Some luxury goods, or items that are not considered essential, are accompanied by a luxury tax. Luxury tax is often modeled after sales tax, a tax which is applied to the sales or rental of specific properties or services, or value added tax (VAT), a tax which is applied to exchanges in which the value of an item or service has increased.

Luxury tax is often applied to very expensive cars and jewelry. In cases of expensive real estate transactions for private homes and properties, luxury tax might also be applied. Because luxury tax only applies to items that can be purchased by the wealthy, it only applies to the wealthy. There is rarely a public outcry regarding luxury taxes because they only apply to a narrow margin of individuals.

If you plan on purchasing a Bentley or a precious stone the size of a baby’s fist, then you should prepare yourself not only for the cost of your purchase, but also for the cost of the luxury tax that you are likely to pay out.

Sometimes luxury taxes may be rescinded if an item drops in value or becomes available in some other way to the general public. If diamonds suddenly dropped to the shocking price of ten dollars per carat, or if Bentley automobiles started selling for the same price as economy sedans, then the luxury tax on such items might be waived. Unfortunately for most of us, both of these instances are highly unlikely.

Luxury tax can be a very important part of the sports world. Luxury tax is sometimes applied to the total payroll of a sports team if the total exceeds a limit imposed by the sports league. The purpose of this luxury tax is to prevent major teams with large incomes from signing all of the top players in a league. If a team had the financial leverage to buy every top player, then the competition within the sport would perish and the interest of fans would likely wane. In this interesting instance, luxury tax creates (literally) a more level playing field. The money that is derived from a luxury tax applied to professional sports contracts is divided among teams in smaller markets. These teams generally use the funds from the luxury tax to sign important players.

While luxury tax has many different uses and is applied to many different goods and services, it is almost always associated with transactions of large sums.