Understanding direct and indirect taxes

Understanding the various types of taxes is essential for businesses to manage their expenses and ensure compliance effectively. In the U.S., taxes primarily fall into two categories: direct and indirect.

Direct taxes

Direct taxes are imposed on the income of individuals and organizations and paid directly to the government. Several types of direct taxes include corporate, income and property taxes:

• Corporate Tax: Imposed on the income or profits of corporations and businesses.
• Income Tax: The most common form of direct tax, imposed on an individual's income earned in a fiscal year and paid directly to the government.
• Property Tax: Imposed on real estate, including land, buildings, and other types of property such as vehicles, typically based on the property's assessed value.

Indirect taxes

Indirect taxes are collected by a seller, such as a retailer, from the consumer. These taxes are added to the cost of a product or service, and the consumer pays the tax indirectly when making a purchase.

• Sales and Use Tax: Applied to both products and services at a fixed rate defined by the taxing jurisdiction, rather than a percentage of the product's price. This tax is typically collected at the point of sale and then remitted to the government. For more information on Vertex’s Sales and Use Tax Software Solutions, visit this page.
• Value-Added Tax (VAT): Imposed on the incremental value of goods and services at various production and distribution stages, ensuring a more equitable distribution of the tax burden.
• Excise Duty Tax: Often called the "sin tax," targets specific goods and services, such as alcohol, tobacco, and fuel, to discourage consumption and generate revenue for healthcare and other programs.

As you navigate the complex world of taxation, consider using Vertex tax solutions to simplify indirect tax compliance.