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I’ll Have Some Margarita Mix To Drink and a Packet of Lemonade Mix For Dessert

3 min readBy: Mark Robyn

The Streamlined Sales TaxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. Project (SSTP) is a group of revenue officials and experts organized for the stated purpose of bringing simplicity and uniformity to state sales taxes. States can join if they agree to amend their taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. codes to comply with SSTP’s rules. Since definitions often vary from state to state, part of SSTP’s mission is to come up with standard definitions for various products and services. For example, the SSTP has devised a standard definition for “candy”, which is important because many states have sales tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. s for groceries but not candy (more on this below).

On July 2 the Streamlined Sales Tax Governing Board committee ruled that fruit-flavored cocktail mixes, such as Jose Cuervo Margarita Mix, qualify as “soft drinks” under the organization’s Streamlined Sales and Use Tax Agreement. According to the retailer that requested the rule interpretation, Jose Cuervo

contains 0% Juice. Contains no alcohol. The intended use for the product is to combine it with liquor to produce an alcoholic cocktail. The State of Illinois currently considers this and similar items to be soft drinks because they can be directly consumed as a non-alcoholic fruit flavored ready to drink beverage.

At the same time, Tax Analysts reports (subscription required) that the SSTP ruled that “unflavored, unsweetened, ready-to-drink iced tea” is not a soft drink. To me, unsweetened iced tea seems much more like a soft drink than does a margarita mix, which is used solely for making alcoholic beverages that are definitely not soft drinks. But the SSTP’s definitions rely more on ingredients than intended use, and so they have arrived at this definition. It is interesting to note that the state of Illinois reasons in a different way, saying that the mix could possibly be consumed as a soft drink and so should be considered a soft drink.

Following both of these patterns of logic I could argue that lemonade mix should be considered candy since it is made mostly of sugar and fruit flavoring and because it could possibly be consumed as candy. I don’t know who would want to open up the lemonade packet and dump it into their mouth for an intense lemon experience, but it could be done, and if we are considering only the ingredients that make up the product or only any potential use of the product then I think I have a pretty good case.

Whether margarita mix is a ready-to-drink beverage is questionable, but the bigger question is about why the SSTP has made this soft drink distinction in the first place. The only reason can be to help states implement poor, albeit uniform, tax policy. States often exempt groceries from sales taxes, but they want to make careful distinctions about what qualifies as groceries so as not to give consumers a tax break on products like soda or margarita mix. But exempting groceries from sales tax is poor tax policy and leads to economic distortions, higher tax rates, and more volatility in revenue.

Another likely reason that the SSTP has made this distinction is that soda taxes and other sin taxes levied on unhealthy products are a popular topic these days. But protecting us from ourselves or protecting society from the harm done by an individual’s sugar consumption is not a good use of the tax code. Taxes are meant for raising revenue not micromanaging people’s lives.

About the only legitimate use I can imagine for the soft drink clarification would be for food stamp programs, since states generally want food stamp participants to use the programs only for necessities and not luxuries like soft drinks. But this is not a sales tax issue. It is an issue for food stamp program administrators.