When it comes to sales tax rates on food items, all may not be as it appears. Is a candy bar “candy” or a regular food item? How much milk does a beverage have to contain before it is excluded from a tax on sugar-added beverages? And what happens to the classification of that beverage when it crosses state lines? The intricacies of defining food items can make it difficult to determine which tax rates apply.
Recently Tax Foundation challenged readers to “guess the after-tax price for a basket of goodies that one might purchase at a grocery store in Chicago Illinois.” The contents of the basket included the following:
- A Frappuccino 4-pack
- A store brand cola 12-pack
- 1 gallon of Arizona Green Tea
- A bag of fun size Snickers bars
- 8 Twix bars
Before tax the goodie-basket cost $20.74. Can you guess how much it cost after tax? Take your time. The correct answer is $26.10, a 21% increase. If you guessed wrong, you are in good company. None of the participants in the Tax Foundation contest got it right. Dan C. came closest, with $26.03. What makes the sales tax on the items in the basket so difficult to calculate?
Let’s consider the Twix candy bar and Frappuccino’s tax dilemmas. Here are a few of the variables that affect how the Twix gets taxed:
- Does it contain flour? (yes)
- Is it refrigerated? (no)
- Where is it sold? (depends)
If the answer to either of the first two questions is yes, then according to the Illinois statute concerning food, soft drinks and candy, the Twix is not candy and gets taxed at 1% rather than 6.25%. The statute also assigns different tax rates to different venues that sell food (e.g. delis vs. grocery stores).
Here are a few of the variables that affect how the Frappuccino gets taxed:
- Does it contain added sugar? (yes)
- Does it contain milk? (yes)
- If so, is milk the primary ingredient? (no)
- How many ounces in one bottle? (38 oz.)
These questions relate to the Illinois’ proposed excise tax on “sugar-sweetened beverages.” Since the Frappuccino contains sugar and is not primarily milk, it falls under the proposed excise tax, which taxes a “penny per ounce” (38 oz = $0.38). However, this is not necessarily so in other states, which propose similar taxes, since some states exclude products containing any milk whatsoever from this type of excise tax. So not only do you have multiple variables to consider when calculating sales tax on food items, but different states have different “food definitions.”
One factor that contributes to this complicated landscape is concern over growing obesity rates in the U.S. Tax Foundation’s “Overreaching on Obesity . . .” report shows how recent concern over growing obesity rates has “taken the form of proposals for taxes on fast food, salt, and vending machines, as well as outright bans on specific substances like trans fats.” In the words of the report, some of these complex definitions of items like Twix and Frappuccino exist to “help trim the nation’s waistline.” Perhaps we cannot guess the tax rate on the goodie- basket because some legislatures want to make it less palatable to our pocketbooks. Indeed, what might seem like a simple candy bar in a basket turns out to represent layers of tax law.
I’m not sure having tax laws rooted in social issues like national health will truly affect our spending on candy and soda pop, but it will be interesting to see what new tax code the legislatures come up with next.
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