Luxury Tax

What is a luxury tax?

A luxury tax is a type of tax that is levied on the purchase of expensive or unnecessary goods and services. It’s a form of indirect tax built into the price of the item. The consumer pays this tax when they make a luxury purchase. 

Over the years, different types of luxury tax have been implemented to generate additional revenue and shape buyer behavior. These taxes have had some success and have also drawn sharp political lines. 

Sales tax and VAT compliance software can help e-commerce companies stay current with tax rules and exemptions. In the United States, this type of software makes tracking and filing sales tax easy. Elsewhere, tools exist for staying compliant with value-added tax (VAT) and goods and services tax (GST).

Types of luxury tax

The term luxury tax has been used in a variety of ways. When people refer to a “luxury tax,” they are typically talking about one of two different things:

1. A tax on harmful goods and services: Also known as a “sin tax,” this is when a government taxes items considered harmful to individuals, such as alcohol, tobacco, or gambling. A sin tax is designed to both deter people from engaging in risky behavior and to generate revenue. People often place the sin tax under the umbrella term of luxury tax because the items involved are non-essential and therefore luxuries. Critics sometimes claim that its  a regressive tax because it affects lower-income earners more. 
2. A tax on expensive goods and services: This refers to a tax on high-ticket items typically only purchased by the wealthy, such as yachts, furs, or jewelry. Pricey goods are often associated with extravagance – hence the term “luxury tax.” This is considered a progressive tax, meaning that a higher payment burden is placed upon those who earn more.  

In the U.S., the federal and state government can both levy taxes, which means some states have their own unique luxury taxes. For instance, New York, New Jersey, Hawaii, Connecticut, and the District of Columbia all have what is called a “mansion tax.”

Also known as a real estate transfer tax on high-income properties, a mansion tax is a way of closing budget gaps or helping balance tax rates between lower-income and higher-income residents. 

History of the luxury tax

Luxury tax regulations have shifted and evolved in the U.S. and beyond. The tax has been used to raise money for various government objectives. Some examples are explained below.

• Congress levied a tax in 1898 to help pay for the Spanish-American War. At the time, citizens had to pay a penny on any long-distance call costing more than 15 cents. Since only wealthy people owned phones, this fee was considered a luxury tax. 
• In 1991, Congress approved a 10% luxury tax on high-end automobiles, boats, jewelry and furs, and private planes in an effort to lower the federal deficit. Once the tax was in place, people started purchasing fewer of these goods, making the tax less effective than anticipated. Two years later, in August 1993, it was eliminated after nearly sinking the yacht industry.
• In 2021, Canada proposed a budget imposing a tax on new cars and aircraft over $100,000 CAD and new boats worth over $250,000 CAD. The tax is the lesser of either 10% of the retail sale price or 20% of the retail sale price above the threshold. The tax is scheduled to come into effect on September 1, 2022.