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Legal Dictionary

ad valorem tax

Legal Definition of ad valorem tax

Related terms


Definition of ad valorem tax

Noun

ad valorem tax (plural ad valorem taxes)

  1. A tax that is assessed as a proportion of the value of the property being taxed.

Further reading

An ad valorem tax (Latin for according to value) is a tax based on the value of real estate or personal property. It is more common than a specific duty, a tax based on the quantity of an item, such as cents per kilogram, regardless of price.

An ad valorem tax is typically imposed at the time of a transaction (a sales tax or value-added tax [VAT]), but it may be imposed on an annual basis (real or personal property tax) or in connection with another significant event (inheritance tax, surrendering citizenship, or tariffs). In some countries stamp duty is imposed as an ad valorem tax.

Sales tax

A sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax is usually set as a percentage by the government charging the tax. There is usually a list of exemptions. The tax can be included in the price (tax-inclusive) or added at the point of sale (tax-exclusive).

Ideally, a sales tax is fair, has a high compliance rate, is difficult to avoid, is charged exactly once on any one item, and is simple to calculate and simple to collect. A conventional or retail sales tax attempts to achieve this by charging the tax only on the final end user, unlike a gross receipts tax levied on the intermediate business who purchases materials for production or ordinary operating expenses prior to delivering a service or product to the marketplace. This prevents so-called tax "cascading" or "pyramiding," in which an item is taxed more than once as it makes its way from production to final retail sale. There are several types of sales taxes: seller or vendor taxes, consumer excise taxes, retail transaction taxes, or value-added taxes.

Value-added tax

A value-added tax (VAT), or goods and services tax (GST), is tax on exchanges. It is levied on the added value that results from each exchange. It differs from a sales tax because a sales tax is levied on the total value of the exchange. For this reason, a VAT is neutral with respect to the number of passages that there are between the producer and the final consumer. A VAT is an indirect tax, in that the tax is collected from someone other than the person who actually bears the cost of the tax (namely the seller rather than the consumer). To avoid double taxation on final consumption, exports (which by definition are consumed abroad) are usually not subject to VAT and VAT charged under such circumstances is usually refundable.

Property tax

A property tax, millage tax is an ad valorem tax that an owner of real estate or other property pays on the value of the property being taxed. There are three species or types of property: Land, Improvements to Land (immovable man made things), and Personal (movable man made things). Real estate, real property or realty are all terms for the combination of land and improvements. The taxing authority requires and/or performs an appraisal of the monetary value of the property, and tax is assessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions.

References:

  1. Wiktionary. Published under the Creative Commons Attribution/Share-Alike License.



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