The Issues Involving Food Taxability - it isn't THAT Weird

There is a lot written about the taxability of food. Most of it involves some "weird" rules with bloggers throwing up their hands in disbelief at how bizarre the world has become.

While I bow to no one in my belief that sales tax rules are frequently stupid and often corrupt, it's worth noting that some of the laws make sense, even if convoluted, when you consider what they're intended to accomplish.

Depending on the state, food is frequently an exception - either not taxable or taxed at a lower rate. However, our elected officials want to make sure that there are certain foods that are NOT treated in this special way. Because we just can't possibly let someone have a Coke or a Milky Way tax-free. Our beloved politicians know better than the poor huddled masses. Although why they are OK with letting us eat potato chips and ice cream is beyond me.

These "weird" rules involve two objectives:

1. The politicians have to figure out a way of differentiating nontaxable food from food that they have decided is bad for us and is therefore taxable. The most common items that are taxed differently are candy and pop (or soda). That means intricate rules to differentiate candy from cookies, and similar gyrations to separate juice from orange drink.

Frankly, I'm not sure why cookies should get a pass. They're just as bad for you as a nice Peanut Butter Cup. And Hostess products? C'mon. What's the difference between a delicious Snowball and a Baby Ruth, other than some flour?

Here's the Sales Tax Guy solution. If it's sweet, it's taxable. Period. People drink too much orange juice anyway - bad for your teeth.

2. Possibly even more complicated is differentiating restaurants, whose sales are universally taxable (sometimes even at a higher rate), from places that also sell groceries. This would include delis, bakeries, etc. who function as grocery stores, but also as restaurants. For example, there are rules that say that if someone is sold six donuts, it's not taxable. But if you buy just two, then you're obviously going to stuff your face with them right away. And our betters want to make sure you pay sales tax on them.

And the Sales Tax Guy solution? If they walk out the door with it, and it's not sweet, it's not taxable. Done. Bakeries may complain, but do you think I'm going to let a little thing like sales tax stand between me and my chocolate eclair? Really?

Ohio comes to close to this rule. If food is sold to be eaten off the premises, then it's not taxable. Simple. They complicate things with beverages, but it's still much simpler than any other state. More about Ohio here.

There's a final rule that a few states have. This one is to make sure those nasty, icky businesses, who can't vote, don't get to take advantage of non-taxable food. In those states, they add "for home consumption only" to the criteria for exempt food. Or they'll do something else to insure that only individuals and families (voters) get to buy their food free from tax.

One solution to the whole problem is to make all food taxable. That REALLY simplifies things. But then you'd have people complaining that it just makes sales tax even more regressive. But that's a topic for my next post.

Or go with the Ohio method. Of course, that would mean the state would lose a lot of tax revenue - and we can't have that. But it would sure be less regressive - and really easy. And I'm thinking the voters would like it. Are you listening, politicians?

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

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Golden Rule: Three Different Types of Property

[This is an overhaul of an article originally written in February of 2009]

While there are variations for what constitutes real and tangible personal property, these are pretty good definitions in most states.

Real Property

Real property is generally property that has been:

1. permanently
2. affixed to other real property (like land and buildings) and
3. is integrated into the value or use of that real property.

Permanent usually means there are no plans or expectations to remove the item - it will last as long as the building or at least 10 to 20 years.

Affixed means that you'd cause significant damage if you removed the addition.  

"Integrated" means that the additional property extends the life or increases the value of the existing real property. In addition, it would be something that would be expected in the building or that facilitates the purpose of the building (like a roof).

One test that I've seen is: if the building were purchased, would the new owner retain the addition, or would they probably tear it out?  In other words, is the addition something that is fundamental to the purpose and value of the building?  For example, if someone buys a house, would they keep the old draperies?  Probably not.  They might keep the Venetian blinds, but the drapes?  Blech.  Out they go!

Effect on construction contractors

If a construction contractor permanently affixes TPP to real property, and it becomes integrated into that real property, she has converted that TPP into real property.  In most states, the contractor's sale wouldn't be taxable and she would pay tax on the TPP when purchased by her.

TPP - Tangible Personal Property

Tangible personal property is property that is perceptible to the human senses (tangible), and is not real property. See above.

A simpler way to describe at TPP that is not as accurate, but easier to grasp, is: tangible personal property can be moved without causing damage to the property or to any property it is attached to.


Note that sales of real property are not generally taxable, but that sales of tangible personal property are, by default,taxable.  There are lots of exceptions and variations.

Intangible Personal Property

And then there's a third type of property: intangible personal property.

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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. Here's more information

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Golden Rule: The Resale Exemption

This one is so obvious, it's taken me until now to make it a golden rule.

The idea of sales tax is that it's a tax on consumption. In other words, it's a tax on the transaction that involves the final consumer (end user). Most transaction oriented taxes are set up that way.

It's a different story when you start talking about who the tax is imposed on. Some states have a "gross receipts" tax, for example. The tax is legally imposed on the seller, but they are generally allowed to pass it along to the end user. But that "gross receipts" tax is still only imposed on the gross receipts of sales to the end user.

Who is the end user?

It's really hard to positively define them. So we use a negative definition - who isn't the end user? As discussed in the golden rule of taxable sales, "the final consumer is generally going to be the person who bought for any other reason than to resell..."

If you bought something to consume, you're the end user.
If you bought it to save or collect, you're the end user.
If you bought something to give to someone else, you're still the end user.

But if you bought it to resell to someone else, then you're not the end user. You're buying it for resale. The sale to you is exempt in virtually all states. Now before you start telling the good people at Wal-Mart that you're buying for "resale," a word of caution. You still have to go through all the state's registration paperwork, provide the seller with a resale certificate, and you'll have to file sales tax returns. Other than that, simple.

Why do consumption taxes only involve consumer transactions?

Because if the tax was imposed every time there was a sale, then the taxes would pyramid. For example:

The iron mine charges sales tax to the steel mill
The steel mill charges sales tax to the fabricator
The fabricator charges sales tax to parts wholesaler
The parts wholesaler charges sales tax to the component manufacturer
The component manufacturer charges sales tax to the car manufacturer
The car manufacturer charges sales tax to the car dealer
The car dealer charges you sales tax

You wind up paying a whole lot more for that car because everybody added that 8% sales tax into their costs and prices. That's pyramiding. So consumption taxes are only imposed on that last transaction.

The resale exemption justifies other exemptions, to some extent:

Containers
Agriculture
Manufacturing
Direct supplies used by taxable service providers (in some states)

What about use tax?

Remember, that use tax is essentially a loophole plugger and wasn't meant to be a stand alone tax. Even though it technically isn't a tax on the transaction, it still is considered a consumption tax. It is, after all, a tax on use.

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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.

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Absorption

This is the first article in my current "absorption" series.

Most states have a law on the books that says something like this:

Thou shalt not tell thy customers ....

[sorry - just watched "The Ten Commandments" - I'm starting over now.]

The seller must separately show the sales or use tax on the invoice. The seller cannot bury the tax in the price of the goods, nor can they offer to "refund the tax." Not separately showing the tax on the invoice is generally called absorption. The seller is absorbing the tax into the price of the goods.

Why do states have this rule? It sounds like no big deal. If the seller wants to eat the tax, let 'em. See the link to the news article on absorption here to see why it's a good idea to make legislators stuff socks in their mouths.

These are the reasons I've learned, without doing any serious research on the subject. And if anyone can think of any more, please let me know.

1. If the buyer gets an invoice showing that no taxes were charged, what are they going to have to do when the auditor comes to visit? So the invoice, with the taxes shown separately, provides the taxpayer with a receipt showing that they've paid the tax. But if the seller absorbed the tax, there's no receipt and the buyer gets taxed a second time. Hooray for the auditor!

Note that this is why I told you in this article, to not simply accrue taxes when certain sellers don't charge you tax. If they absorbed the tax, then you'd simply be paying a second time.

2. States that have this rule intend for the sales and use tax to be imposed on the final consumer, not on the seller. Why? Because the state has other taxes they may want to impose on the seller's sales, like gross receipt taxes, franchise taxes, income taxes, etc. If they did not make it clear that the tax was on the final consumer, then those other taxes might be a problem because you then would really and truly have double taxation.

I'm not a tax theorist (although I play one on TV), but I'd guess that if the state passed a law that says that there's a 6% tax on your sales, and then next year passed another law saying that there was an occupation tax of 7% of your sales, you'd probably have a winning case of the same thing being taxed in the same way two different times. I'm guessing that something that bald-faced won't work. Otherwise the states would do it. They have to be a little sneakier than that.

But if the state insists that sales tax is imposed on the ultimate consumer, and that the seller is merely the collector of the tax, then the state can get away with imposing that 7% occupation tax.

So the state passes a law that says the seller must pass the tax on to the buyer. Therefore the buyer is clearly carrying the burden of the tax. Absorption laws make this clear.

3. Having laws stating that the tax must be separately stated give the seller an excuse for charging tax. Rather than getting into a dickering match with someone about the 6% sales tax they have to charge, the seller can merely say that they're required by law to charge tax.

4. Tied in with number 3, if the seller does build the tax into his price, what happens when there's a rate or rule change? Do they now have to go through and reprice everything? It's probably a minor point but requiring them to add the tax to the invoice seems to solve that problem and, in the long run, be more efficient.

5. This one sticks to me from my first sales tax audit, over 30 years ago. I was chatting with the sales tax auditor. He was a very nice guy, an old timer who was counting the days to his retirement. He really stuck it to us (we deserved it), but he was nice about it. During one meeting, I asked him about the reason for absorption laws. He said that they don't want citizens to get the idea that sales tax is an optional thing, that it's up to the seller to decide if they get taxed or not. Which ties in with item 3 as well. The state wants people to expect sales tax.

So this article covers the absorption law and most of the reasons for its existence. In future articles, I'll talk about the variations on this law and how the seller can really get in trouble on this.

Sales Tax Guy

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Picture note - It's a sponge. And I'm talking about absorption. Get it? ;-)

The Resale Exemption

This is really almost not an exemption. That's because purchasing for resale is fundamental to the concept of sales and use taxes (SUT). SUT is usually a tax on the final consumer (or at least the transaction involving the final consumer). Since someone buying product to resell isn't, by definition, the final consumer, there shouldn't be any sales or use tax. Henceforth, the resale exemption.

If you buy something that you're going to sell to someone else, you shouldn't pay sales or use tax on it. You should provide your vendor with a resale certificate (that's what it's typically called). This gives your vendor reliable assurance that you're not to be taxed and why.

Then, when you sell your product, you must charge your customers tax and remit it to the appropriate state. Unless, of course, your customer is also buying for resale, in which case he/she needs to provide you with a resale certificate.

This is called the resale exemption. This is not absolutely universal, but it's pretty dang close. And it's really not an exemption like food, non-profit organizations, etc. It's fundamental to the entire concept of sales and use taxes.

There are variations on this rule. For example, in most states, real property construction contractors who buy building materials for their projects are considered the end users and are not buying for resale. Lessors, in most states, buy their property for resale because they will be charging the lessee tax on the rental or lease charges. And there are a few states where people, who provide taxable services, can buy some of their materials tax free using this exemption. Finally, the ingredients exemption for manufacturers, as well as the container exemption, are natural extensions of this exemption.

Sales Tax Guy
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"So, what's this use tax?"

I get this question all of the time and I just realized I've never written about it directly.

Use tax was invented to plug loopholes in the law where sales tax didn't get collected. Essentially, the law works this way: if you have purchased something that should have been taxed, and it wasn't, then you owe use tax.

The best example is a book from Amazon. com. In most states, they won't charge you tax. But you're not off the hook. It should have been taxed, but Amazon.com didn't have to (that's another long story involving nexus). Therefore, you as the buyer must pay use tax.

The states really don't expect individuals to pay the tax, although they give you the opportunity and they're kinda ticked off about it. In many states, there's a line on your state income tax return, usually near the bottom of the second page, where you're expected to put something in there. Most people don't. And states generally have a form for you to fill out to report your use taxes. This is probably one of the least downloaded forms the states have. If you feel a pang of guilt, and want to start filling it out, it often has a name like "consumer's use tax return." Look on the state's web page under forms.

But businesses, who will get audited eventually, need to worry about this. They will eventually get caught. See this golden rule.

Sales Tax Guy
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Two Different Types of Property

[THIS ARTICLE HAS BEEN UPDATED, OVERHAULED AND REPLACED!]

Seems like we should have these cleared up for future purposes
While there are variations, these are pretty good definitions in most states.

RP - Real property

Real property is generally property that has been:

1. permanently
2. affixed
3. to other real property (like land and buildings) and
4. integrated into the value or use of that real property.

Factors that that are considered for item 4 include whether the additional property extends the life, or increases the value of the existing real property. One test that I've seen used, which is pretty good, is: if the building was purchased, would the new owner probably retain the addition, or would they probably tear it out?

TPP - Tangible personal property

Tangible personal property is property that is perceptible to the human senses (tangible), and is not real property. See above.

Note that, in general with lots of exceptions and variations, sales of real property are not taxable, but that sales of tangible personal property are, by default, taxable.

And then there's a third type of property: intangible personal property.

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

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

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.

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