Word of the Month for October 2026: National Sales Tax

There are some words that sound almost comforting:  Freedom. Fairness. Simplicity.

And then there are three other words that make the hairs on the back of a taxpayer's neck stand up: "Federal Sales Tax."

Imagine, for a moment, that Congress comes along and tells you that the income tax is going away. No more Form 1040. No more withholding from your paycheck. No more payroll tax. No more federal estate and gift tax. And, perhaps most tantalizing of all, no more Internal Revenue Service.

Sounds pretty good, doesn't it?

Now imagine that Congress hands the job of collecting the replacement tax to the states.

Wait.  Hold up.  The ugly step sisters?  The bumbling in-laws?  Those are "the states" of which you speak?

Yep.  The very state governments that already have their own sales-tax statutes, tax commissions, regulations, auditors, filing requirements, exemptions, definitions, enforcement procedures and (depending upon where you live) some rather creative ideas about what constitutes a taxable "service"?

Now the plot thickens.

That is essentially what the FairTax Act of 2025, H.R. 25, 119th Cong., 1st Sess. (2025) proposes.

And before we go any further, let's clear up one piece of political housekeeping: H.R. 25 was NOT introduced by President Donald Trump. It was introduced by Representative Earl "Buddy" Carter of Georgia on January 3, 2025, and referred to the House Committee on Ways and Means. As of October 2026, it remains a bill not a law.

So why discuss it now?

Because H.R. 25 proposes one of the most radical changes to the federal tax system in modern American history.  And once you get past the seductive phrase "abolish the IRS," there is considerably more going on.

Before we get all into this, let's define what we're talking about here.  NATIONAL SALES TAX (noun): A national sales tax is a tax imposed by the federal government upon the consumption of taxable goods and services, generally collected at the point of retail sale rather than through taxation of income.

Under H.R. 25, the tax would be imposed on the 

use or consumption in the United States of taxable property or services. 

The bill calls for a 23-percent tax-inclusive rate beginning in 2027, with the rate thereafter tied to the revenue needed for general federal spending, Social Security and Medicare. H.R. 25 § 201, 119th Cong. (2025).

An important word hidden in plain sight is "inclusive."  

See, a 23-percent tax-inclusive rate is not the same thing as adding 23 percent to a $100 purchase.

For example, if the pre-tax price is $100, a 23-percent tax-inclusive rate produces a total price of approximately $129.87. In ordinary sales-tax language, that is roughly a 29.87-percent tax-exclusive rate.

So when somebody says, "It's only 23 percent," the reasonable response is:  "Twenty-three percent of what?" 

So, What Exactly Does H.R. 25 Do?

H.R. 25 is not simply a bill creating another sales tax.  It attempts to rebuild the federal tax system from the ground up in essentially 4 steps.

Step 1. The federal income tax goes out the window.

Section 101 repeals Subtitle A of the Internal Revenue Code, which contains the federal income and self-employment tax provisions.

Step 2. Federal payroll taxes go.

Section 102 repeals Subtitle C, including the federal payroll-tax machinery used for Social Security and Medicare.  But (and this is an important BUT) Social Security and Medicare do not disappear.

The bill instead directs federal sales-tax revenue into the Social Security and Medicare trust funds (under H.R. 25 § 102, § 904) which has been so "perfectly administered" by the federal government for lo these many years.

Step 3. Estate and gift taxes are gone.

Section 103 repeals Subtitle B of the Internal Revenue Code.

Step 4. The IRS is phased out.

This is where the headline gets interesting.  H.R. 25 provides for the phase-out of IRS funding and administration of the repealed federal taxes. It also creates a Sales Tax Bureau within the Department of the Treasury.

So "abolish the IRS" does not mean "abolish federal tax administration."

It means something closer to:  Abolish the IRS as we know it and replace its remaining federal tax functions with other Treasury machinery.

The bill specifically creates a Sales Tax Bureau to administer the national sales tax in states where federal administration becomes necessary and to perform other federal duties relating to the tax under H.R. 25 § 302.

That's our first little plot twist. 

The States Get the Collection Job

This may be the most interesting part of the entire bill.

H.R. 25 says that the national sales tax is to be "administered, collected, and remitted to the United States Treasury" by a state if that state qualifies as an "administering State."

To qualify, a state must maintain a sales tax and enter into a cooperative agreement with the Secretary of the Treasury.

So, as per H.R. 25 § 401 the agreement covers such things as:

• transfer of federal tax money;
• information exchange;
• confidentiality;
• taxpayer rights;
• dispute resolution; and
• other administrative matters.

And the states get paid for doing it.  That's right - an administering state may retain an administration fee equal to one-quarter of one percent of the federal tax it collects.

So the federal government says:  "This is our tax."

The state says:  "Sure. We'll collect it."  

And the state gets to keep a piece of the money for doing so.  That's not exactly the abolition of government tax administration; it's outsourcing. 

And Here Comes Uncle Sam Again

Remember that word in the title, "Primarily?"  H.R. 25 says the national sales tax will be administered primarily by the states.

Not exclusively by the states but "primarily."

What this means is that if a state does not qualify as an administering state, the Secretary of the Treasury administers the federal sales tax there. A state can also have another state perform the job under certain circumstances (kinda like how states dump their trash in New Jersey instead of their own landfills) under H.R. 25 § 404.

Of course, the Secretary of the Treasury retains substantial authority.  In fact, The Treasury Secretary may:

• issue regulations;
• issue guidelines;
• assist states;
• provide for uniform administration;
• provide public guidance;
• facilitate interstate agreements;
• resolve certain disputes among states; and
• administer the tax directly in certain jurisdictions.

If a state regulation conflicts with a lawful federal regulation concerning the federal sales tax, the federal regulation controls as per H.R. 25 § 402 and § 406.

So the IRS may be going out the front door but the federal government appears to be leaving a Treasury Department-shaped footprint in the back door. 

The Catch: State Sales Taxes Don't Go Away

This is another point that could easily get lost in the sales tax pitch.  

H.R. 25 does not abolish state sales taxes.  Instead, it specifically contemplates a "conforming State sales tax" which is a state tax using the same definition of taxable property and services as the federal system.

And the bill expressly contemplates that both the federal sales tax and a conforming state sales tax may be paid together in a single payment as per H.R. 25 § 2(a)(2), § 501.

In other words:  Federal sales tax + state sales tax = still possible.  In practice, what we the people could be looking at is a true Socialist 100% tax rate (50% to the Feds and 50% to the states).

So, while the national sales tax replaces federal income and payroll taxation, it does not magically make state taxation disappear.

And this is where things get interesting. 

Fifty States, Fifty Tax Personalities

Today, state sales taxes are hardly uniform.  Utah, for example, taxes tangible personal property and certain services, including particular repair, renovation, cleaning and maintenance services.

Oregon, by contrast, has no general sales or use tax.

That means a national system administered through state tax machinery immediately encounters a basic question:  What exactly is a taxable "service"?  

and that question is not academic.

Utah's courts have spent decades wrestling with it.

In Hardy v. State Tax Commission, 561 P.2d 1064 (Utah 1977), the Utah Supreme Court examined whether materials used by dentists in providing professional services were subject to sales or use tax. The court had to distinguish between the taxable sale of tangible property and a service in which tangible property was merely incidental.

Likewise, in BJ-Titan Services v. State Tax Commission, 842 P.2d 822 (Utah 1992), the Utah Supreme Court dealt with the difficult boundary between taxable tangible property and nontaxable services and discussed the state's "essence of the transaction" and "ultimate user or consumer" approaches.

That is the sort of dispute H.R. 25 would have to address on a national scale.

What happens when the plumber says the customer bought a service?

What happens when the plumber says the customer bought materials plus labor?

What happens when the software company sells a subscription?

What happens when the doctor provides medicine as part of a treatment?

What happens when an attorney sells advice?

What happens when artificial intelligence provides a service?

What happens when a business buys something that is partly for business and partly for personal use?

The bill has answers to some of these questions but/and it does not eliminate the need to argue about them. 

The Supreme Court Has Already Been Down This Road

The good news is that there is a substantial body of sales-tax constitutional law.  The bad news is that it demonstrates just how complicated interstate taxation can become.

In National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753 (1967), the Supreme Court held that Illinois could not require an out-of-state mail-order company with no physical presence in Illinois to collect Illinois use tax.

The world, however, changed.

In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the Court retained the Commerce Clause physical-presence rule for state sales-tax collection even though its Due Process analysis had evolved. The Court expressly noted that Congress possessed the power to resolve the interstate taxation problem.

Then came the internet.

In South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), the Court overruled the physical-presence rule of Quill and permitted states to require certain remote sellers to collect sales tax based upon economic connections to the state.

In Complete Auto Transit, Inc. v. Brady, the Supreme Court established a four-part test for determining whether a state tax involving interstate commerce violates the Commerce Clause. The tax must apply to an activity with a substantial nexus to the taxing state, be fairly apportioned, not discriminate against interstate commerce, and be fairly related to services provided by the state. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).

H.R. 25 is not operating in a constitutional vacuum.  It is stepping into a constitutional minefield that the Supreme Court has spent decades mapping. 

The Really Interesting Part: Destination

H.R. 25 uses a destination principle.  For tangible personal property, the destination generally is where the property is first delivered to the purchaser. Real property is taxed according to where the property is located. Other property generally follows the purchaser's residence, while services have their own destination rules as per H.R. 25 § 405.

Why does that matter?

Because the question becomes: Which state gets the money?

Suppose a company in Utah sells something to a customer in New York.  Utah collects it.  New York claims it.  The seller ships it from Nevada and the customer uses it in Florida.

Welcome to the tax lawyer's version of Clue.

H.R. 25 therefore creates a federal Office of Revenue Allocation to resolve disputes among administering states concerning where taxable property or services are destined. Its decisions would be subject to judicial review in federal court under an abuse-of-discretion standard under H.R. 25 § 405(i).

So, yes, the IRS is being abolished but federal courts, federal regulations, the Treasury Department and a federal Office of Revenue Allocation remain part of the scenery. 

What About Regulations?

Here is an important distinction.  There are no H.R. 25 implementing regulations yet because H.R. 25 is not law.  But the bill anticipates a substantial regulatory structure if enacted.

The Treasury Secretary would have authority to promulgate regulations concerning administration, uniformity, interstate taxation, imported goods, definitions and other matters.

The bill even requires most federal regulations to be published in the Federal Register and generally delayed for 90 days before taking effect, subject to an emergency exception as per H.R. 25 § 406.

Oh, and state tax administrators would still have their own rules and procedures.

That creates an interesting legal question:  How much "national" sales tax can you have when somebody else is doing the administering?

H.R. 25 attempts to answer that by making federal rules controlling when federal and state rules conflict.  And while that all sounds uniform, it also means that the supposedly simple national sales tax could generate an entirely new body of federal regulations interpreting what "taxable," "consumer," "service," "business," "investment," "export," "intermediate sale" and dozens of other terms mean.

The tax code may get shorter but the regulations may not. 

Oh and Don't Forget About the Audits

This is another myth worth killing.  A national sales tax does not mean nobody gets audited.

H.R. 25 gives the sales-tax administering authority authority to issue administrative summonses and conduct examinations and audits of people who may be liable to collect and remit the tax.

Businesses must maintain specified records for six years as per H.R. 25 §§ 507–508.

Oh, and don't forget about the penalties.

For example:

• knowingly or recklessly accepting a false intermediate or export certificate can trigger a penalty of 20 percent of the uncollected tax;
• late remittance can result in a penalty of 1 percent per month, up to 24 percent;
• false rebate claims can result in a civil penalty of at least $500 or 50 percent of the improperly claimed amount;
• certain false rebate claims can also carry criminal penalties of up to one year imprisonment.

as per H.R. 25 § 504.

So the IRS may disappear; auditors do not.  They just may be wearing state badges. 

The Family Consumption Allowance

H.R. 25 attempts to address one of the biggest criticisms of a consumption tax: poorer households generally spend a greater proportion of their income on necessities.  The bill therefore creates a monthly Family Consumption Allowance, commonly called the "prebate."

Under this "prebate," a qualifying family would receive a monthly amount calculated by multiplying the federal sales-tax rate by the applicable monthly poverty level.

But there is a catch here, too.  The family has to register.

Under H.R. 25 § 301–305, the registration requires information including the names and Social Security numbers of family members sharing the household.

So the system that says:  "You don't have to deal with the IRS anymore" still requires Americans who want their monthly federal consumption allowance to register with the sales-tax administering authority.

Again: Different tax system. Different paperwork. 

So, What Could Possibly Go Wrong?

Now we get to the part every reasonable taxpayer should be asking about.  Not because H.R. 25 is necessarily evil.  Not because the current tax system is wonderful.  But because every complicated government system eventually encounters the law of unintended consequences.

1. The "23 percent" problem

The 23-percent rate is tax-inclusive.  On a conventional tax-exclusive basis, it is approximately 30 percent.  That distinction could become a political and consumer-relations headache.

2. The state bureaucracy problem

Instead of one primary federal tax administrator, taxpayers could be dealing with state agencies administering a federal tax under federal regulations.  That could produce substantial differences in administration, enforcement culture and taxpayer experience.  The Tax Foundation has specifically identified this concern, noting that taxpayers could effectively encounter as many as 51 administering agencies rather than one IRS.

3. The "what is a service?" problem

The more the economy moves toward services, subscriptions, digital products, artificial intelligence and hybrid transactions, the harder it becomes to draw a bright line around taxable consumption.  State courts already struggle with this problem.  A national system will not make the question disappear.

4. The state-tax stacking problem

Nothing in H.R. 25 abolishes state and local taxation.  As I noted above, a federal consumption tax could very well coexist with state and local sales taxes.  The cash register could become a rather crowded neighborhood.

5. The evasion problem

A very high retail tax creates a substantial incentive to avoid the tax.  

• Buy used instead of new.
• Buy from someone who does not collect.
• Buy across borders.
• Pay cash.
• Barter.
• Call a taxable sale a "service."
• Call a service a "business input."

The higher the tax, the more valuable avoidance becomes.  The bill therefore contains substantial enforcement provisions which brings us right back to audits, records, penalties and government enforcement; none of which address the obvious black market this bill would create.  

6. The "Congress can change its mind" problem

Perhaps the most interesting constitutional wrinkle is the Sixteenth Amendment.  H.R. 25 states that Congress finds that the Sixteenth Amendment should be repealed.  

Wait, what?!  Why get rid of the 16th Amendment?

There is nothing defective about the 16th Amendment that requires repeal.  H.R. 25's sponsors simply want it repealed for a strategic reason: to prevent a future Congress from bringing back a federal income tax after the Fair Tax has replaced it.

Confused?  Let me break this down for you.

The Sixteenth Amendment says:

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States…”

The Supreme Court has repeatedly explained that the Amendment removed the constitutional obstacle that Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895), 158 U.S. 601 (1895), had created for federal income taxation. In Brushaber v. Union Pacific Railroad Co., 240 U.S. 1 (1916), the Court explained that the Amendment confirmed Congress's ability to impose income taxes without apportionment.

So why does H.R. 25 want it gone?  Because repealing the Internal Revenue Code is not the same thing as repealing the constitutional power to tax income.  H.R. 25 would repeal the federal income-tax statutes, but the Sixteenth Amendment would remain sitting in the Constitution.

That means a future Congress could theoretically say:  "Well, we tried this national sales-tax thing and it didn't work.  Let's enact an income tax again."  And Congress wouldn't first have to amend the Constitution to obtain the power to tax income. The constitutional authority would already be there.

That is precisely why H.R. 25 contains its rather extraordinary seven-year sunset provision.  Section 401 provides that if the Sixteenth Amendment isn't repealed within seven years after enactment, the Fair Tax provisions eventually terminate.

Basically, H.R. 25 sponsors want to remove the safety net under their high wire act. 

The Bottom Line

There is nothing inherently unconstitutional about Congress replacing one method of federal taxation with another. The Constitution gives Congress broad taxing authority, subject to constitutional limitations.

Nor is there anything inherently sinister about allowing states to administer a federal tax. Congress has used federal-state cooperative arrangements in numerous areas of government.

The interesting question is whether the proposed system would actually be simpler for Americans.  And it might be.

It might also turn the United States into a nationwide sales-tax laboratory in which 50 states, federal regulators, federal courts, state courts, businesses and taxpayers spend the next decade litigating what exactly constitutes taxable consumption.

And that is the part worth watching.

So, while the IRS may be leaving the stage, the Treasury, state tax agencies, auditors, federal regulations, state regulations, federal courts, state courts, record keeping requirements, penalties and a brand-new Sales Tax Bureau are just waiting in the wings to snatch up your disposable income.

Essentially, same government, new cash register.  And if that sounds suspiciously like the plot twist at the end of a tax-law thriller, well...welcome to the National Sales Tax!