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Sales Tax Complexity: Valentine’s Day Edition

4 min readBy: Scott Drenkard

Happy Valentine’s Day! Today, millions of lovebirds will buy last minute chocolates and goodies for their sweethearts. In some states, these transactions will be subject to a sales 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. , in others, candy will be exempt from a 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. . In the statutes, this treatment usually comes down to whether the state specifically excludes candy from their definition of groceries (or “unprepared food,” as the statutes sometimes call it).

Ideally, all final retail sales (including groceries) would be subject to the same sales tax rate. This makes classification of products easier for businesses, promotes a broad base (so states can have a lower rate), and doesn’t use the tax code to try to influence behavior (why should restaurants be subject to the sales tax and not grocers?). However, many states depart from this ideal.

While detractors will say that taxing groceries makes the sales tax overly regressive (low-income individuals do in fact spend a higher percentage of their income on groceries), their concern is already addressed by food stamps programs in most states. Medium and high income individuals also buy groceries, and when they do, they should pay a sales tax.

The chart below shows the general sales tax rate in each state, treatment of groceries, and treatment of candy and soda. An ideal base would look like Alabama, Hawaii, Idaho, Kansas, Mississippi, Oklahoma and South Dakota, taxing groceries (including candy and soda) all at the same rate.

As a second best option, if a state exempts groceries, authorities should not further complicate things by carving out which groceries should be subject to a sales tax and which should not.

When states start to go down this road, the implementation gets difficult, if not hilarious. Many states define candy as:

“Any preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts or other ingredients or flavorings in the form of bars, drops, or pieces. 'Candy' does not include any preparation containing flour or requiring refrigeration."

But after flour becomes the defining characteristic of whether something is candy or not, authorities have to define “flour.” This predicament led the Streamlined Sales Tax Governing Board to clarify things by developing a six page document on the word. You seriously can’t make this stuff up.

Sales Tax Treatment of Groceries, Candy and Soda, as of January 1, 2013

State State General Sales Tax Grocery Treatment Candy Treated as Groceries? Soda Treated as Groceries?
Ala. 4.00% Included in Base Yes Yes
Ariz. 6.60% Exempt Yes Yes
Ark. 6.00% 2.00% Yes Yes
Calif. (a) 7.50% Exempt Yes No
Colo. 2.90% Exempt No No
Conn. 6.35% Exempt No No
Fla. 6.00% Exempt No No
Ga. 4.00% Exempt Yes Yes
Hawaii 4.00% Included in Base Yes Yes
Idaho 6.00% Included in Base Yes Yes
Ill. 6.25% 1.00% No No
Ind. 7.00% Exempt No No
Iowa 6.00% Exempt No No
Kans. 6.30% Included in Base Yes Yes
Ky. 6.00% Exempt No No
La. 4.00% Exempt Yes Yes
Maine 5.00% Exempt No No
Md. 6.00% Exempt No No
Mass. 6.25% Exempt Yes Yes
Mich. 6.00% Exempt Yes Yes
Minn. 6.875% Exempt No No
Miss. 7.00% Included in Base Yes Yes
Mo. 4.225% 1.225% Yes Yes
Nebr. 5.50% Exempt Yes Yes
Nev. 6.85% Exempt Yes Yes
N.J. 7.00% Exempt No No
N.M. 5.125% Exempt Yes Yes
N.Y. 4.00% Exempt No No
N.C. 5.75% Exempt No No
N.D. 5.00% Exempt No No
Ohio 5.50% Exempt Yes No
Okla. 4.50% Included in Base Yes Yes
Pa. 6.00% Exempt Yes No
R.I. 7.00% Exempt No No
S.C. 6.00% Exempt Yes Yes
S.D. 4.00% Included in Base Yes No
Tenn. 7.00% 5% Yes Yes
Tex. 6.25% Exempt No No
Utah (a) 5.95% 1.75% Yes Yes
Vt. 6.00% Exempt Yes Yes
Va. (a) 5.00% 2.50% Yes Yes
Wash. 6.50% Exempt Yes No
W.Va. (b) 6.00% 1.00% Yes No
Wis. 5.00% Exempt No No
Wyo. 4.00% Exempt Yes Yes
D.C. 6.00% Exempt Yes No
(a) Three states collect a separate, uniform "local" add-on sales tax: California (1%), Utah (1.25%), Virginia (1%). We include these in their state sales tax.
(b) West Virginia is in the process of phasing out its tax on groceries. The rate will be eliminated July 1, 2013 if certain fiscal conditions are met.

Source: Tax Foundation, Overreaching on Obesity: Governments Consider New Taxes on Soda and Candy (Oct. 2011), Commerce Clearinghouse.

More on Sugar and Snack Taxes here.

Follow Scott Drenkard on Twitter @ScottDrenkard.