The bizarre world of sales tax law
sales tax law
When you think about it, sales taxes shouldn’t be that complicated. You make a sale and the appropriate locality adds a fixed percentage to the price for its share. In a simple system, this would just be a grade school multiplication problem but do you think our governments ever keep things simple?
The truth is that over time, state and local jurisdictions have created all kinds of exceptions and special situations for tax laws. Some of these rules make sense, some are confusing, and some are just plain bizarre. Let’s take a closer look at the complex world of sales tax law.
What is taxed normally?
Sales taxes get complicated because they are controlled by state governments, not the federal government. As a result, each state has different rules for what transactions are taxed and which are not.
Generally, most states charge general sale taxes on the sales of tangible goods like furniture, toys, and jewelry. This is because many sales tax codes were created when the economy was based primarily on manufacturing. Now that we buy more and more services, states are starting to change tax codes to include services but this is still less common. A good rule of thumb is to assume that most tangible goods will be charged sales taxes and other purchases depend on your state’s specific rules.
Common exceptions to general rates
You’ll also see certain types of exceptions to sales tax law show up around the country. Many states waive sales on essential household goods. State governments often don’t charge sales taxes on groceries, clothing and medicine because they want to help taxpayers afford these necessary goods. Many unprepared foods are tax exempt or charged at a lower rate. However, state governments often charge full sales tax on prepared meals because these are more of a luxury than a necessity.
Sales of goods that are going to be resold are often exempt from sales taxes as well. Since the purchaser will resell the item and collect taxes then, the government doesn’t want to double-tax the transactions. Many governments also try to subsidize certain industries like farming, manufacturing, and nonprofit organizations by offering sales tax exemptions or reductions.
On the other hand, state governments often charge higher tax rates on certain products like cigarettes and alcohol, offhandedly called “sin taxes”, to discourage their purchase.
You can see a pretty common theme here. The government waives sales taxes on activities it wants to encourage and support while increasing taxes on activities it wants to discourage. That makes perfect sense. As you go through these rules though, you start to see situations that leave you scratching your head.
Bizarre tax laws
Every state has its own strange tax laws. In New York, if you buy an unsliced bagel it counts as unprepared food and is tax exempt. However, if as soon as the seller slices the bagel, it is considered prepared and becomes taxable. Residents need to decide the extra convenience is worth another few cents in taxes per bagel.
Following the reasoning of essential versus nonessential, Colorado doesn’t charge sales tax on essential food packaging items. However, packaging that is considered unessential and possibly wasteful is taxed. In theory this makes some sense, but can you guess how it plays out? Restaurants and fast food vendors don’t need to collect taxes on cups or paper plates, but do need to collect taxes on cup lids and napkins. This ends up being more confusing than helpful.
Tax laws for religious materials also create problems. Most states exempt religious publications from sales taxes. Where do you draw the line at religious publications though? New religions are constantly coming up and often their publications fall outside the state guidelines and are taxed. What if a pastor buys a Dr. Seuss or Harry Potter book to make a point for a sermon? You can see how a well-intentioned tax law can create all kinds of controversy.
Location of the seller and buyer also complicates tax issues. Most states tax businesses that have a nexus in the state, meaning they have a physical presence in the area. For years, online businesses have been able to avoid state tax laws by never having a physical presence. However, several states have closed this loophole as legislators believe it gives online companies an unfair edge over brick and mortar companies. The Marketplace Fairness Act is also being considered by congress to mandate that online companies collect sales taxes in every Streamlined Sales Tax-conforming state.
There are passionate supporters on both sides of this issue.
Who says that tax law can’t spark exciting conversations?
Lucinda Rowlands has been the general manager at Zip2Tax since 2010. She has extensively researched sales and use tax regulations in order to help small businesses navigate complicated tax rules.