Avoiding a Regressive Tax

While I was writing the food article a few days ago, I got to thinking about a common complaint about sales and use taxes. The problem is that these kinds of taxes tend to be regressive. The burden of the tax seems to fall more on the poor than on the rich. The idea springs from the fact that certain things are bought by everyone, rich and poor and therefore the poor spend more on these items as a percentage of their income than the rich. Therefore, sales and use taxes take up a larger percentage of their income than that of rich folks.

You could argue this issue, but I'd rather not because it'll get in the way of the point I'm trying to make.

In order to minimize the regressiveness of sales and use taxes, states implement various exemptions on things that are pretty much basic necessities. So you'll see tax exemptions for the following items:

Prescription drugs (almost universally exempt)

Food (offered in many states)

Residential utilities (gas and electricity for homes - available in most states)

Clothing (in a few states, mostly in the Northeast, plus sales tax holidays in other states)

Repair labor on motor vehicles (I've only seen this in one state, but it's not a bad idea)

And a service that is rarely taxed is hair care. You almost never see the services of a barber or hair stylist listed as taxable.

In addition, the perusal of just about any state's mix of exemptions and taxable services will find that the taxes are imposed much more often on businesses than individuals. A cynical person might think that this is merely a way of making voters happy. A more idealistic person would probably believe that this is another effort at making the state's taxes less regressive.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different.

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.

---

Food

Food is a very common sales and use tax exemption. Most states have either a full or partial exemption for "grocery store food."

First of all, what do I mean by "grocery store food?" States generally differentiate between food purchased in a restaurant, and food that will be taken home and prepared (usually bought at a grocery store). Unfortunately that leaves a big gray area involving deli's, donuts, the microwave at 7-11, vending machines, and other situations involving food that doesn't meet the clean definitions of restaurant food and grocery store food.

States deal with this mess by having detailed and highly variable rules that always need to be reviewed for the state you're concerned with.

My rule of thumb? If you're a caterer or a restaurant, just about everything you sell will be taxable. If you sell food that has been recently prepared, it's probably taxable. Anything else will vary by state, but is what I would typically call grocery store food. Things like food supplements, candy, juice drinks, alcohol, and pop (or soda if you're from that part of the world) are often taxed, just because of their non-nutritive nature.

Another problem is that restaurants often give employees meals when they're on duty. Remember that the restaurant bought the food for resale and now they're giving it away. That means they may owe use tax on those meals. State laws vary depending on when the meal is given, if it's part of the employees' compensation, and valuation.

If you like to buy "green" and frequent the local farmers' market, fear not. Many states have specific exemptions for farmers who sell their own produce. Not all, but quite a few.

And then there's Ohio. Fifty years ago, if you went to a restaurant, it was for on-premises consumption. So it was taxable. If you went to the grocery store, it was for off-premises consumption and it wasn't taxable. Simple. And Ohio kept that very simple rule.

But consider this statistic that I picked up someplace. 40% of the US population eats at McDonald's at least once a week. And it's probably mostly drive-through, so it's obviously for off-premises consumption. So today, if you walk into a Panera at a service area on the Ohio Turnpike, and order it "to go," they won't charge you tax because you're purchasing for "off-premises consumption." Of course, I then took my tuna salad sandwich (hmmmmm) and ate it in the seating area. Hah! I'm a rebel!

Ohio could have gotten into step with the rest of the states and come up with the more complicated rules. But they kept it easy. Which of course means that they are foregoing tax revenue that the other states are getting. But it sure is great to eat out in Ohio!

So remember this little loophole when you're visiting Ohio. The locals know the game. The only people who order it "to stay" are the tourists.

See the other articles on "food."

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different.

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

---

Intangibles

There's real property. And then there's tangible personal property. We defined both last year.

Usually, sales of real property aren't taxable. Although services performed on real property are often taxable.

Tangible personal property is, by default, taxable. And services performed on tangible personal property are very often taxable.

But there's a third type of property: intangible personal property. This is property that really is a right to something. It may be documented by a piece of paper, metal or plastic. But that item only documents the right. Intangibles would include stocks, bonds, licenses, permits, etc. Since intangible personal property is pretty obviously not tangible personal property, then intangibles would be, by definition, not taxable.

This is one of the reasons why most of the sales made by government agencies, particularly at the state and local level, aren't taxable. They sell mostly permits and licenses, which are intangible. This is also why you don't have to factor sales tax into your investment planning. There's no sales tax on stocks. Gold? That's a different story.

And in most states, gift cards and certificates aren't taxable when you buy them. When I bought that card in the picture above, I paid $50 with no tax. I didn't really pay $50 for a piece of plastic. I'm dumb, but not stupid. I paid that $50 for the right to buy $50 worth of food from one of the restaurants that accept the card. Generally, states will not impose tax on these kinds of pre-purchases. The tax gets imposed on the purchase when the card is used. When they handed me the bill at the restaurant, it included tax. I then simply paid the bill (including the tax) with the gift card.

One exception is phone cards. Most states do impose sales tax on phone cards.

It's too bad money can't buy happiness. Because at least it would be exempt from sales and use tax.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different.

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.

---

News, Links and Commentary

Arkansas has released rule 2010-1 for tax treatment for vets in that state. If you're an Arkansas veterinarian, all I can say is get the rule, get a bottle of the beverage of your choice and allocate an hour or so to figuring it out. Hey, at least you have some exemptions, so that's something.

---

Florida would like you to know that there is no sales tax on admissions to these events: National Football League Pro Bowl; National Hockey League All-Star Game; Major League Baseball Home Run Derby held before the Major League Baseball All-Star Game; National Basketball Association All-Star Game; National Basketball Association Rookie Challenge; National Basketball Association Celebrity Game; National Basketball Association 3-Point Shooting Contest; and National Basketball Association Slam Dunk Challenge.

Talk about an exemption that doesn't need to exist.

---

Georgia passes laws to conform to the Streamlined Sales Tax Project

---

Illinois now provides that any qualified building materials sold for the Illiana Expressway (to bypass the Borman on the south for you locals) will be tax exempt. This road is years away, but it's nice to know that Blagojevich's replacement is thinking ahead.

And the new guy has signed off on the Illinois sales tax holiday in August. myfoxchicago.com

---

Michigan's governor gives up on trying to tax services. When are they going to learn? detnews.com

---

Mississippi's sales tax holiday coming up at the end of July. wapt.com

---

Be careful about data processing services in New York. While they're not taxable, New York is treating the use of software remotely as the taxable sale of canned software. Sneaky. (New York Advisory Opinion TSB-A-10(4)C, 05/27/2010) There's a little on this from AccountingWeb

A New York restaurant failed to keep anything resembling proper records with missing receipts, paper tapes, mislabeled years. Frankly, it simply sounds like they had a pretty cavalier attitude about accounting. So the state decided to simply observe one day's business (a Saturday) and estimate the restaurant's tax liability from that one particular day.

The message here is keep records! If you don't have anything to audit, the state can start doing things the hard way - for you.

---

An Ohio company claimed that they were in the business of "transportation for hire" and were entitled to an exemption on the trucks and equipment they purchased. They manufactured materials used BY shippers. That was it. But the owner claimed that they were a common carrier, without being able to show any documentation. "Hey, trust me, I'm a common carrier. Really." The state was not impressed. What's amazing to me is that this got to the appeals board. Either several parties involved in this were really stupid, or there's more to the story. I hope it's the latter.

---

Oklahoma is the latest state whose legislators seem to have lost it. A new law goes into effect that requires out of state retailers (who have NO nexus) to provide notifications to their customers that they owe OK use tax. The rules are complicated. But I have just one question. If the out of state retailer has no nexus in Oklahoma, and therefore doesn't have to collect tax, how can Oklahoma make them provide all of this notice?

Sales Tax Buzz has some commentary on this.

---

Tennessee Sales Tax Holiday in August. dnj.com

---

In Virginia, they're essentially requiring larger vendors to give the state an advance. That'll solve the budget problems they're having and even give them a surplus. But it's just a sneaky way of forcing vendors to lend the state money. Sales Tax Buzz has the details.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different.

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

---