All of the taxes citizens pay can be grouped into two categories: direct taxes and indirect taxes. Which taxes are direct taxes? Which are indirect taxes? What is the difference between a direct tax and an indirect tax? Here is an overview of direct taxes versus indirect taxes and which fees fall into each category. 

What is a Direct Tax?

As the name implies, a direct tax is a fee that you pay directly to a person or agency. Income taxes and property taxes are good examples of direct taxes, since taxpayers remit these fees directly to their federal or state departments of revenue. When it comes to direct taxes, consumers typically know about them and remit the payments or necessary documents on their own.

What is an Indirect Tax?

On the other hand, an indirect tax is a fee that you pay as part of another transaction. In this case, the money does not go directly from the consumer to the collecting agency. Instead, it is routed to an intermediary such as a retailer, who then remits it to the collecting agency.

For example, a sales tax is an indirect tax. The buyer is often aware that he or she is paying the tax, but he or she does not remit the payment to the collecting agency. Instead, the retailer takes responsibility for sending the payment to the appropriate state agency. Because the tax is remitted to a third party, it reaches the collecting agency via an "indirect" route.

Hidden Indirect Taxes

The tricky thing about indirect taxes is that you may not even be aware that you are paying them, because they may be included in the overall purchase price or the retail price of an item. When you buy a retail product, you are actually paying indirect taxes. How so?

The manufacturer is required to pay taxes, both on its profits and on the goods used to make the product. In response to these expenses, companies generally inflate their product prices to make up for these costs. As a result, when you purchase the product, you are indirectly paying the cost of those taxes by easing the manufacturer's out-of-pocket tax expenses.

A direct tax is a tax that you pay directly to the appropriate collector. An indirect tax, which may still be paid by you, simply goes to a middleman or middle company before reaching the collector. Both taxes are a part of the everyday lives of most consumers.