Halloween shoppers have several delicious decisions to make before trick-or-treaters show up at their door. And in many states, those options will change how much tax they pay.
For example, in Illinois, residents pay a higher state sales tax rate on Reese’s Peanut Butter Cups, Gummy Worms and Hershey’s Milk Chocolate bars — 6.25% — compared to Twix, Twizzlers and Hershey’s Cookies ‘n’ Cream bars. 1 in%.
It can be devilishly difficult for shoppers to try to differentiate between these two groups of behaviors, but for the Illinois Department of Revenue, the difference is simple. The first three are candy, and the second three are not.
This example shows how state sales taxes can affect taxpayers, retailers, and Halloween candy buyers in unexpected ways.
Importance of Sales Taxes
From a states’ point of view, there’s a lot to like about sales taxes, which are fees you pay when you buy a cup of coffee or a new computer. Forty-five states have sales taxes ranging from 2.9% in Colorado to 7.25% in California. In some cities with a local sales tax, this rate can be even higher.
Research has found that taxpayers do not pay much attention to how much they pay in sales tax. This makes sales taxes a politically attractive source of revenue.
What’s more, states don’t have to do much in the process because businesses have to collect taxes at the place of sale, which streamlines enforcement.
For these reasons, states rely heavily on sales taxes to fund their governments. In 2019, sales tax accounted for about 31% of states’ tax revenue, making it the second largest source behind income taxes.
However, sales taxes raise concerns. That is, they place a greater burden on low-income taxpayers than on high-income taxpayers, as the former spends a higher percentage of their disposable income on expenses that are typically subject to sales tax.
People must buy food and other basic necessities to survive, making it harder for low-income taxpayers to change their shopping habits to avoid the burden of sales tax. To address this concern, many state legislatures have chosen to reduce the sales tax rate that applies to the sale of certain necessities such as groceries and medical supplies.
Illinois, for example, lowers its sales tax rate for grocery purchases from 6.25% to 1%. Other states, such as California, simultaneously exempt groceries from their sales taxes.
States should draw a line
Trick-or-treating then becomes the line at which foods are exempt from the regular sales tax rate.
It’s easy to classify certain foods as groceries, such as eggs, milk, and bread. Others, such as wine and prepared food, are easy to exclude — and are often subject to additional taxes beyond the basic sales taxes.
But how does one deal with all the food in between those groups? For example, is meat a necessity? How about candy?
One approach to this problem is to list each food item in fine detail that counts as a grocery item, with the rest of the food item taxed at a higher rate. Such a list would provide fully targeted tax relief but would demand constant and costly updating as new products make their way into grocery stores.
Rather than the granular method, states often take a more generalized approach, defining groceries as food intended for off-premises—which essentially means food is bought to take home, not on the spot. Is eaten – and everything else doesn’t deserve it. Reduction in sales tax rates.
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Many states, such as Illinois, go further and provide that certain categories of food, such as candy, also do not qualify as groceries.
These generalized approaches sacrifice accuracy for ease of administration but ultimately demand further line drawing. When is food purchased for domestic consumption? What is candy?
When is Candy Candy?
States such as New York sometimes seek preparation methods to determine when to purchase food for consumption at home or on premises. Order a bagel with cream cheese or ask to have it toasted, and the New York Department of Taxation and Finance concludes that you’ll dine—and have to pay sales tax. Leaving the toaster and other extras exempts that bagel because the city assumes you’re carrying it.
Illinois defines candy as confectionery and confectionery, but not if flour is a listed ingredient. A few dozen other states have similar rules, while some, such as Arizona and Michigan, treat candy like any other grocery item.
So, depending on which state you live in, the cookie crunch in your Twix is doubly satisfying. It feeds your sweet tooth while also giving you a sales tax exemption.
And, yes, Twizzlers and Hershey’s Cookies and Cream both contain flour, too.
This is an updated version of an article published on October 25, 2019.