Sales Tax Slice: Will the MFA Turn Multistate Sales Tax Compliance Into a Pumpkin?


Pumpkins are everywhere this time of year – front porches, supermarkets, and on your child/cat/dog in the form of a costume. Those who live in states with sales tax likely paid tax on those pumpkin costumes, but what about the real pumpkins? Whether a pumpkin is subject to sales tax depends on the state, and even then, it might not be a simple yes-or-no answer. 

 New York taxes pumpkins based on their use. A few years ago, the New York Commissioner of Taxation and Finance issued an advisory opinion on when pumpkins are and are not taxable. (TSB-A-10(30)S). Using it to bake a pie? That pumpkin for human consumption is sales tax free! Carving it into a fierce jack-o-lantern? Bring extra change to the supermarket, sales tax is due with no consideration for the fact that the purchaser might plan on toasting those seeds for a snack. 

The sales tax treatment of candy might be a trick or treat, too. New York has similarly ruled on the sales taxability of Twix bars, determining the question non-SALT people might never have thought to ask — are they cookies (exempt from sales tax) or candy (subject to sales tax)? New York says they are cookies when they’re sold in family packs and advertised, marketed and sold as packaged cookies and snacks, and candy when they are sold in multi-packs and are advertised, displayed and sold as candy in a retail store’s candy section. (TSB-A-93(38)S). 

The Streamlined Sales Tax Agreement has facilitated greater uniformity among participating states by adopting uniform definitions. But for nonparticipating states, the proposed federal Marketplace Fairness Act could add another layer of complexity: a physical presence nexus standard that could apply to some items, but not to others. 

A state that amends its laws in comformance with the SSTA would be entitled to require remote retailers to collect its sales tax under the proposed MFA. 

But could the MFA add another layer of complexity for the states that have not achieved simplification via the SSTA? 

For example, New York currently has different sales and use tax treatment for “clothing” at the state and local levels. If the state wanted to include clothing in the tax base that applies to remote vendors, then under the MFA rules it would have to change its tax structure because the MFA requires that the state and local tax based must be the same for categories of goods and services, Karl Frieden, vice president and general counsel for the Council On State Taxation, said at a recent Bloomberg BNA Tax Roundtable.

Instead of changing its tax structure, “New York could opt out and not include clothing in the tax base that applies to remote vendors,” Frieden said. “The result would be that the physical presence nexus standard would still apply to remote vendors of clothing in New York.” 

The MFA could make multistate tax compliance even spookier: a nexus standard that varies depending on the type of property that is being sold.

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