You’d think that if you eat it, its sales tax treatment would be the same – at least similar across different states and given methods of preparation of the food. Wrong.
Sales tax applies to food in nothing short of a cornucopia of varying ways depending on where you buy it and whether it’s groceries or prepared (and, in some case, where you eat the prepared food or it you’ve added certain foods to it).
Groceries
Grocery items are usually sold in grocery stores and can include non-prepared and canned food as well as packaged snacks, spices and beverages. Pre-packaged food such as canned drinks, bottled beverages, packaged snacks, frozen meals and canned products can also be “groceries” for purposes of sales tax.
Most states don’t have general a sales tax on groceries, though many local communities do. States that still tax groceries at either full or reduced rates include Alabama, Arkansas, Hawaii, Idaho, Illinois, Kansas, Mississippi, Missouri, South Dakota, Tennessee and Utah. As this issue is often a political tool, it’s possible that some or all those states will likewise remove their sales tax down the road; Tennessee lawmakers working on it, for example, as are those in Utah and Mississippi, that last the state with the highest sales tax on groceries.
Not all groceries and grocery food taxes are created equal. Maine exempts only grocery “staples,” for instance. Candy, alcohol and soft drinks usually incur sales tax in many states; chewing gum does in some states but doesn’t in others.
Or take marshmallows. In many states they’re simply “food purchased for human consumption,” a definition often used to ignite groceries’ sales tax exemption. According to the Tax Policy Center, states that follow the Streamlined Sales and Use Tax Agreement (SSUTA) define taxable candy as sugar or other sweeteners combined with chocolate, fruits, nuts or other ingredients or flavorings. But SSUTA member state Indiana says marshmallow crème is tax-exempt but a bag of marshmallows is subject to a sales tax because marshmallows are “pieces,” while crème is not. Not to mention that in some states a marshmallow incurs sales tax if it’s covered in candy or chocolate.
Again, divergent and widely differing definitions of what is a “grocery” item depend heavily on location.
Dine-in, take-out and grab a fork
Restaurant sales are straightforward in that they incur sales tax – and, in some places, additional meals taxes – almost everywhere in the U.S. Observers say this tax trend is not only here to stay but could increase. Lawmakers love the revenue as Americans continue to eat out more.
Ready-to-eat food, whether you grab it to go or it’s served to your table in a four-star restaurant, is generally a much more complex sales tax recipe than groceries. To examine a sampling of states, Kansas recently whittled its grocery sales tax to zero but maintains its full sales tax on prepared food.
Other prepared food can be more complicated. Take-out food is exempt from sales tax in Ohio, for instance. Taxable “prepared food” in Michigan includes food sold in a heated state or that is heated by the seller; has two or more food ingredients mixed or combined by the seller for sale as a single item; or is sold with eating utensils provided by the seller (not including a container or packaging used to transport the food).
But “heated” when? On the question of whether sales tax applies, Michigan offers the example of a seller who fries pieces of chicken then cools them and sells the pieces of cold fried chicken by the pound. Even though the chicken was earlier “heated by the seller,” when sold in an unheated state by weight the cold fried chicken is not “prepared food” and so is free of sales tax – unless eating utensils are provided by the seller with food sold in an unheated state by weight or volume as a single item or bakery items.
Utensils trip the sales tax wire in Indiana, too, except for, say, a box of doughnuts. “Items that contain four or more servings packaged as one item and sold for a single price (a ‘bulk serving’) do not become prepared food because the restaurant has utensils available.”
In New York, taxable prepared foods include food that’s sold heated, has been prepared by the seller and is ready to be eaten whether for on premises or off. Taxable food in New York also includes sandwiches (whether heated or unheated), carbonated beverages, candy and confectionery and pet foods.
New York’s “bagel tax,” though, recently garnered headlines, an 8.875% sales tax on prepared food that isn’t applied to unprepared foods (i.e., baked goods). Some eateries were reportedly getting around the tax by not slicing the bagels or putting a topping on them, leaving this to the customer after the purchase.
If you’re selling food, always know what else is stirring in the sales tax pot.
Over food, sales tax can get nothing short of wacky. And anyone who claims they’re simplifying sales tax is still leaving the hardest parts – and the liability – up to you. Rely on sales tax experts to maintain your compliance. Contact TaxConnex to learn more about our end to end sales tax solution.
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