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What’s Wrong with California’s Sales Tax Exemption for Groceries?

3 min readBy: William Ahern

New regulations from the California State Board of Equalization (BOE) are supposed to clarify how grocers should tally their tax-exempt sales. Instead they inadvertently make a good argument for abolishing the 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. exemption entirely.

Grocery 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 have been sweeping the country on the flimsy argument that state 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. es applied to groceries are unfair to the poor. In fact, the poor’s groceries, when purchased with food stamps, are better than tax-exempt – they’re free. If the legislature feels that food stamps are not reaching enough of California’s poor, or that the stamps aren’t worth enough to buy sufficient groceries, then California should expand its food stamp program and apply its general sales tax to all other grocery purchases.

Will there be some people just above the food stamp threshold for whom the tax will sting? Yes, but that demographic can be (and already is) targeted for tax relief through the income tax.

The damage done by the grocery exemption is considerable. It makes sales tax revenue much less stable, a major problem in California. It also forces up the tax rate on every other purchase: California’s minimum sales tax rate of 7.25% is highest in the nation. And as for the complex business of how grocers must sort out what’s taxable and what’s not, the BOE regulations speak for themselves:

1. “Exempt food products” means those items generally described as food products in Section 6359 and Regulation 1602. If grocers are uncertain as to the classification of any product, they should contact the nearest board office.

Gee, that’s not too helpful. If the BOE is so unclear about what’s exempt, maybe they do better describing what must be taxed:

Grocers selling clothes, furniture, hardware, farm implements, distilled spirits, drug sundries, cosmetics, body deodorants, sporting goods, auto parts, cameras, electrical supplies, appliances, books, pottery, dishes, film, flower and garden seeds, nursery stock, fertilizers, flowers, fuel and lubricants, glassware, stationery supplies, pet supplies (other than pet food), school supplies, silverware, sunglasses, toys and other similar property should not include the purchases and sales of such items in the purchase-ratio method.

Actually, that’s not too helpful either. Of the thousands of items not listed, which of them would be “similar to” farm implements, deodorant or sunglasses?

The complex BOE regulations go on and on, giving grocers advice on how to tally coupons, handling allowances, snack bars, gasoline sales, etc., etc. They describe the purchase-ratio method of calculating tax-exempt sales, the modified purchase-ratio method, the retail inventory method, and finally the mark-up method which includes this gem of a requirement:

Determine markup factor percentages by commodity groupings based on shelf tests covering a minimum purchasing cycle of one month within a three-year period.

But those aren’t all the methods grocers can use!

List of Methods Not Exhaustive. The methods by which grocers may determine their sales of exempt food products are not limited to the methods described above.

How about this for an alternative method: All sales by grocers subject to sales tax unless purchased with food stamps. The tax rate could be lower, the revenue more stable, and the regulations much shorter.