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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Oh, Come ON! - More Nutty Rules from your elected representatives and public servants.

From time to time, I come across just plain stupid rules that pretty much make no sense.  You know they wrote the law with absolutely no thought to whether it made sense or not. I'll also classify this under stupid politician tricks, because, well, they are.

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In Missouri, over the counter drugs are taxable, which is the case in most states.  But for disabled persons they're exempt from sales tax, but only if the right paperwork is filed.  Here's the relevant law:

"Sales of over-the-counter drugs when sold to an individual with a disability or to the individual's agent are exempt from tax. When selling over-the-counter drugs to an individual with disability, the retailer should obtain a purchaser's signed statement of disability. The retailer should retain these statements for three (3) years. The statement should include the purchaser's name, type of purchase and amount of purchase, and be signed by the purchaser or the purchaser's agent. The retailer should request a form of identification, such as driver's license, credit card, etc. to verify the identity of the purchaser."

It's good to take care of disabled people.  But why not just make it simpler by saying that OTC drugs are exempt for everyone?  Some states do this.  And, as an effort to make sales tax less regressive, it's probably a good idea.  But, come on!  Only a career bureaucrat, or your standard-issue politician, could think this kind of paperwork is a good thing.  Oh, wait, I remember now...Missouri is the "show me" state.  So I guess they want to be "shown" that the buyer has a disability.   

By the way, I've never seen the above law, or anything like it, in any other state.  And I didn't find any definition of "disabled."  So I guess Missouri didn't want to "show me" that part.  It's also not clear whether the disabled person has to provide this documentation every time he buys a bottle of aspirin, or whether or not he only has to file once. 

I'm guessing the politicians did this to be able to say that they gave a benefit to the disabled, but made the benefit so hard to exploit that there really was no loss of tax revenue.  They do that a lot.  See Minnesota's Capital Equipment exemption.

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Let's continue to pick on Missouri...

In many states, there are exemptions for fund-raising sales by non-profit organizations.  Generally they're restricted to an annual dollar amount, a small number of events per year, or a few days per year, usually less than a week or so.  In most cases, the rules would cover most of the non-profits and churches I've been involved with. 

But in Missouri, all sales by non-profits are exempt from sales tax, as long as the proceeds fund the mission of the organization, which you'd expect.  Let me repeat the key phrase here...all sales - for the entire year! 

Now, again let me say that I have nothing against non-profits.  Some of my best friends are non-profits.  But making all of their sales exempt seems like Missouri is giving away the store. Don't they have budget problems like every other state?  And before you start spluttering...keep in mind that taxing non-profit sales doesn't mean you're taxing the organizations themselves.  Since the tax is added to the bill, the tax is merely being passed on to the customer.  As long as the organization does it correctly, they have no financial burder, other than filling out the return and keeping a supply of pennies handy. 

And if you're going to say that this would interfere with their funding, keep in mind that the vast majority of states don't grant a year-round exemption!  They grant a limited exemption to cover occasional fundraising events. But, in Missouri, if the hospital runs a gift shop, those sales are exempt all year.  Why can't the gift shop charge tax like every other gift shop in Missouri?

Hey Missouri politicians!  Need some money?  I got your money right here!

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Moving across the Mississippi River, let me now talk about Illinois.

Where to start?  Illinois is an insanely complicated state.  I attribute this to the low IQ's of most of our politicians (I live here so I'm partly to blame) and their complete inattention to the effects of the laws they pass.  Maybe the fact that many of our governors and miscellaneous government officials wind up in jail has something to do with it too.

Anyway, our rocket scientists in Springfield came up with something called the Manufacturer's Purchase Credit (MPC).  This is another one of those laws that appears to only exist in one state - Illinois.  Don't these dopes talk to the dopes in other states?  Because this one is just plain sad. 

In most states that have lots of manufacturing, exemptions are granted for equipment and supplies (I'm seriously over-simplifying).  In Illinois though, you earn a credit for the tax you would have had to pay on the equipment you get tax free under the manufacturing exemption.  And you can apply that credit against your supplies.

First of all, most people just can't get their head around this concept.  "Wait a minute, I'm getting a credit for taxes that I would have paid?  And it's only 50%?  And what the hell are these forms?"

There is a lot of bookkeeping involved and and complicated reports that have to be filed.  I wouldn't be surprised if only a fraction of manufacturers understand this well enough, and have the bookkeeping skills, to take full advantage of this.

Wait a minute.  Maybe they were talking to Missouri (and Minnesota) after all!  Sneaky suckers!

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Finally, we come to Massachusetts.  These jugheads passed a law a couple of months ago to tax computer services.  While other states do tax this, it's not a good idea for a state that is trying to position itself as a high-tech hub  (ya see, that's because "high-tech" usually involves computer services).  That last comment was for any politicians that might read this.  The rest of you knew what I was driving at. 

Anyway, at the time, there were lots of protests against this tax, but the legislature passed it, and the governor signed it.  They ignored the rabble because they're politicians, and they don't have to worry about what people think until the election.  And who cares about the businesses anyway?  And then the howls really began.  And the politicians realized that the election really wasn't that far away.  After a couple of months, the legislature repealed it, almost unanimously, and the governor signed it. You can almost see the tails between their legs.  Oops.

I will give these lunks credit for recognizing their mistake and fixing it.  But they were still stupid to pass it in the first place.  Do you politicians even read the laws?  Or if that's too much, maybe an executive summary of the law?  Or think ahead?

If you'd like to read more, here's a nice summary of what took place. http://www.wickedlocal.com/carver/topstories/x1843589170/STATEHOUSE-ROUNDUP-Saying-oops-on-tech-tax

So here are the take-aways:

1.  Politicians aren't terribly smart, but they might just be devious enough to pass an exemption granting a benefit, but making it difficult to take advantage of that benefit.

2.  Or they're just dumb. 

And to any politicians that actually read this, I didn't mean you. You knew that, right?  Still pals?

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

See the disclaimer on the right.

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com
and there's more sales tax news and links here http://salestaxnews.blogspot.com

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Nutty Rules: Georgia and the DAR

I did a "Taxing Policies" webinar for Georgia today.  While putting the finishing touches on my research, I took note of their rules for non-profit organizations.  Georgia is one of those states that doesn't have a broad exemption for non-profit organizations.  In fact, they only have exemptions for a handful of groups.   But one of those few is the Daughters of the American Revolution.  Now, I've looked at Georgia's rules many times before, but it hit me this time because the wife of a friend just became a "daughter."

Here are the questions that leap to mind.  First, how can they justify this treatment?  They don't have a similar exemption for the Sons of the American Revolution!  Which sounds vaguely discriminatory.  And why in the hell (oops, we're talking about the DAR here) -  I'll start over.  Why in the heck would they give an exemption for the DAR when they don't even exempt the Boy Scouts and Girl Scouts?!?  Seems...tacky.

Hmmmm.  I'll just let these float out there as rhetorical questions.  Because I'm absolutely sure there's a perfectly valid reason.

Nothing to see here.  Move along.

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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 that haven't been discussed, and every state is different.  Here's more information

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Great Article: Weirdest Sales and Use Taxes

from Accounting Today

I enjoy reading about weird rules.  I've tripped across many of them in my time, but there's often a new one I haven't heard of.  Usually, there are also a few in the article that look strange to someone unfamiliar with sales and use taxes, but when you look a little closer, they really do make sense. Two items mentioned in this article, the watercraft rule and the flower in the candy rule,  are actually pretty standard and kind of make sense.  But there are some, like the hot air balloon rule, that I've not seen before.  And the belt buckle rule in Texas is truly strange. Enjoy the article.

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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.
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Historical Places

I had a question from a webinar participant last week about the "landmark exemption."  I had to honestly respond that I didn't have a clue about what he was talking about.  In a subsequent exchange of emails, I figured out that Texas has an unusual and obscure exemption for contractor's services performed on buildings that are the National Register of Historic Places.

I've been doing training on Texas sales and use taxes for eight years and that's the first time I'd ever heard of it.  My excuse is that Texas has some of the more spectacularly complicated rules about contractors.  And this is a pretty obscure rule.  In order to find information on it, I finally had to resort to doing a text-search for "historic" in my RIA database.  But once I figured out what was going on, I found that there were a couple of good lessons for you folks.

First of all, who would have thought there was an exemption such as this?  I did some additional research in other states and only found one other state, Connecticut, that has a generic exemption for construction related costs on historic buildings.  TWO STATES!  There are a couple of other exemptions floating around, but they tend to be for specific projects such as a YWCA building in DC, provide tax credits if the projects promote tourism, or are for projects covered by non-profit organization exemptions.   

I find it hard to justify this exemption.  The tourism related credits I get - there's a tax revenue pay-off for the state that will probably offset the credits.  But, with states desperate for money, they're giving exemptions for restoring a historic building?  Now I am a big fan of historic places - they're one of my photography projects.  But is the presence or absence of a tax credit really going to have an affect on an owner's decision about restoration?  I'll bet the net result is that some well connected folks get some tax benefits, and the state loses a lot of money unnecessarily.  Sigh.

The second point is that there are some really obscure exemptions out there.  Always be looking to take advantage of the lack of common sense on the part of our elected representatives.  Pay particular attention to continuing transactions that will result in big dollars, as well as the one-off big deal. And, now that you've read this, keep an eye out for historic site exemptions while you're at it.

Finally, to complete the discussion about historic places, there's another exemption that is a little more common.  Many states impose sales tax on admissions charges.  And many of those states grant exemptions for admissions to historic sites.

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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

Get these articles in your inbox - subscribe at 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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Lots of Weirdness in Arkansas

I'm going to have to start making fun of entire states in this series of Nutty Rules.

Rarely do I see such a patchwork of laws, nesting exceptions, and missing or downright conflicting rules. For example, installation services are shown as being not taxable. But there is this thing called "initial installation." It's taxable. Would someone please explain to me how often someone has a "second installation?"

And their manufacturing equipment rules are head-scratchers. There's an exception for equipment for new facilities and expanded capacity. And there's an exception for substantial replacement of machinery. What's left? It seems like the politicians really don't know what they're trying to accomplish. They also call things manufacturing, like drying agricultural products, that don't really seem like manufacturing. Maybe it's just me.

Let's talk containers. According to the regulations, only manufacturers, processors and restaurants can take advantage of this exemption. I can't believe that the corporate home of Wal-Mart wouldn't let retailers skate on the cost of bags. Come on, Arkansas. All the other states have a general container exemption, why not you?

Many states have a residential utilities exemption. Arkansas has it, but the threshold means you'd have to be so poor, I'm not sure how you'd afford electricity in the first place.

Many states do not have a broad non-profit organization exemption. And as with those other states, Arkansas does let a few organizations off the hook. You wonder what friends those organizations had that they were able to get an exemption. And what about all of the other deserving charitable organizations?

I have the feeling that Arkansas politicians have taken the concept of "adding more laws, but not cleaning out the ones you already have" to a new level. Have you seen the exceptions under their Consolidated Incentive Act? And I count 15 different additional taxes that the locals can impose.

Hey, I'm really not complaining. All that complexity makes for loads of entertainment when I prepare for one of my Taxing Policy webinars. And complexity keeps me employed. So I'm all for it.

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

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Is that car wash taxable?

Amazing as it may seem, car washes are often taxable. In some states, self-service, coin-operated car washes are not taxable. But the kind that pulls your car through (you know where the guy who dries your car leaves streaks on the windshield) may be taxable.

If a state taxes car washes, self service vs. pull through seem to be the major variations.

Except in Florida.

I just did a Taxing Policies webinar for Florida, and as usual, I spend a few hours reviewing the laws and refreshing my memory. No matter how many sales tax seminars, I've done in a state, I often find new nuggets of weirdness. So it went for Florida.

In Florida, car washes may be taxable. But unlike other states, which sometimes make the coin-op facilities not taxable, Florida bases the test on whether or not wax or other coatings are applied and remain on the car.

And I quote:

• The entire charge for a wash job, in which wax, silicones, or any other substance is added that forms a protective film or coating, is taxable. The purchase of materials such as wax, silicones, and the like, which form a protective film or coating, is exempt to the dealer. The dealer shall extend a resale certificate to his supplier in lieu of paying tax.

You see, in Florida, the theory is that the service of repairing and maintaining TPP is not taxable. But if there is any transfer of TPP during the service, then the whole service becomes taxable. A watch repairer who just cleans your watch doesn't have to charge you sales tax on the service. But if he adds a drop of oil, the entire amount becomes taxable.

So by adding that wax to a simple wash with soap and water, you make the whole thing taxable. If Florida is having budget problems, and they're looking for loopholes to fill, this might be one to work on. I'm just sayin'.

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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/

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Flag Exemptions

In the category of nutty sales and use tax exemptions, these states impose no tax the sale of flags. In all cases there is no sales tax on the US flag. And most exempt theirs as well.

Connecticut - US and CT
Florida - US and FL
Maryland - US and MD
Massachusetts - US only
New Jersey - US and NJ
New York - US and NY
Pennsylvania - US and PA
Rhode Island - US and RI
Vermont - US flag only, and only for sales to or by nonprofit veterans organizations
Virginia - US , VA and local flags if sold by government agency
West Virginia - US and WV - regulation size only
Wisconsin - US and WI

This is an article I've been meaning to right for a while; frankly, ever since I came across this exemption for the first time. I'm guessing that the US exemptions were enacted in some fit of patriotic fervor on the part of the politicians. But the state flags? And nobody is going to vote against the law, or argue to repeal it because they would be toasted in the campaign commercials.

Imagine the youtube video, "Joe Blow, your representative, actually voted to repeal the sales tax exemption for the US Flag. What kind of American is he?? Vote for Tom Jones and he'll reinstate the exemption as soon as he takes office!"

And why give the exemption anyway? Are people buying more flags in those states because of the exemptions? If you drive through the residential areas of Milwaukee, will you see a lot of Wisconsin state flags flying proudly below all of the US flags?

Heck, I'll bet that most retailers in those states charge sales tax anyway because the sales tax software company didn't program this one - they didn't even know about it! Who would have thought?

Now, of course, they will. Because I just know they all read this blog. Sure. And Santa's coming in a few days too.

Have a nice weekend, folks.

Sales Tax Guy

See disclaimer and research the issues thoroughly before making decisions

Here's information on our upcoming seminars and webinars

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Nutty Rules

In SC, rental of portable toilets is considered the rental of TPP and therefore taxable. Included in the taxable amount are any other charges for service. But fear not! SC also provides an exemption for 70% of the total charges for rental of portable toilets. That's a relief.

In IA, automobile racetrack owners can get a rebate of the sales tax they paid on purchases ofTPP.

In TX, data processing services are taxable. That means that spam filtering services are taxable too.

In WI, there's an exemption for snowmobile trail groomers and attachments for snowmobile clubs. I've never seen this one anywhere else. So the rest of you in other snow states have every right to feel jealous.

Sales Tax Guy

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Evil Revenuers

This comment came up the last time I was in a state on the east coast with remarkably complicated and badly documented rules for contractors*. In some cases, contractors buy for resale, in other cases they pay tax on their product but charge tax on their services; and in other cases they can sell their services for resale, but only if they get a certificate that the state doesn't seem to want to tell them the number of.

Every time I do seminars in this state I cringe, because the contractors in the room, who would like to do the right thing, can't seem to figure anything out. And neither can I.

One participant speculated that the state deliberately kept things confusing so that they were assured, whenever they audited contractors, that they'd find plenty of money to assess.

I'd hate to believe that were true.

Sales Tax Guy

* I don't need trouble with these people, so I won't mention the state. But trust me, if you're a contractor and you're in this state, you know who I'm talking about.

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

More wierd exemptions MN, ND, WI

Minnesota

“From April 1, 2002 through December 31, 2004, construction materials used or consumed in the construction of a meat-packing or meat-processing facility that replaces a facility that was destroyed by fire and costs more than $75,000,000”

I'm guessing someone knew a guy who knew a guy.

North Dakota

“Tangible personal property consisting of flight simulators or mechanical or electronic equipment for use in association with a flight simulator”

There's a big flight school in ND. Nothing to run into when you crash.

Wisconsin

“Snowmobile trail groomers and attachments for a snowmobile club that: “(a) meets at least three times a year, (b) has at least 10 members, (c) promotes snowmobiling and (d) participates in the snowmobile program under state law”

And the folks in Michigan and Minnesota are ticked off that they don't have this one.

Wierd exemptions - IN and NY

Almost every state has wierd exemptions and I collect them (mostly since I use them as examples in my seminars). I classify these types of exemptions into a couple of categories:

Favored industries: These are exemptions meant to help out industries that the state is known for and that the state wants to help out.

Silly, but make sense: These are exemptions that are frivolous, and politicians should be embarrassed about, but still make a certain amount of sense.

Huh?: These are exemptions that just are off the wall and make no obvious sense, at least to me. And since I'm writing this, I get to decide.

Here are a couple of in the favored industries category. They're so obvious that they don't even require comment by yours truly:

Indiana

"Sales of engines or chassis, or spare, replacement, or rebuilding parts or components for engines or chassis, that are leased, owned, or operated by professional racing teams are exempt."

New York

"Tangible personal property for use or consumption directly and predominantly in the production of live dramatic or musical arts performances."


More later

STG