Sales Tax Slice: Water, Water Everywhere, But Are Those Drinks Subject Tax?

tap water

Colgate’s admonishment to turn off the faucet during the Superbowl as well as recent events in Flint, Michigan have served as a reminder of how important clean water is. While many people drink water straight from the tap, some people prefer bottled water or use water purification systems to ensure that what they’re drinking is clean.

While water is certainly tangible personal property, the states vary wildly in their approach to taxing it. As discussed below, the states have very different methods for taxing tap water, bottled water and water purification systems.

Tap and Bottled Water

Traditionally, tap water has been the most cost-effective way to get water. Many people don’t realize that some states, like Arizona, Arkansas, Indiana and Missouri, actually tax tap water. Kansas, Kentucky, and Ohio, generally subject the provision of water to sales tax, but exempt water service provided to residential premises. Other states, including California, Connecticut, Michigan, and New York, exempt the sale of water provided through pipes altogether from sales tax. (I can’t imagine that the residents of Flint, Michigan would be altogether pleased if they were required to pay sales tax on their contaminated water.) However, even as these states exempt water service from sales tax, Connecticut and New York impose a separate gross earnings tax on the providers of public utilities, including water companies.

Several celebrities like Beyoncé, Mark Wahlberg and Michigan native, Eminem, recently made donations of bottled water to the people of Flint, Michigan. Luckily, Michigan exempts bottled water from sales and use tax. Many states, however, such as New York, Maine, and Kansas, subject bottled water to the full sales and use tax rate. Other states, such as Virginia, Illinois and West Virginia, tax bottled water at the reduced rate imposed on groceries generally.

Water Filtration Systems

What if you want to ensure that you’re drinking clean water, but want to be more environmentally friendly by skipping the myriad of plastic bottles? Some taxpayers install water filters or water filtration systems in their homes. New York treats the installation of water softeners and filtration systems as a capital improvement, meaning that sales tax is due on the system itself, as well as on the materials and supplies used to install it. One creative taxpayer in New York even unsuccessfully tried to argue that water filtration systems should be exempt from sales tax as medical equipment. California taxpayers must pay sales tax on the lease of water purification systems. Other states, such as the recently rain-starved Texas, exempt rainwater filtration and purification equipment and even desalination equipment from sales tax. New Jersey exempts water filtration systems that are permanently attached to real property from sales tax as construction materials.

Whatever the sales tax rate for clean water, I suspect that, given the alternative, most taxpayers will pay it.

Continue the discussion on LinkedIn: Should states impose sales tax on water and water filtration systems?

For more information about state tax issues, sign up for a  free trial on Bloomberg BNA’s Premier State Tax Library.

By Emilie Burnette