I’ve long been fascinated by industries that sell a good or service either at cost or a loss, and make up the money on some secondary good or service. Movie theaters, as the classic example goes, make almost no money selling tickets, but make bank on concessions. This is strange, but it works out – if I’m low on cash, I can still see a movie for relatively cheap, and my trip to the theater is somewhat subsidized by wealthier people who feel they can afford spending $10 on 20 cents of popcorn.
In other cases, the subsidizing is done by the poor. Gas stations, for example, sell gas at almost no markup, and exist to sell salty snacks and drinks. This is great for the consumer that doesn’t buy salty snacks and drinks at gas station prices, but in this case it’s generally poorer people I see in there buying this stuff. Wealthy people swipe their card, fill up their 7-series, and get back to drinking their starbucks or whatever.
And prompting this thread was the recent bitching about how debit cards are going to start costing money because banks can no longer subsidize them by charging high fees to morons who can’t keep a checking account balanced.
I know it’s a contentious topic, but I feel like the last cast is an example of a government forcing a realistic internal price structure. Which got me thinking – is that what a VAT does?
Consider me rather ignorant about VATs. How do they work exactly? I read through the wiki and it presents basic examples, but doesn’t go into much detail. Does a gas station pay different VAT rates on their gas and their salty snacks? Do movie theaters pay different rates on tickets versus concession sales? Do they have to break concession sales down by category, paying more VAT for products they add little value to (Coke syrup) and more for those others (unpopped kernels)? Or does the movie theater just pay one VAT rate on its entire operation?
Is VAT based solely on the net profit? Like, do gas stations pay no VAT on gas if they sell it at cost? Or does the government set rates based on whatever they say the value added is?
Would this do anything to restructure costs? Or would gas stations continue to sell gas at cost + VAT + a penny and make all their money on Mountain Dew?
When Canada introduced the GST (Goods and Sevice Tax) my observation was that from a business pespective, it’s a profit and payroll tax. You get a refund on GST paid, which generally is for the material and service inputs to your busness; then charge a flat tax to customers on the output (“Value added”). The net result is that the major components of the sale price that the business does not pay GST on are wages and markup.
In the case of a gas station, the operator pays the refinery $X/litre and a 5% GST on that. They charge the customer 5% GST (Plus a whack of other taxes rolled into the price) and remit to the government GST collected minus all GST paid. Either you have a fancy accounting system to track it all if you have a complex business, or they allow shortcuts - if you don’t want to waste time tallying GST paid send us he industry average for your business - X% of sales (maybe, 3.5%? When GST was 7% it was typically 5%)
I find that hard to believe, frankly. I should think only about one in twenty gas customers actually buy snacks (ok, I pulled that figure out of my ass, but still…) plus a few more who wander in on foot because it is closer than the liquor or convenience store down the street. I don’t doubt that the markup on the snacks is huge, but it is still not that money per transaction, and I doubt that most gas stations shift that much volume in snacks (the stuff often looks as though it has been on the shelves for quite a while). I understand that the markup on the gas is very small in percentage terms, but surely that is still where most of the profit is, because they are doing a lot of volume (and on a fairly pricey product).
I used to live a block from two gas stations on opposite corners of a junction. One had a tiny, dingy snack store. The other was a 7-11 24 hour convenience store. Gas at the 7-11 was a lot more expensive than at the other place. I figure they were counting on people who came primarily for the shopping picking up some gas too, avoiding the inconvenience of driving across to the other side of the junction to save money - i.e., the opposite of the model you describe.
Per that story, the gas station makes 9 cents on a gallon. If they’re selling $60,000 worth of gas a week, that works out to about 20,000 gallons of product. At 9 cents per gallon, that’s $1800 of profit on gas in a week. If your store is manned 16 hours a day, 7 days a week, by an $8/hr employee, that’s half your gas profits right there. And you haven’t even kept the lights on, serviced your pumps, or paid your mortgage. From what I’ve read elsewhere, that profit structure is typical.
The “value added” by each vendor in the chain is simply the difference between what they pay for materials, equipment etc. and what they sell their product for. It’s not a tax on how profitable each operation of a business is, it’s a tax on how much value it is perceived to create. Customers who pay $10 for popcorn don’t care how much the popcorn cost to make, they just know that, to them, it’s worth $10.
[edit] Well OK, I suppose the amount of VAT paid due to a profitable enterprise such as selling popcorn would be higher, but the rate of VAT is the same.
**Does a gas station pay different VAT rates on their gas and their salty snacks? **
Depends if the implementation of the VAT has different rates for gas and “salty snacks”
**Do movie theaters pay different rates on tickets versus concession sales? **
Depends if the implementation of the VAT has different rates for movie tickets and concession sales.
Do they have to break concession sales down by category, paying more VAT for products they add little value to (Coke syrup) and more for those others (unpopped kernels)?
Only if the VAT has different categories for coke syrup and popcorn, which is unlikely.
Or does the movie theater just pay one VAT rate on its entire operation?
Depends on the VAT implementation. One way of doing it would be charged VAT on all sales, and get a rebate derived from the cost of purchasing concessions that are onsold (i.e. the corn syrup and unpopped kernels). I’m not sure how the tickets would be treated, possibly taking the cost of purchasing the rights to show the film as a cost? This all depends on the specifics of the VAT and what the government collecting the tax says you can claim as a cost.
Is VAT based solely on the net profit? Like, do gas stations pay no VAT on gas if they sell it at cost?
Net profit is the revenue minus total cost of a business (including wages etc.), VAT is charged on the “value added”, the difference between what it cost to purchase materials and the revenue from selling whatever you turned the materials into. This doesn’t include any other costs. So yes, if a gas station sold gas at the same price as it was purchased then there effectively would be no VAT on the gas part of the operation.
Or does the government set rates based on whatever they say the value added is?
What do you mean exactly? That the there is a law says that all gas stations add a value of X to gas and tax that? Or that tax departments look through businesses books and figure out the tax liability from that? No for the first. Yes for the second, kinda. You have to be able to show that what you say the value added was, is what was really added. Like all taxes.
Would this do anything to restructure costs? Or would gas stations continue to sell gas at cost + VAT + a penny and make all their money on Mountain Dew?
Probably not, it has more of an effect on wholesalers and how they report taxes. You can assume that raising a VAT tax rate % might raise prices to the consumer but that is like any other sales tax.
Simple VAT - collect on all sales X% for the government. Pay Y% on all VAT-eligible costs of inputs. Subtract paid from collected (X-Y) and send that to the government.
Typically, some transactions are exempt. Insurance premiums, for example. Bank deposits ar a simple transfer of cash, so exempt. In Canada, groceries (but not snacks or restaurant meals) are exempt, medical supplies, rents, most used items, etc. Those are political/social decisions. The anti-tax people screamed when the GST applied to books, typically exempted by plain provincial retail sales taxes; ditto for new houses - there’s a sliding rebate scale. However, the simplest course of action is to tax as much as possible and keep the rate low as a result.
The big deal is that traditional retail sales taxes did not apply to services - plumbers, contractors, etc - so in effect, it’s massive expansion compared to a retail tax. OTOH, for the contractor, he can now claim a rebate on the material he buys for a job.
For a typical business, the main expenses that do not include an offsetting tax paid are wages. So essentially, a VAT is a tax on wages and profits.