The word tax actually means “to collect”, and in its legal sense, it is an obligation that is owed to the state or federal government. A tax is an obligatory financial burden or any other sort of direct levy imposed upon a taxpayer by an administrative body authorized by a government to undertake certain public functions and government spending. Evasion of or refusal to pay taxes, and any consequent action taken against the taxpayer, is punishable by criminal law. Taxation is typically used to raise funds for the support and maintenance of the country. It is also utilized to address other social and public needs.

A tax is generally defined as a fixed amount of money that is levied to an individual or institution on behalf of the government. This money is raised either by directly charging the tax to the taxpayer (interest), by directly collecting it from the taxpayer (customs or tariffs), or by devoting a portion of the tax revenues to public works, projects, or the relief of suffering. The tax system in the United States varies greatly by state. In most states, property tax is the largest tax that is levied. State governments also commonly levy inheritance tax, or personal income tax.

Federal and local governments use indirect taxes to raise funds. Indirect taxes are paid by the person who receives the payment or the entity that makes the payment. Examples include income tax, estate tax, and sales tax. Major indirect tax categories are employer withholdings, nonrefundable tax credits, and federal tax credits. Many states have a property tax that is collected by an Assessor-General.

The major types of direct taxes are income tax, estate tax, and property tax. Indirect taxes are commonly called customs or excises. Excise taxes are rarely levied directly by the federal government. Examples of indirect taxes include many regressive taxes such as payroll taxes, gas tax, and food stamp.

There are two major types of indirect tax: personal and corporate taxes. A few states, including Vermont, do not allow the indirect tax classification, which means the classification has no restrictions. Personal taxes are usually equal across the board, while corporate taxes are calculated differently. The U.S. government uses a formula to assign a tax amount to a company.

In the U.S., direct taxes are normally given to the individual. However, many multinational companies have established their own subsidiary offices in offshore tax havens such as Switzerland. Under these circumstances, the company must pay its own share of indirect taxes. This is called off-shore tax avoidance. Businesses can avoid this by using a qualified offshore company or by structuring their business so that they have no contact with the United States.