Taxability matrix: Are pumpkins tax exempt?

Are pumpkins considered tax exempt food or non-exempt decorative items?

taxability matrix

If sales tax applies to jack-o’-lanterns, but not to edible pie pumpkins, what do you do in this case?

Pumpkins are one of those items where it isn’t clear whether the buyer is going to eat them or play with them. Only six states — Alabama, Idaho, Kansas, Mississippi, Oklahoma and South Dakota — do not exempt or at least reduce the sales tax rate on food and grocery items. This leaves pumpkin sellers with a conundrum. How is the determination to be made as to whether they are tax exempt food?

Back in 2007, Iowa briefly enacted and that same year repealed a law forcing retailers to attempt to determine whether the purchaser’s intended to eat or carve the bright orange squash. They were then supposed to charge sales tax on the carving jack-o’-lantern but exempt the sales tax for the delicious little soon-to-be treat.

The Iowa tax department sent a bulletin to retailers reminding them that where once all pumpkins were tax exempt food, now they were to be taxable if they were 1) advertised to be used as jack-o’-lanterns; and 2) they were understood to be jack-o’lanterns. How exactly one is supposed to “understand” the intended usage of a buyer and later prove that to the department of taxation is left to your imagination.

To complicate the matter even further, Iowa’s pumpkins could still be sales tax exempt if 1) the buyer presented a sales tax exemption certificate; 2) the pumpkin was of a pie variety and specifically advertised for that purpose, or 3) they were purchased using food stamps.

How are pumpkins treated in your state? Did you pay sales tax when you bought yours this year. Please comment and let us know your experience.

 

Rhode Island court re-examines sales tax on extended warranties

sales tax on extended warranties

sales tax on extended warranties

Dell charged sales tax on extended warrantiesRetailers do not usually charge customers more sales tax than the law requires. But that is precisely what Dell Computer did to at least two customers in Rhode Island when they collected sales tax on extended warranties. This led to more than ten years of litigation, and according to a June 27 decision by the Rhode Island Supreme Court, the case will not end anytime soon.

The two customers purchased their computers from Dell in 2000. One was a business purchase, the other for personal use. Dell charged both customers Rhode Island sales tax not only on the computers, but also charged sales tax on extended warranties offered as a separate option. In 2003, the customers filed a class action against Dell, arguing they were improperly charged sales tax on “nontaxable services.” The customers alleged Dell was negligent in failing to calculate the correct sales tax, and the extra charges constituted an “unfair and deceptive trade practice” under Rhode Island law.

In 2005, Rhode Island’s Division of Taxation advised Dell, “[t]he charge for the optional service, maintenance, or extended warranty contract is not subject to tax when such a charge is separately stated by the retailer to the purchaser.” As Dell did, in fact, separately charge each customer for their service contract, the division concluded the additional sales tax was improper.

Meanwhile, it took nearly six years for the Rhode Island courts to resolve various preliminary issues surrounding the class action. In 2009, the Rhode Island Supreme Court issued a pair of decisions allowing the case to proceed. In 2012, a Superior Court judge granted summary judgment to Dell, finding there were no triable issues for a jury to decide.

The Rhode Island Supreme Court partially reversed the Superior Court. The five-judge court unanimously held Dell should prevail on the negligence claim, as the company “did not owe a legal duty to plaintiffs regarding the collection of taxes.” The justices split 4 – 1 on the unfair and deceptive trade practices claim. The majority said a jury could find Dell’s improper sales tax charges “offended public policy, was immoral, unethical, oppressive, or unscrupulous, and caused substantial injury to consumers.” One justice dissented, arguing “it defies common sense” to say Dell, in a good-faith effort to collect Rhode Island’s sales tax, acted illegally.

The majority’s decision only revives the claim of the customer who purchased a computer for individual use. Rhode Island’s unfair and deceptive trade practices law does not apply to business purchases.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.

Exemption Certificate Management

Make sure you document which transactions are or aren’t taxable

Not everything that is sold is necessarily subject to state sales or use tax. Each state has different regulations governing what is and what is not exempt from the collection and remittance of tax. One general rule of thumb is that the purchaser is responsible for proving that their transaction is tax exempt by providing the seller with a valid certificate of exemption.
As an example, the state of California offers full and partial sales and use tax exemptions.

ECM

Don’t let a hectic work day be an excuse for keeping sloppy records or letting your exemption certificates lapse.

A partial exemption means that the qualified sale is exempt from the state general fund portion of the sales tax, but it is still subject to the statewide tax rate plus any applicable district taxes. A full exemption includes the state general fund portion of the sales and use tax, the statewide tax rate and district taxes.

Burden of proof #1: It is the responsibility of the purchaser to “prove” their transaction is tax exempt by providing a valid exemption certificate to the seller.

To claim a sales and use tax exemption, the appropriate certificate must be obtained from the Board of Equalization (available online at http://www.boe.ca.gov/sutax/staxformsa.htm) and properly completed. A partial exemption certificate will require a description of the property that was purchased. For example, a retailer of packing equipment would describe the property on the partial exemption certificate as “packing equipment.” The operator of a hardware store who sells hand tools, nuts and bolts to a qualified person for a qualified use could enter the description on the partial exemption certificate as “agricultural tools and parts for farm machinery and equipment.”

Burden of proof #2:It is the seller’s responsibility to maintain an up-to-date file of exemption certificates to “prove” to the state that any given transaction should be tax exempt.

An exemption certificate must be filed with the retailer, provided in a timely manner, filled out properly, and renewed regularly. This means that for exemption purposes, the exemption certificate (partial or otherwise) will be considered timely if it is taken any time:

  • Before the retailer bills the purchaser for the qualified property,
  • Within the retailer’s normal billing or payment cycle,
  • At or prior to delivery of the qualified property to the purchaser or his or her representative, or
  • No later than 15 days after the date of purchase.

As each state takes a different approach to exempt sales, exemption types and information required, not to mention the various certificates and forms that may be required, be sure to consult with a professional CPA or a tax lawyer.