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Tax Complexity: Ice Cream Cake Edition

3 min readBy: Richard Morrison

Former 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. Foundation economist Josh Barro has a great column up on Forbes this week about just how ridiculous the minutiae of a state’s tax code can get. It seems that Wisconsin recently changed its 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. for food, leaving some question as to exactly which foods are exempt and which are not. There was apparently sufficient confusion as to require the state to issue memos covering specific categories of food, including this fascinating one on “Sales of Ice Cream Cakes and Similar Items.” I’ll let Josh describe the contents:

If I understand the memo correctly, the rules are as follows. Ice cream cake is a taxable prepared food if you make it yourself, but not if you’re just reselling the cake. However, if the cake contains real cake layers, it’s a non-taxable baked good no matter who made it, so long as the amount of cake exceeds the amount of ice cream. (No, really: Example 9 is a cake with two cake layers and one ice cream layer, which is tax exempt; Example 10 is a cake with one cake layer and two ice cream layers, which is taxable because it doesn’t contain enough cake.) If you buy a cake from someone and then decorate it yourself, it’s taxable no matter how much flour it contains. And if you slice any cake and serve it in individual servings, or if the cake consists of fewer than four servings, or if the customer is going to eat the cake on the premises at your business, or if you give the customer utensils with his cake, it’s a taxable prepared food, though you may be exempt from that last one if the sale of prepared foods is incidental to your business.

Of course, I am open to the possibility that I have missed some nuances on the memo. If I were actually about to open an ice cream cake business in Wisconsin, I’d do more research.

This morass of confusing definitions is, unfortunately, neither new nor unique to the Badger State. Such Byzantine regulations are often found in state tax policy conderning food, as economist Scott Drenkard found in his study last year, Overreaching on Obesity: Governments Consider New Taxes on Soda and Candy.

In Colorado, New Jersey and other states, the definitions are fairly similar: “‘Candy’ means 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.”

Simple as pie, right? Well, maybe not. We haven’t heard from the multi-state 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. Governing Board yet.

For purposes of the definition of candy, “flour” does not include a product that can be called “flour” under the Food and Drug Administration’s food labeling standards if the product is not grain based. If only the word “flour” is listed on the product label, it is assumed that the product contains grain based flour. However, if the word “flour” on the label is preceded by a modifier used to describe the product the “flour” was made from and the modifier is not a type of grain, then the product is not considered to contain “flour” for purposes of the definition of candy.

Got all that?