Many of us are ready for the excitement of the 139th running of the Kentucky Derby at Churchill Downs and celebrations for Cinco de Mayo this coming weekend, but let's take a moment to make sure everyone has chosen the right hat and freshen up on a few relevant sales tax considerations before sprinting out of the gate.
Horses, especially race horses, can fetch a hefty price tag. Even though states can collect a correspondingly hefty sales tax amount on the sale price, many states, including Kentucky and Illinois, provide sales tax exemptions for their sale and various uses within their state.
For example, while Kentucky's sales tax applies generally to the sales price of horses, fees paid for breeding horses, and the sales price of horses claimed at race meetings within the state, Kentucky provides an exemption for the sale of horses that are less than two years old to nonresidents. Kentucky also exempts the sale or use of horses, or interests or shares in horses, provided that the purchase or use is made for breeding purposes only; the use of stallions for breeding purposes by an owner or shareholder; the trading of stallion services by an owner or shareholder; the boarding and training of horses in the state; and the temporary use of horses for racing, exhibiting, or performing.
Whether you'll pay sales tax on a fancy hat for the Derby or a festive sombrero for Sunday depends on whether your state provides an exemption, or even a reduced rate, for clothing and wearing apparel. If you purchase a fancy hat for the Derby in Kentucky, you will pay sales tax, as the state does not provide an exemption for clothing. You will also pay tax if you purchase a sombrero in Texas, but not if you had bought it during the state's annual sales tax holiday (held in August).
The question of whether sales tax also applies to your beverage of choice for this weekend's festivities depends not only on the state, but also on whether you purchase it from an establishment or purchase fresh ingredients as grocery items and mix your own drink. Generally, sales tax applies to food and beverage items purchased at restaurants and bars, but states frequently exempt food and food ingredients as grocery items when purchased from grocery stores.
For additional information on each state's approach to taxing sales of food and beverages, clothing and wearing apparel, and exemptions for certain horse-related transactions, see Bloomberg BNA's Sales and Use Tax Navigator.
By Christine Boeckel
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