SALES TAX SLICE: HUNGRY FOR REVENUE, STATES EXPAND TAXES ON FOOD

Nutella

Nutella or peanut butter? The choice used to be mostly driven by taste. But now there are the tax implications to consider. Mainers got a new set of complex rules subjecting previously untaxed food products to sales and use tax. Beginning January 1, taxpayers must add sales tax on hundreds of previously exempted foods and beverages to their grocery shopping lists.

These new rules target a variety of formerly exempt food products, like potato chips, ice cream and sports drinks, but still exempt certain food products. For example, “confectionary spreads,” such as marshmallow fluff and hazelnut or chocolate spreads are now taxable (sorry, Nutella fans), but peanut and other nut butters remain exempt from sales tax as a grocery staple. Nut lovers shouldn’t get too excited; while peanut butter, which is generally made by grinding peanuts, is exempt from sales tax, nuts and seeds that have been processed by salting, spicing, smoking, roasting or other means, including shelling, are now subject to sales tax. What if your favorite peanut butter is made from roasted and salted nuts? Consumers may question the consistency of these new policies.

Other formerly exempt fan favorites include pop tarts and toaster strudels, beef jerky and even fruit gummies. (My home state of Texas explicitly exempts snack food items such as corn nuts and pork rinds.)

If Maine’s new rules weren’t thorny enough, the taxability of a food product is also determined by who made it, where it was purchased and at what temperature. For example, frozen pies sold at a grocery store are exempt, but pies baked and sold by a restaurant or a store are subject to 8 percent sales tax. Pies purchased from a farmer’s market and then resold in a store are taxed at 5.5 percent, but if the pies are sold directly by their maker at a farmer’s market they’re taxed at 8 percent. Totally intuitive, right?

“The broad expansion of taxable grocery items is part of a two-year, $6.7 billion budget plan lawmakers approved in June, which contains modest property and income tax cuts.…State officials have estimated that the change in sales tax policy will generate an additional $97 million in revenue in the 2017 fiscal year,” the Portland Press Herald Reports.

Maine is not the only state wreaking havoc on the Friday night snack food run. In Florida, hot prepared food products that have been prepared for sale in a heated condition and sold at any temperature that is higher than the air temperature of the room where the products are sold are subject to sales tax. Conversely, if the heated food is a bakery product that is still warm from the oven, the product is exempt as long as the heat source is not used to maintain the food product in a heated state.

Although the rules regarding the taxation of food vary from state to state, some jurisdictions, like Alabama, Kansas, Oklahoma, South Dakota, and Vermont, have made it easier for taxpayers by either eliminating the exemption for food or exempting all food from sales tax. This all-or-nothing approach certainly sounds administratively simple compared to the complex regimes currently in effect in some states, but it doesn’t seem to be a popular trend.

As far as I’m concerned the states can continue making Swiss cheese out of the sales tax laws for food and food products; it’s going to take a lot more than tricky taxes to keep me away from the Nutella!

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Are more coherent policies needed for imposing tax on food?

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