taxes on consumption (5100) in total taxation fell from 31.1 % to 29.6% between 1975 and 2022, while it increased as a percentage of GDP during that period from 8.7% in 1975 to 9.9% in 2022 on average.
Source: OECD, based on OECD, Revenue Statistics 2024 (OECD, 2024[3])
Figure 1.5 below and Annex 1.A Table 1.A.6 show the evolution of the tax structure (as a share of major taxes in total tax revenue) in OECD countries between 1965 and 2022. Personal income tax and social security contributions account for almost 50% of total tax revenue in OECD countries in 2022, respectively producing approximately 23.6% and 24.8% of total taxes on average. With a share of approximately 20%, VAT is the third largest source of tax revenue for OECD countries on average. Corporate income taxes represent 12% of total tax revenue in 2022.
Source: OECD, Revenue Statistics 2024 (OECD, 2024[3])
1.3.1. VAT is the main consumption tax for most countries around the world
Since the mid-1980s, VAT (also called Goods and Services Tax – GST) has become the main consumption tax in terms of both revenue and geographical coverage. VAT is designed to be a tax on final consumption that is broadly neutral towards the production process and international trade. It is widely seen as a relatively growth-friendly tax. Many developing countries have introduced a VAT during the last three decades to replace lost revenues from trade taxes following trade liberalisation. Over 170 countries operate a VAT today (see Annex A and Figure 1.6 below), including 37 of the 38 OECD member countries, the only exception being the United States (see Section 1.4 below). This is more than twice as many as 30 years ago. VAT raises approximately a fifth of total tax revenues in the OECD and worldwide.
Although there is a wide diversity in the way VAT systems are implemented from one country to another, all these systems share a common objective and a common tax collection mechanism. The OECD International VAT/GST Guidelines (OECD, 2017[5]) provide an overview of the core features of VAT, which are briefly summarised below.
VAT is a tax on final consumption
The overarching purpose of a VAT is to impose a broad-based tax on final consumption, which is understood to mean final consumption by households. In principle, only private individuals, as distinguished from businesses, engage in the consumption at which a VAT is targeted. “Businesses buy and use capital goods, office supplies and the like - but they do not consume them in this sense” (Hellerstein, 2010[6]). In practice, however, many VAT systems impose VAT burden not only on consumption by private individuals, but also on various entities that are involved in non-business activities.
From an economic viewpoint, one can consider that the effective burden of VAT may not always fall entirely on final household consumption. It may also fall in varying proportions on businesses and households, notably depending on the extent to which VAT is effectively passed through to final consumers. Indeed, the effective incidence of VAT is determined not only by the mechanical operation of the tax as such but also by circumstances such as commercial policy and market conditions, including the elasticity of demand and the nature of competition between suppliers (Ebrill, Keen and Perry, 2001[7]). Those circumstances may notably make a business decide not to pass on the burden of the VAT (entirely) to private consumers in certain cases, for instance in case of a VAT-rate increase, but rather to absorb it entirely or partially by reducing its profit margin.
VAT is collected under a staged collection process
The staged collection process means that VAT is in principle collected on sales to businesses (B2B) as well as on sales to private consumers (B2C). However, since its purpose is to impose a tax on final consumption by households, the burden of the VAT should in principle not rest on businesses, except where explicitly provided for in legislation (e.g. where purchases are made for the private consumption of the business owners or their employees). This is achieved by giving businesses the right to deduct the VAT they incur on their inputs from the VAT they collect on their outputs and to remit only the balance to the tax authorities. Each business in the supply chain thus takes part in the process of collecting the tax, by charging VAT on its supplies and remitting the proportion of the tax corresponding to its margin, i.e. on the difference between the VAT incurred on its taxed inputs and the VAT charged on its taxed outputs. The VAT burden finally falls on private household consumption, as private consumers do not have the right to recover the VAT on their private purchases. In this respect, the VAT differs from a retail sales tax (“RST”), which taxes consumption through a single-stage levy imposed in theory only at the final point of sale.
There are two main approaches for relieving businesses of the burden of the VAT they pay when they acquire goods, services or intangibles for business purposes under a staged VAT collection process:
The invoice-credit method, which is a “transaction-based method”, whereby VAT-registered businesses charge VAT on their taxable supplies and issue an invoice for each supply to their business customers (and sometimes also to private customers) indicating the amount of the VAT charged. Business customers are entitled to credit the input-VAT incurred on their business purchases against the output-VAT they charge on their sales, provided that the input-VAT incurred on these purchases is properly documented in a valid invoice issued by the supplier. It creates an incentive for businesses to request proper invoices from their suppliers, thus ensuring that each supply is properly recorded and reported for VAT purposes and that the correct amount of VAT is remitted to the tax authorities – at least in theory.
Under the subtraction method (which is an “entity-based method”), the tax is levied directly on an accounts-based measure of value added, which is determined for each business by subtracting the VAT calculated on allowable purchases from the VAT calculated on taxable supplies.
All OECD countries that operate a VAT now use the invoice-credit method. Japan, that was the only OECD country to use a subtraction method, moved to an invoice-credit method as of 1 October 2023. Under the new “Qualified Invoice System” (QIS), Japanese Consumption Tax (JCT) taxpayers who file consumption tax returns are in principle only entitled to deduct input JCT if they receive a ‘qualified invoice’ from a seller that is a JCT taxpayer and registered as a Qualified Invoice Issuer (‘QII’). The new system requires sellers to include their QII registration number and the appropriate JCT information (e.g. applicable tax rate and tax amount) in invoices issued to businesses so that these businesses are able to claim the input credit for the JCT documented by that invoice in their return.
The core principle of VAT neutrality
The staged collection process, whereby tax is in principle collected from businesses only on the value added at each stage of production and distribution, gives to the VAT its essential character as an economically neutral tax. The full right to deduct input tax through the supply chain, except by the final consumer, ensures the neutrality of the tax, whatever the nature of the product, the structure of the distribution chain, and the means used for its delivery (e.g. retail stores, physical delivery, Internet downloads). As a result of the staged payment system, VAT “flows through the businesses” to tax supplies made to final consumers (Chapter 2 of the OECD’s International VAT/GST Guidelines (OECD, 2017[8]) presents the key principles of VAT-neutrality and a set of internationally agreed standards to support neutrality of VAT in international trade).
Where the deductible input VAT for any period exceeds the output VAT collected, there is an excess of VAT credit, which should in principle be refunded. This is generally the case in particular for exporters, since their output is in principle free of VAT (i.e. exempt with right to deduct the related input tax) under the destination principle, and for businesses whose purchases are larger than their sales in the same period (such as new or developing businesses or seasonal businesses). These are especially important groups in terms of wider economic development, so it is important that VAT systems provide for an effective treatment of excess credits to avoid the risk that VAT introduces significant and costly distortions for these groups of business. At the same time, however, the payment of refunds evidently can create significant opportunities for fraud and corruption. It is important therefore that an effective refund system is administered properly, supported by a well-designed and operated risk based compliance strategy and by a comprehensive audit strategy (IMF, 2001[9]).
When the right to deduct input VAT covers all business inputs, the final burden of the tax does not lie on businesses but on private consumers. This is not always the case in practice, as the right to deduct input tax may be restricted in a number of ways. Some are deliberate and some result from imperfect administration (see Chapter 2).
The application of the neutrality and destination principles in VAT achieve neutrality in international trade. Under the destination principle, exports are exempt with a right to deduct the input tax (that is, “free of VAT” or “zero-rated”) and imports are taxed on the same basis and at the same rates as domestic supplies. Accordingly, the total tax paid in relation to a supply is determined by the rules applicable in the jurisdiction of its consumption and all revenue accrues to the jurisdiction where the supply to the final consumer occurs.
Sales tax systems, although they work differently in practice, also set out to tax consumption of goods, and to some extent services, within the jurisdiction of consumption (see Section 1.4 below). Exported goods are usually relieved from sales tax to provide a degree of neutrality for cross-border trade. However, in most sales tax systems, businesses do incur some irrecoverable sales tax on their inputs and, if they subsequently export goods, there will often be an element of sales tax embedded in the price.
1.3.2. VAT has now been implemented in 175 countries worldwide
The spread of VAT has been a major tax development over the last half-century. Limited to less than 10 countries in the late 1960s, it is today an important source of revenue in 174 countries worldwide (see Figure 1.6 and Annex A).
The domestic and international neutrality properties of the VAT and its ability to generate substantial tax revenues have encouraged its global spread. Many developing countries have introduced a VAT during the last decades to replace lost revenues from trade taxes following trade liberalisation. In the European Union, VAT is directly associated with the development of its internal market. The adoption of a common VAT framework in the European Union was intended to remove the trade distortions associated with cascading indirect taxes that it replaced and to facilitate the creation of a common market in which member states cannot use taxes on production and consumption to protect their domestic market or to gain a competitive advantage compared to other member states. Today, 37 of the 38 OECD countries operate a VAT, the only exception being the United States.
Note: See Annex A
Source: OECD, based on Fabiola Annacondia 2024
Although VAT is today the most widespread general consumption tax in the world, there is another form of general consumption tax: the retail sales tax (RST). RST is a tax on general consumption charged only once on products at the last point of sale to the end user. In principle, only consumers are charged the tax; resellers are exempt if they are not final end users of the products. To implement this principle, business purchasers are normally required to provide the seller with a "resale certificate," which states that they are purchasing an item to resell it, or with equivalent evidence that the business will fulfil whatever tax obligations it may have (e.g. a so-called “direct pay” permit, which is analogous to the “reverse charge” concept). The tax is charged on each item sold to purchasers who do not provide such a certificate or equivalent evidence. The retail sales tax covers not only retailers, but all businesses dealing with purchasers who do not provide a resale or other evidence signifying that no tax is due (e.g. a public body or a charity, unless specific exemption applies).
The basis for taxation is the sales price. Like the VAT and unlike multi-stage cumulative taxes, this system allows the tax burden to be calculated precisely and it does not in principle discriminate between different forms of production or distribution channels. In practice, however, at least in the United States, the failure of the retail sales tax to reach many services and the limitation of the resale exemption to products that are resold in the same form that they are purchased, or are physically incorporated into products that are resold, leads to substantial taxation of business inputs.
In theory, the outcomes of VAT and retail sales tax should be identical: they both ultimately aim to tax final consumption of a wide range of products where such consumption takes place. They also both tax the consumption expenditure i.e. the transaction between the seller and the buyer rather than the actual consumption. In practice, however, the end result may be somewhat different given the fundamental difference in the way the tax is collected. Unlike VAT where the tax is collected at each stage of the value chain under a staged payment system (see Section 1.3 above), sales taxes are collected only at the very last stage i.e. on the sale by the retailer to the final consumer. The latter method has significant disadvantages: the higher the rate the more pressure is placed on the weakest link in the chain i.e. on the retailer and in particular on numerous small retailers. All the revenue is at risk if the retailer fails to remit the tax to the authorities and the audit and invoice trail is poorer than under a VAT, especially for services. In addition, revenue is not secured at the time of importation, and this can be crucial for many developing countries. As a result, a single point resale sales tax is efficient at relatively low rates, but is increasingly difficult to administer as rates rise (Smith and Tait, 1990[10]).
The United States is the only OECD country that employs a retail sales tax as the principal consumption tax. However, the retail sales tax in the United States is not a national tax. Rather, it is a subnational tax imposed at the state and local government levels. Currently, 45 of the 50 States as well as thousands of local tax jurisdictions impose broad-based retail sales taxes. In general, the local taxes are identical in coverage to the state-level tax, are administered at the state level and amount in substance simply to an increase in the state rate, with the additional revenues distributed to the localities. Retail sales taxes are complemented in every state by functionally identical “use” taxes imposed on goods purchased from out-of-state vendors, because the state has no power to tax out-of-state “sales” and therefore imposes a complementary tax on the in-state “use” (Jerome R. Hellerstein, 2024[11])
Combined state and local sales tax rates vary widely in the United States, from 1.82% (Alaska), 4.50% (Hawaii) and 5.44% (Wyoming) to 9.54% (Louisiana and Tennessee), 9.47% (Arkansas) and 9.45% (Washington). Five states do not have a state-wide sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon and, of these, only Alaska generally allows localities to charge local sales taxes and Montana permits special taxes in local resort areas (Jared Walczak, 2024[12]). These rates are (much) lower than the applicable VAT rates in OECD countries. This is due to two main factors: the compliance risks associated with the sales tax collection method (see above) and the competition between jurisdictions (see below).
Retail sales and use taxes in force in the United States are subject to significant competitive pressure, especially in the context of interstate and international trade. Prior to the US Supreme Court’s decision in South Dakota v. Wayfair, Inc. (June 2018), Supreme Court rulings interpreting constitutional restraints on state taxation prohibited states from requiring vendors to collect tax with respect to cross-border sales when they were not physically present in the purchaser’s state. States were therefore unable effectively to collect use taxes with respect to cross-border sales from remote sellers, a problem that became increasingly significant with the advent of the Internet and online sales. In Wayfair, the Court overruled the physical-presence requirement for enforcing tax collection obligations on remote vendors as “unsound and incorrect,” and it sustained a South Dakota statute imposing such obligations on remote vendors whose annual sales into the state exceeded USD 100 000 or who annual engaged in 200 or more separate transactions in the state. In place of the physical-presence nexus rule for requiring remote vendors to collect tax on sales to in-state customers, the Court adopted a nexus rule that looks to whether the vendor “avails itself of the substantial privilege of carrying on business” in the state based on its “economic and virtual contacts” with the state.
Although the general standards the Court articulated in Wayfair provide little concrete guidance to state tax administrators and state tax advisors as to the nature and level of “economic and virtual” contacts that will satisfy constitutional nexus norms for remote sellers, the Court did identify several features of the South Dakota statute that, in its view, were designed to prevent undue burdens upon interstate commerce and thus implicitly provided guidance to the states in designing their tax enforcement regimes. First, the nexus statute provided a safe harbour for those who transact only limited business in the state. Second, the statute did not apply retroactively. Third, South Dakota was one of more than 20 states that have adopted the Streamlined Sales and Use Tax Agreement (SSUTA - available at www.streamlinedsalestax.org), which “standardizes taxes to reduce administrative and compliance costs.” As the Court elaborated: “It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability.” Indeed, as of August 2024, every one of the 45 states with sales taxes has adopted legislation or administrative guidance imposing tax collection obligations on remote vendors, as well as on digital platforms, based on thresholds analogous to those sustained by the Court in Wayfair, and more than half of these states are members of SSUTA, a number that is likely to increase in the future. It is also worth noting that the US Congress possesses the ultimate power (regardless of pre-existing judicially created nexus rules) to prescribe the terms under which remote vendors must collect tax on cross-border sales and could approve proposed legislation authorising states to require such collection if they have adopted SSUTA or similar measures to ease compliance burdens for vendors.
In the OECD nomenclature, taxes on specific goods and services (5120) include a range of taxes such as excises, customs and import duties, taxes on exports and taxes on specific services. This publication focuses on excises only.
A number of general characteristics differentiate excise duties from value added taxes:
They are levied on a limited range of products.
They are not normally due until the goods enter free circulation, at a single stage in the supply chain.
Excise charges are generally assessed by reference to the weight, volume, strength or quantity of the product (specific or “ad quantum excise”), combined in some cases, with its value (ad valorem excise).
Consequently, and unlike VAT, the excise system is characterised by a small number of taxpayers at the manufacturing or wholesale stage (although, in some cases they can also be levied at the retail stage).
Whilst VAT was first introduced about 70 years ago, excise duties have existed since the dawn of civilisation. Although they generally apply to alcoholic beverages, tobacco products and fuels in all OECD countries and beyond, their tax base, calculation method and rates vary widely between countries, reflecting local cultures and historical practice. Although excise duties, like VAT, were originally designed as a means of raising public revenue, governments are increasingly using them to influence consumer behaviour and achieve public health and environmental objectives.
As with VAT, excise taxes aim to be neutral internationally. As the tax is normally collected when the goods are released into free circulation within a jurisdiction, neutrality is often ensured by exempting the targeted goods from excise duties under controlled regimes (such as bonded warehouses) and certification of final export (again under controlled conditions) by customs authorities. Similarly, imported excise goods are levied at importation although frequently the goods enter into controlled tax-free regimes until released into free circulation.
Excise taxes may cover a very wide range of products like salt, sugar, matches, fruit juice or chocolates. However, the range of products subject to excise has declined with the expansion of taxes on general consumption. On the other hand, excise taxes on alcohol, tobacco and hydrocarbon oils are increasingly used by governments to influence consumer behaviour while they continue to raise significant revenues for governments (see Chapter 3 and 4).
There has indeed been a discernible trend in recent decades to design and levy these taxes with a view to achieve policy objectives above and beyond simply raising revenue. A number of excise duties have been adjusted with a view to discourage certain behaviours considered harmful, especially to health and environment. This has particularly been the case for excise duties on tobacco and alcohol whose rates have increased over time with the aim of reducing their consumption. The structure of certain excise duties, for example on road fuels and vehicles, has also gradually changed to encourage behaviour that enhances collective welfare, notably by stimulating sustainable consumption and environmentally friendly products and technology (see Chapter 3).
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Notes: For the purposes of this publication, “consumption Taxes” are considered as these under Item 5100 of the OECD classification of taxes
The OECD average is the unweighted average
Source: OECD, Revenue Statistics 2024 (OECD, 2024[3])
Note: The OECD average is the unweighted average
Source: OECD, Revenue Statistics 2024 (OECD, 2024[3])
Note: The OECD average is the unweighted average
Source: OECD, Revenue Statistics 2024 (OECD, 2024[3])
Note: The OECD average is the unweighted average
Source: OECD, Revenue Statistics 2024 (OECD, 2024[3])
Note: The OECD average is the unweighted average
Source: OECD, Revenue Statistics 2024 (OECD, 2024[3])