Which statement is true about sales tax described as ad valorem?

Which statement is true about sales tax described as ad valorem?

• A. It is a fixed tax per unit
• B. It is based on price of goods sold
• C. It is a tax on income
• D. It is a tax on wealth

Answer: (B)

Ad valorem means the tax is calculated as a percentage of the value (price) of the goods sold. So for a given rate, higher-priced items incur higher taxes, and lower-priced items incur lower taxes. This is why a sale tax described as ad valorem is based on the price of what’s sold, not on a fixed amount per unit. It’s different from a fixed tax per unit, which would charge the same amount regardless of price, and from taxes on income or wealth, which target earnings or net worth rather than the value of the goods. For example, with an 8% ad valorem rate, a $50 item pays $4 in tax, while a $200 item pays $16.

Ad valorem means the tax is calculated as a percentage of the value (price) of the goods sold. So for a given rate, higher-priced items incur higher taxes, and lower-priced items incur lower taxes. This is why a sale tax described as ad valorem is based on the price of what’s sold, not on a fixed amount per unit. It’s different from a fixed tax per unit, which would charge the same amount regardless of price, and from taxes on income or wealth, which target earnings or net worth rather than the value of the goods. For example, with an 8% ad valorem rate, a $50 item pays $4 in tax, while a $200 item pays $16.