Tax Policy – Sales Taxes on Soda, Candy, and Other Groceries, 2018

Key Findings:

  • Most states that levy a general sales tax offer an exemption for groceries, thereby removing qualifying “grocery” products from their sales tax base. However, many states claw back their grocery exemption for certain categories of goods, such as candy and soda.
  • As evidenced by arbitrary variations in the tax treatment of groceries, candy, and soda, selective application of sales taxes increases tax complexity while producing distortive effects. For example, most states apply the sales tax to Milky Way Midnight® bars but do not tax the sale of regular Milky Way® bars, which meet the definition of a grocery.
  • The Streamlined Sales and Use Tax Agreement (SSUTA) was established to promote a basic level of uniformity among state sales tax practices, but even with nearly half the states abiding by SSUTA definitions, varying sales tax rates on different types of groceries make sales tax administration unnecessarily complex.
  • Broad-based consumption taxes have the potential to be a relatively simple, transparent, neutral, and stable form of taxation, but differential tax treatment of groceries erodes the efficiency and effectiveness of state sales tax systems.
  • While grocery sales tax exemptions are well-intended, in practice they are limited in their ability to help low-income consumers.
  • For states that wish to offer a robust grocery-specific safety net, a well-administered grocery credit system may offer a simpler and more reasonable alternative to the status quo.
  • For states and consumers alike, there are many benefits to sales tax systems that tax all final consumer products – including groceries – at a low, flat rate.

Introduction

In most states throughout the U.S., consumers visiting a supermarket would not pay state sales taxes on their bacon and eggs for the week, but often would pay sales tax on a ready-made rotisserie chicken. If they pick up a Hershey’s® bar in the checkout line, that is likely subject to the sales tax, but if they pick up a Twix® bar, that likely is not. A bag of potato chips is usually exempt from the sales tax when purchased at a grocery store, but if purchased at a deli across the street, the chips would likely be subject to the sales tax.

These examples illustrate that the application of state sales taxes to food items is anything but simple.

But why?

Generally, the answer is that political considerations are prioritized above desires for a simple tax system. One of the most prevalent sales tax exemptions among states is the “grocery” exemption: 38 states and the District of Columbia carve out full or partial sales tax exemptions for goods classified as groceries.

Proponents of grocery exemptions argue that taxing necessities like food and beverages is unfair to individuals with lower incomes, who spend a larger portion of their earnings on groceries than those with more discretionary income.[1]

While grocery exemptions are well-intended, implementation of these policies has proven cumbersome. Many states, in their effort to remain consistent with the “necessity” argument while recouping lost revenue, have clawed back their grocery exemptions for certain “nonessential” food products. Candy and soda are common targets for exclusion due to their perceived lack of nutritional value. Among the states with full or partial grocery exemptions, 62 percent exclude either candy or soda from the exemption, meaning those products are subject to sales tax.[2]

While the desire among states to exempt necessities from the sales tax base is understandable, haphazardly applying the sales tax to some consumables while exempting others makes tax compliance that much more difficult and might not best serve those citizens these policies are designed to help.