Ch7. Sales Tax, Estate Tax & Gift Tax — Indirect Taxes and Wealth Transfer

Sales Tax & Use Tax Framework

Taxable Events:
Sale of tangible personal property (seller collects)
Use of out-of-state purchases (buyer self-assesses use tax)
Certain services (varies by state)

Rates:
State sales tax: varies (0% in Oregon/NH to ~7.5% in CA)
Local add-ons: combined rates often 8%–10%+
Exemptions: groceries, prescription drugs, medical devices (vary by state)

Collection Structure:
Seller collects tax at point of sale
Remits to state (monthly, quarterly, or annually)
Buyer owes use tax if sales tax not collected (e.g., online purchase)

Nexus Rules:
Physical nexus: store, warehouse, employees in-state
Economic nexus: sales >$100,000 or 200+ transactions (post-South Dakota v. Wayfair, 2018)

Federal Sales/Excise Tax

Federal Excise Taxes (no broad federal sales tax in US):
Gasoline: ~$0.184/gallon (federal)
Cigarettes: $1.0066/pack
Alcohol: varies by type
Air transportation: 7.5% of ticket price + segment fee
Heavy trucks: 12% of retail price

Importation (Customs/Tariffs):
Customs duties on imported goods
Varies by country of origin and product classification (HTS code)

Federal Estate Tax (Form 706)

Taxable Estate:
All property owned at death (fair market value)

Gross Estate Includes:
Real property, financial assets (stocks, bonds, bank accounts)
Life insurance proceeds (if decedent held incidents of ownership)
Retirement account balances
Gifts made within 3 years of death (§2035)

Key Deductions:
Marital deduction: unlimited (100% of assets to surviving spouse)
Charitable deduction: unlimited
Debts and expenses: funeral costs, administration fees, mortgages

Unified Credit / Basic Exclusion:
2025: $13,990,000 per person (indexed for inflation)
Portability: unused exclusion of deceased spouse can transfer to survivor
→ Effective exclusion for married couple: ~$27.98M (2025)

Estate Tax Rates: 40% flat rate above the exemption
Filing: Form 706 due 9 months after date of death (6-month extension available)

Federal Gift Tax (Form 709)

Taxable Gifts:
Lifetime transfers without adequate consideration

Annual Exclusion:
$19,000 per donee per year (2025, indexed for inflation)
Gifts up to this amount per recipient are excluded from gift tax

Gift Tax Exemption:
Unified with estate tax — same $13,990,000 lifetime exclusion (2025)
Taxable gifts reduce the exemption available at death

Gift Tax Rate: 40% flat rate (same as estate tax)

Special Rules:
§2503(c) trusts for minors
§2503(e): Direct payment of tuition and medical expenses — excluded completely (no limit)
Superfunding 529: 5-year gift tax election up to $95,000 (2025) per beneficiary

Filing: Form 709 due April 15 of the year following the gift
Prior gifts: cumulative lifetime taxable gifts aggregate across years

No Federal Sales Tax in the US ★★★★★ : The US has no national VAT. Sales taxes are state/local only. Federal indirect taxes are excise taxes on specific goods. Memory hook: Federal = income tax; Sales tax = state level

**Estate Tax Exemption = ~ $14M per person (2025)** ★★★★★ : Married couple effectively shielded ~$ 28M via portability. Rate above exemption: 40%. Memory hook: 2025 exclusion ≈ $14M; rate = 40%

*Annual Gift Exclusion = $19,000 per donee (2025)** ★★★★☆ : Cumulative per-donee per-year limit. Spouse-to-spouse gifts: unlimited (marital deduction). *Memory hook: Annual exclusion =$ 19K/person; med/tuition = unlimited exclusion

Practice Quiz

Q. What is the difference between the annual gift tax exclusion and the lifetime gift tax exemption?

The annual exclusion ( $19,000 per donee in 2025) covers gifts to each individual recipient each year with no gift tax consequences and no filing required. The lifetime exemption ($ 13,990,000 in 2025) is the total amount a person can give away tax-free over their lifetime beyond the annual exclusions. Gifts exceeding the annual exclusion reduce the lifetime exemption dollar-for-dollar. When the lifetime exemption is exhausted, gift tax applies at 40%. Since the gift and estate tax exemptions are unified, gifts that use up the lifetime exemption also reduce the estate tax exclusion available at death.

Q. What is the §2503(e) exclusion, and how does it compare to the annual gift exclusion?

The §2503(e) exclusion allows unlimited tax-free transfers for direct payment of another person’s tuition (to an educational institution) or medical expenses (to a medical provider). Unlike the annual exclusion ($19,000 per person), the §2503(e) exclusion has no dollar cap and does not count against the lifetime exemption. Key requirement: payment must be made directly to the school or medical provider — reimbursing the individual does not qualify. This makes it one of the most powerful estate-planning tools for parents and grandparents paying college tuition.