Halloween shoppers have many delicious decisions to make before trick-or-treaters show up at their doors. And in many states, those choices will change how much tax they pay.
In Illinois, for example, residents pay a higher state sales tax rate on Reese’s peanut butter cups, gummy worms and Hershey’s milk chocolate bars – 6.25% – than on Twix, Twizzlers and Hershey’s Cookies ‘n’ Creme bars – 1%.
Trying to distinguish between these two groups of treats may be devilishly hard for shoppers, but to the Illinois Department of Revenue, the difference is simple. The first three are candy, and the second three are not.
This example illustrates how state sales taxes can affect taxpayers, retailers and Halloween candy shoppers in unexpected ways.
The importance of sales taxes
From states’ perspectives, there is a lot to like about sales taxes, which are the levies you pay when you buy a cup of coffee or new computer. Forty-five states have sales taxes ranging from 2.9% in Colorado to 7.25% in California. The rate can be even higher in some cities that also have a local sales tax.
Research has found that taxpayers don’t seem to pay much attention to how much they pay in sales taxes. This makes sales taxes politically appealing sources of revenue.
Not only that, states don’t have to do a lot of work in the process since businesses must collect the taxes at the point 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-biggest source behind income taxes.
However, sales taxes do raise concerns. Namely, they burden low-income taxpayers to a greater degree than high-income taxpayers, since the former spend a higher percentage of their disposable income on expenses that are typically subject to a sales tax.
People must buy food and other basic necessities to survive, making it harder for low-income taxpayers to change their purchasing habits to avoid the sales tax burden. To address this concern, many state legislatures have chosen to reduce the sales tax rate that applies to sales of certain necessities such as groceries and medical supplies.
Illinois, for instance, lowers its sales tax rate from 6.25% to 1% for grocery purchases. Other states, like California, exempt groceries from their sales taxes all together.
States must draw a line
The trick – or treat – then becomes where to draw the line on which foods to exempt from the regular sales tax rate.
Some foods, like eggs, milk and bread, are easy to categorize as groceries. Others, like alcohol and prepared meals, are easier to exclude – and often are subject to extra taxes beyond basic sales taxes.
But how does one deal with all the food in between those groups? For instance, is meat a necessity? How about candy?
One approach to this problem is to list in granular detail each food that counts as a grocery item, leaving the remaining foods to be taxed at the higher rate. Such a list would provide perfectly targeted tax relief but would demand constant and costly updating as new products make their way into grocery stores.
Instead of a granular method, states often take a more generalized approach, defining groceries as food for consumption off-premises – which essentially means the food is purchased to take home, not to be eaten on the spot – and everything else is not eligible for reduced sales tax rates.
Many states, like 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 home consumption? What is candy?
When is candy candy?
States like New York sometimes look to preparation methods to determine when food is purchased for consumption at home or on the premises. Order a bagel with cream cheese or ask for it to be toasted, and the New York Department of Taxation and Finance concludes you will be dining in – and need to pay sales tax. Skipping the toaster and other extras makes that bagel exempt because the city assumes you’re taking it to go.
Illinois defines candy as sweets and confectioneries, but not if flour is a listed ingredient. A couple dozen other states have similar rules, while some, such as Arizona and Michigan, simply consider candy like any other grocery item.
Therefore, depending on which state you live in, that cookie crunch in your Twix is doubly satisfying. It feeds your sweet tooth while also getting you a sales tax break.
And, yes, Twizzlers and Hershey’s Cookies and Cream both have flour in them, too.