The place to find business sales tax information

— as well as solutions, services and jobs!

The Case for Taxing Groceries. Or Against It. Or for It …

author photo of Connie Eisenberg

Arkansas recently passed legislation that would reduce the sales tax on “food and food ingredients” to 1/8% if certain budget goals are met. Is this a good idea? There are two competing public policies at play here, plus a healthy dose of politics.

Good tax policy calls for low rates applied to a broad base with few exceptions. This allows states to meet their revenue targets without imposing too high a tax on any given transaction, and it has the additional benefits of reducing costs and increasing compliance. Under this theory, groceries should be taxed at the same rate as everything else because each carve-out reduces the amount of revenue and increases complexity. Aside from the revenue equation, simplifying taxability (now there's a topic for discussion ...) means nobody has to figure out if that cranberry juice cocktail contains enough juice to be exempt or reprogram the system when Milky Way bars are reformulated without flour.

Another public policy holds that necessities should not be taxable. Sales taxes fall on the poor the hardest because they spend much of their income just to meet their basic needs. We can argue about whether we as a society can’t get away from sales taxes but there's no avoiding the fact that sales taxes are regressive and grocery sales taxes are particularly regressive because we've all gotta eat. Some states use income tax credits to offset the sales tax, but as applied, even that relief is only partial. For example, Idaho offers a $70 annual refund ($90 for individuals with less than $1,000 in income). The credit is not available for any month the person received food stamps, among other limitations. The Idaho sales tax rate is 6% so $70 represents $1,166 in food purchases for the year, or $97 per month. For comparison, average monthly SNAP (food stamp) benefits are $133, so $97 worth of food isn't a whole lot to live on.

This leads to the political angle: every dollar of tax is a dollar less of fruits and veggies for Little Johnny. Of course the response to this is that sales tax is a vital component of the state budget and without it the state won't be able to pay Little Johnny's teacher. (This is all about Little Johnny; it doesn't matter if the state is simultaneously giving tax breaks to out of state filmmakers.) Fifteen states currently tax food at either the full or partial state tax rate. Over the past few years several states have eliminated or reduced their taxes on groceries but none have gone the other way and imposed state taxes on food. Oddly enough, Streamlining actually forced the imposition of local sales taxes in a few places that had exempted groceries. Texarkana, AR, used to match Texas's exemption rather than Arkansas's imposition of sales tax on food, and several Georgia counties that previously exempted groceries from certain local taxes now tax them in the name of maintaining a uniform tax base.

So ... what does it all mean? From a purely economic perspective, taxing groceries makes sense. The regressivity could be minimized with better income tax credits, and those of us
who can afford steak can also pay a little extra for tax. Practically speaking, I can't see any politician getting up and announcing that he wants to tax breakfast cereal. Supporters of the Marketplace Fairness Act have been accused of raising taxes when all they are trying to do is increase (or shift) compliance with existing taxes. Actually raising taxes? Not very likely!

So, what do you think? Should food be subject to sales tax? Should it be taxed at a lower rate than general tangible personal property? If states do tax groceries, how can they minimize the financial impact on those least able to absorb more taxes? And most important from a real-life perspective, what’s the political spin that would make grocery taxation palatable to voters?

Connie Eisenberg has been publishing sales and use tax data for CCH for the past ten years and prior to joining CCH, she was Director of Operations at a pharmaceutical company, where she was involved in compliance and regulatory issues at the federal and state levels. Connie is strangely fascinated by the minutiae of sales tax policy and implementation. ("Does that licorice contain flour? Oh, goody, it isn’t candy in some states! ") Despite holding advanced degrees in both law and accounting, Connie still has friends.

Note: Connie Eisenberg is no longer accepting new comments or questions. Use the Site's SEARCH bar to locate other helpful information on this topic.

Other recent “Food (Tax) for Thought” posts by Connie Eisenberg:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

4 Responses to The Case for Taxing Groceries. Or Against It. Or for It …

  • Posted by Jo on June 5, 2014 4:03am:

    It seems crazy to dig up this blog post nearly a year later but I found it when doing a search for Milky Way ingredients. Why? Because this:
    "nobody has to figure out if that cranberry juice cocktail contains enough juice to be exempt or reprogram the system when Milky Way bars are reformulated without flour."
    Milky Way bars HAVE actually been reformulated and no longer contain wheat flour as an ingredient so they are now considered candy under SSTP rather than food. We've updated our POS system accordingly to begin charging tax on them in the SSTP states that tax candy. :::sigh:::

    • Posted by Author photo of Connie EisenbergConnie Eisenberg on June 6, 2014 12:55am:

      Thanks for stopping by, Jo!
      Sigh is right!
      For even more fun facts about candy taxation, check out my "If It’s Sweet It Might Be Candy, But Is It Good Tax Policy?" post at http://www.salestaxsupport.com/blogs/industry/food-tax/sweet-candy-tax-policy/.

  • Posted by Author photo of Connie EisenbergConnie Eisenberg on June 26, 2013 5:19am:

    You raise some great points, Bob! In fact, some of my future posts will be discussing candy and beverages, as well as food sales by different types of businesses. You are absolutely right about the extreme and often bizarre complexity. "All or nothing at all" sounds like a great tax policy that both buyers and sellers can get behind.

  • Posted by Bob on June 26, 2013 3:57am:

    Connie,
    Thank you for an informative, thought-provoking post! I am personally fascinated with the food/drink from a sales tax perspective.
    No doubt, food/drink are necessities & yet look to the extents that states have gone to carve out portions of these "necessities" that they affix sales tax to. And in the process of these "carve outs" serve to complicate the taxability rules in this & many other areas.
    Meat & potatoes- Agreed necessities. Not taxable. Buy them in a grocery store &, yes they are NOT taxable. But buy them from & have a restaurant prepare & serve them to you, & presto, they ARE taxable!
    Purchase candy & pay sales tax. Well, in many cases, taxability depends upon the composition of the product (e.g. trail mix- % of candy vs. defined ESSENTIAL food) or even the flour used to make the candy (e.g. flour derived from wheat + essential vs. flour derived from nuts = non-essential)
    Soft drinks are taxable. Well, Tang may NOT be (astronauts drank it in space you know). And fruit-ades MAY be taxable depending upon the extent of actual fruit content (essential) vs. other non-essential contents.
    I hope the reader sees that the states have already carved out generous portions of food/drink that many people of lower economic stature purchase in significant quantities while at the same time developing extremely complex taxabilities in this 1 area!
    Personally, I subscribe the Frank Sinatra theory of taxability here: All of Nothing at All! Simply stated, either the states tax food/drink in their entirety with corresponding cutbacks in other areas, or leave it alone it its entirety with corresponding taxes in other areas to make up for any shortfall.
    IMHO, states need to address sales tax simplification NOW. It is hard enough for uber-retailers that have the financial investment in tax professionals + infrastructure to keep pace with the variability of multi-state taxation of food & drink.
    And if states wish to charge a LOWER tax rate to food/drink in attempting to tax ALL of it? Fine with me. It will lessen the impact on the essential food/drink while DECREASING the tax on the non-essentials.
    Tax it all or leave it alone! Too simplistic you say? I say the states are already eating away at this area with -0- concern on who is adversely affected.
    Sales tax simplification IMHO is long overdue & it needs to be implemented in virtually all industries where the states have attempted to carve out portions of otherwise not taxable goods/services.

Disclaimer:

Access to any portion of SalesTaxSupport.com is contingent upon your acceptance of our Terms of Use. This Web Site and content provided by STS Publishing, LLC and its third party content providers, including, but not limited to information, documents, forms, comments, advice and opinions, is for informational purposes only, and is not a substitute for professional advice, nor does the use of this Web Site constitute a professional-client relationship. The Web-Site also includes advertisements, directory listings, job postings and links to third party web sites, all of which are provided for your convenience only and in no way constitute a referral, endorsement, or warranty by SalesTaxSupport.com of any product or service provided by such third parties. All content is provided “as is” with no guarantee regarding accuracy, suitability, or timeliness. Your reliance on any content accessed on or through the Web Site, or on any product or service provider is strictly at your own risk.