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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Great Article: "Food or Candy? Milk or No?"

from avalara.com

More in the adventures of trying to figure out the food exemptions.  This little exercise will show you how to calculate tax on a Twix candy bar and a Frappuccino.  Heck, if you're buying a Frappunccino, sales tax isn't going to be on your mind.

Enjoy the article anyway.  And Happy Thanksgiving.  And I'll be honest - I just wanted an excuse to use the picture.

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This link is part of a series called "Excellent articles that I wish I had written."  The short name is "Great Articles." 

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

Don't forget 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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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."

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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.

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Is food really exempt?

I've seen this now a few times. So I thought it would be worthwhile whispering in your ears.

Grocery store food is exempt from tax in many states, and taxed at a lower rate in even more. The official wording is usually something like "food sold for off-premises consumption." But you and I know that basically means the kind of food you buy off the shelves at the Safeway.

I've now seen a couple of states that restrict the food exemption to individuals or for home consumption. In other words, if a business buys food, say for a company picnic or for the company lunchroom, the food was NOT exempt.

Obviously the grocery store isn't going to differentiate. Food's exempt as far as they're concerned. But your business may get nicked for use taxes on that food. So, if you're in a state that exempts food to some extent, make certain that there isn't an extra sentence that excludes businesses from the benefit of the exemption.

Otherwise, you'll get a surprise during the audit.

Sales Tax Guy

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Link: Ohio's Definition of Taxable Food

http://www.cleveland.com/business/tmurray/index.ssf?/base/business-0/1219480235114810.xml&coll=2
A short article on how one state handles this issue

Nutty Rules - Flour in Candy

In many states grocery store type food is not taxable. But also, in many states, candy is taxable. But how to define candy? While this seems silly, it's not really that strange when you think about it. The Streamlined Sales Tax Project definition (which several states use) for candy essentially says that if there's flour in the item, it's not candy, it's food. Which means a Kit Kat bar is food, not candy.

Why? Think about the poor clerk at the store. He or she needs an easy way to tell a taxable item from a non-taxable item. Looking at the ingredient list to see if flour is an ingredient is pretty easy.

Personally, I'm pretty excited about Kit Kat bars being "food." I can't wait to tell my nutritionist.

Sales Tax Guy

The Marshmellow Rule

I enjoy finding interesting and strange laws as I travel the country doing sales and use tax seminars. I discovered one in New York. They consider grocery store type food to be non-taxable. But as in many states, candy is considered taxable.

So what to do about marshmellows? You and I might not think this would be a big deal, but evidently the regulators in Albany felt the need to address this burning issue.

Miniature marshmellows are exempt as food. The big ones are taxable.

But a seminar participant last week brought up a good point: what about marshmellow fluff?

UPDATE: All marshmellows are now exempt in NY.

Are Pumpkins Food?

I was getting ready to do a seminar series in Illinois and noticed this clarification issued last year by the IDOR. In Illinois, food for human consumption is taxable at a lower rate (1% state tax but some local jurisdictions can add to that). The question evidently came up as to the taxability of pumpkins.

Ready?

If it's sold whole and in edible condition, it's food. But if it's carved out, it's not food and therefore taxable at the full rate just like TPP.

Hope that clears everything up. And beware, this rule might be transferable to other states too.

This post really was just an excuse to use a picture of a pumpkin (that is clearly not used as food, but was BOUGHT as food. Therefore, we only paid the lower rate. Take THAT, IDOR!)

Sales Tax Guy