Tax or Treat?

October 31, 2008

It’s Halloween, and taxes will probably be the last thing on the minds of the young ghosts, ballerinas, witches, and superheroes who go door to door collecting candy tonight.

But the grown-ups who buy the candy might want to give taxes a bit of thought, especially if they live in a state that has ridiculously complex laws regarding the taxation of candy. At Easter time we lamented the trouble the Easter Bunny has calculating his tax burden when he purchases candy and other supplies for Easter baskets. We picked on Iowa as an example of a state where the Easter Bunny would have an especially difficult time determining the amount of tax he’d have to pay at the checkout counter.

Iowa has adopted the Streamlined Sales Tax Project (SSTP) and has some confusing rules about taxes on certain types of candy (taxes on other types of food can be just as confusing, as this issue paper on the SSTP‘s taxation of food shows). When the SSTP when into effect in Iowa, food containing flour was not considered candy anymore, even if most rational people would argue otherwise. For example, classic Milky Way bars, which contain flour, are not considered candy and are therefore tax-exempt, while Milky Way Midnight (dark chocolate) bars are taxed because they do not contain flour. This obviously creates technical difficulties for retailers and confusion for consumers.

From the Rhode Island Division of Taxation:

The exemption for food under R.I.G.L. 44-18-30(a) does not apply to “candy.” “Candy” is defined as any “preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts, or other ingredients or flavorings in the forms of bars, drops, or pieces.” The term “candy” does not include any preparation containing flour as an ingredient.

Because many products commonly categorized as candy contain flour, packaging labels must be examined to determine which items are deemed taxable candy or exempt food products. Examples of items exempt after January 1, 2007 include KitKats, Twix, some licorice, Nestle Crunch, and Milky Way.

“Some licorice”? This means that anyone purchasing last-minute Halloween candy today may want to check the label of licorice packages carefully since some brands contain flour while others do not. Does it really make sense to tax licorice that does not contain flour, and exempt licorice that does, or to make any decision about taxes based on such a picayune criterion?

Levying a different tax rate on candy or any type of “junk food” than on other food creates enough confusion for consumers as it is, without the additional minute distinctions between various types of “junk food.” Most shoppers probably are not even aware of the different tax rates for different types of food, which is problematic, since sound tax policy requires simple, transparent taxes that are easy to comply with. Shoppers should not have to scrutinize the labels of every item on the shelf to determine what is taxed and what is not, nor should they have to take a copy of the state’s tax laws to the grocery store along with their shopping lists.

The taxes on that candy everyone is handing out tonight might just end up being the scariest part of Halloween.

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