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Does the FairTax tax used items?

The FairTax does not tax “used” goods but it is important to note that HR25 has a legal definition of the term “used”.  This is necessary to ensure that items are taxed only once and to prevent tax cheating.   

Under the FairTax, for an item to be considered “used” it must be:

 (1) purchased before the FairTax is enacted, or

 (2) the FairTax on the item must have been previously paid.  

Let’s look at (1) above.  Assume that Joe bought a new car in January of 2005.  Let’s further assume that the FairTax went into effect on Jan. 1, 2006.  Since Joe owned the car before the enactment of the FairTax, it is considered a “used” car.  It has the taxes from the existing tax system embedded in its price.  Therefore, when Joe sells that car to Bill, Bill will not owe tax on the transaction. 

Now, let’s consider (2) above.  The most common example is that Joe buys a new car for personal use and pays the FairTax on it.  If Joe then sells his car to Bill, there would be no tax on it because the tax had already been paid.  Let’s look at another example. Assume that Joe owns a flower shop business and buys a van to use when making deliveries to his customers.  No tax is charged on purchases for business purposes so that the FairTax on goods sold to consumers does not double tax, or put a tax on a tax. 

If Joe decides to sell the van to his friend Bill (who is not in business) for use as his personal vehicle, then it would be a taxable sale to Bill.  Why?  Because Joe did not pay tax when he bought the van for his flower shop.  Since no FairTax has been previously paid on that van; it is not considered used and the sale to Bill would be taxable.

If later, Bill decided he did not like driving a van and sold it to someone else, it would not be a taxable sale.  Why?  Because the tax had been previously paid (when Bill bought it from Joe) making the item “used” and not subject to tax. 

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