What Is an Intangible Tax?

Some assets are intangible, meaning they lack physical characteristics; however, such items are still required to be taxed by some governments. Examples of assets requiring this type of tax include copyrights, patents, and trade secrets, to name just a few. By nature, an intangible tax is a form of sales tax as it is usually imposed when a legal or competitive asset is sold. The tax rate is often determined by adding a percentage of the item’s value, usually between one and ten percent, to its retail cost, but this rule may vary between governments.

An intangible tax is most often imposed on legal property, also known as "intellectual property." This typically includes copyrights, customer lists, patents, trade secrets, and trademarks. These are classified as intangible because their true value is not known at the time of purchase or sale, and they are usually non-physical items. For example, a patent may lead to a long life of sales, or it might be replaced by a superior patent a week later; similarly, it is hard to know how much income will be generated from advertising to a customer list. The owner of these items must typically pay intangible taxes to the government because the true value of the property is unknown.

Some activities that take place within a business, such as knowledge, collaboration, and leverage activities, are considered to be competitive assets. Though no one person or company can completely own this type of asset,as it typically involves multiple people, it is still considered to be a taxable item because it plays a vital role on the overall value of the company. Many organizations do not pay intangible taxes on legal or competitive assets, as they are not sure how to calculate their value, but doing so may have more repercussions in the end, depending on the laws of the government.

Intangible tax systems are notoriously difficult to enforce. As with property taxes, they are based on an assessed value of an asset. Value can be a matter of opinion and may differ between the assessor and the assessed. Furthermore, the value of intangible assets, such as stocks, are liable to fluctuate. Due to their hard-to-quantify nature, some individuals undervalue their assets or forego the process altogether. Many local government offices lack the capacity to verify intangible tax self-valuations.

Some believe the US government loses out on tax revenue when intangible assets, such as intellectual property rights, are sold to overseas subsidiaries. This occurs when a US company sells its rights to a section of the company based in a country where it will not be taxed. US law states the property is subject to an intangible tax; however, companies often sell the rights below market value to save money by avoiding the tax.