Absorbing sales tax – Wacky Tax Wednesday

Update 7.22.2019: Absorbing sales tax is legal in Pennsylvania as of July 1, 2019, and in Texas as of October 1, 2019.

Sometimes when retailers find sales taxes to be confusing, cumbersome, or downright unfair, they absorb them.

Take tampon taxes. Products that governments deem to be essential are generally exempted from tax or taxed at a reduced rate. Yet in most parts of the world, sanitary products are subject to the general rate of tax. Since a large number of women consider these products to be essential, the taxes can be controversial and politically divisive.

In Britain, they’ve been subject to a reduced rate of value added tax (5% rather than 20%) for decades, which may seem fair until you consider the fact that exotic meats, bingo, and edible cake decorations are taxed at 0%. Recently, British MPs balked at the chance to eliminate the tax on tampons: 305 MPs voted to keep sanitary products classified as “non-essential luxury items,” compared to the 287 MPs who voted to exempt them as essential products. (Fun Fact: 191 out of 650 members of parliament are female.)

So what gives?

According to David Gauke, British Financial Secretary to the Treasury, the government is sympathetic but unable to make the requested changes. He explained:

“The UK does not have the ability to extend unilaterally zero rating to new products.  The UK has more extensive zero rating than most, if not all, other member states, but any change to EU VAT law would require a proposal from the European commission and the support of all 28 member states. Without that agreement, we are not permitted to lower rates below 5%.”

The Treasury Minister has vowed to broach the issue with Brussels. In the meantime, some stores in Britain have opted to absorb the highly unpopular 5% tax on sanitary products.

Absorbing the tax

The Huddersfield Students’ Union and many other student union shops do not charge consumers VAT on feminine hygiene products. The union shop at St Andrews planned to absorb the tax but is currently unable to make it work financially. At least one online shop based in the UK offers to refund the VAT on sanitary products, and a British contact reports that several grocery stores quietly absorb the tax.

This got me wondering. Do retailers in the United States make a habit of absorbing sales tax on certain items or at certain times? Are they even allowed to? I had to know.

Sales tax absorption snapshot

It turns out that absorbing sales tax is actually against the law in quite a few states in this country. Many states tax the consumer (consumer excise or sales tax) rather than the retailer (seller or vendor privilege tax). In consumer sales tax states, retailers collect the tax for the state and typically can’t interfere with the state’s taxation of the consumer.

Seller privilege states may also outlaw absorption of the tax — it can make audits more challenging (determining actual sales price and actual exemptions). However, as always with sales tax, there are exceptions to the rules.

It is unlawful for businesses to absorb sales tax in numerous states, including but not limited to:

• Alabama (810-6-4-.20)
• Arizona (42-5165)
• California ( 3, Article 1, Section 6205)
• Colorado (information bulletin)
• Connecticut (law)
• District of Columbia ( 47–2014)
• Florida (07)
• Iowa (24)
• Kansas (information bulletin, p 11)
• Kentucky (KRS 139.220)
• Nebraska (REG-1-039)
• Nevada (NRS 372.115)
• North Dakota (newsletter)
• Ohio (29)
• Oklahoma (710:65-1-5)
• Texas (106); legal as of October 1, 2019, due to the enactment of House Bill 2358
• Vermont (9708)
• West Virginia (vendor responsibilities)

States that permit sellers to absorb sales tax include but are not limited to:

• Georgia (legal since 2012)
• Hawaii (Tax Facts 37-1)
• Louisiana (legal since July 2001 under certain conditions)
• Massachusetts (legal since August 2010)
• Michigan (opinion)
• Missouri (080.5)
• New Mexico (gross receipts tax overview)
• Pennsylvania (as of July 1, 2019 due to the enactment of House Bill 262)
• South Carolina: (sales and use tax manual)
• South Dakota (sales and use tax guide)
• Tennessee (sales and use tax overview)
• Wisconsin (legal since 2011, sales and use tax report)
• Washington (tax included)

Why absorb tax?

Vendors don’t absorb sales tax just for the fun of it — to do so would cut into profit margins. So in states where it is legal for them to absorb tax, why would they?

Typically, they don’t. But one instance in which retailers may choose to absorb sales tax is during a sales tax holiday, when qualifying items are exempt from tax but non-qualifying items are not. Consumers shop during tax-free periods precisely in order to avoid sales tax, and absorbing the tax on other items is a way to entice shoppers to buy more.

Certain states actively let vendors know they can absorb sales tax on non-qualifying items during tax-free periods. These include:

• Maryland (which allowed for this provision starting in 2007)
• New Mexico
• Virginia (Virginia retailers may not absorb sales tax at any other time.)

However, absorption of sales tax is not permitted in all states that provide a sales tax holiday. For example, it is expressly prohibited during Iowa and Texas tax-free periods.

Why else would a vendor want to absorb sales tax? Well, a nonprofit thrift store in Moorpark, California, announced it would absorb sales tax after the state rate increased, “to make it easier for the growing number of people who visit the store to get needed goods.” One Mississippi retailer absorbs sales tax on non-eligible items during sales tax holidays because, he says, “It’s just too confusing to have to explain why it applies to one item and not another.” And last spring, I noticed that a shop in my home town in Washington State promised to not charge consumers sales tax during the month of April, when dreaded income tax is due.

On the other hand, instead of absorbing tax, some vendors choose to impose an additional tax on certain products. Celebrity chef Jamie Oliver adds 10p to the price of sugary beverages sold in his restaurants (the money goes to his Children’s Health Fund).

All this reminds that while sales tax can be charitable, divisive, health conscious, political, and wacky, it is never, ever, dull.