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If It's Sweet It Might Be Candy, But Is It Good Tax Policy?

author photo of Connie Eisenberg

The Streamlined Compliance Review and Interpretations Committee has agreed to consider whether fondue pouches are candy. The product is sold as a sealed pouch containing chocolate wafers and is intended to be heated, melting the chocolate before serving. CRIC's concern is whether the product fits the Streamlined definition of candy or not. This column will consider why that matters and whether it should.

Many states, including both Streamlined and non-SST states, exempt most food but tax candy. There's a uniform Streamlined definition of candy, plus interpretations about whether different types of food are or are not candy. Luckily, SST rule 327.8 notes that the definition of candy only applies to foods commonly thought of as candy so breakfast cereal, beef jerky, canned peaches and BBQ potato chips don't have to be evaluated for candy-ness. Non-SST states of course have their own definitions and interpretations of what makes something "candy."

Some of the interpretations are particularly ... interesting. New York is one of the states that exempt food but tax candy. How does this play out? Well, for one thing, candy excludes baking or cooking ingredients. I don't know why tax policy favors little pieces of chocolate designed to be baked into cookies over little pieces of chocolate intended to be eaten straight out of the bag (and really, who among us hasn't snacked on chocolate chips) but OK, ingredient candy is exempt. What about marshmallows? Large marshmallows were originally deemed to be taxable candy while mini-marshmallows were exempt ingredients. The Tax Department eventually realized the absurdity of this position and decided that all marshmallows, large and small, are exempt ingredients.

Unexpected candy versus not-candy decisions aren't limited to states like New York. The Streamlined definition of candy excludes products containing flour so Twizzlers are exempt. Milky Way bars used to contain flour so they were exempt, but they have been reformulated and are now, sadly, taxable in candy-taxing Streamlined states.

So basically what we've seen is that foods that seem very similar for snacking purposes are treated differently for sales tax purposes. Streamlined states tax marshmallows but exempt licorice because it contains flour. "Food Stamp" states like New York tax licorice but exempt marshmallows as ingredients. What I'm wondering is why this complexity is necessary. Even if you believe that tax policy is the way to encourage healthy eating (keeping in mind of course that once you move beyond quinoa and raw broccoli there's a lot of disagreement about what makes something a healthy choice), is it worth the complexity?

Should states use sales tax policy to discourage consuming unhealthy food, and if they should, how would you define unhealthy? Tell us what you think, or play devil's advocate.

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.

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Comments

2 Responses to If It's Sweet It Might Be Candy, But Is It Good Tax Policy?

  • Posted by Author photo of Connie Eisenbergconnieeisenberg on February 15, 2016 2:36pm:

    Thanks for writing, Marie! This being sales tax, of course the answer to your question about whether marshmallows are taxable is “it depends.” Some states tax all food at the general rate. Some of the states that offer food exemptions or special reduced food rates treat all candy like other food items, while others tax candy. Additionally, state definitions for taxable candy vary. Most states that tax candy tax marshmallows too, although marshmallows are considered exempt ingredients in a few of the states that generally tax candy but exempt candy used in cooking or baking.

  • Posted by Marie on February 12, 2016 5:57pm:

    is there a tax on marshmallows ?

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