Product taxability pain — Wacky Tax Wednesday

Most of us would rather pay less in sales tax than more, given the option. Yet every time a sales tax rate is cut, or a new tax exemption is provided, retailers have to deal with the fallout.

Sales tax holidays perfectly illustrate sales tax complexity, but at least sales tax holidays are somewhat predictable in that they’re annual events in most of the states that have them. A state may add or remove a product from the list of qualifying items, or a retailer may need to make adjustments based on changing inventory, but for the most part, retailers know what to expect and what to do. It’s still a hassle, mind you, but better the devil you know.

New sales tax holidays tend to be a bigger pain point because, well, they’re new. And some of the policymakers responsible for new tax-free periods seem to have something to prove, or something, because the new sales tax holidays really stand out.

For example, Florida’s mix of overlapping tax-free periods makes it difficult for retailers to keep track of what’s exempt when. During its new sales tax holiday for baby and toddler clothing, which runs July 1, 2022, through June 30, 2023, all clothing intended for children age 5 or younger is exempt from sales tax no matter how much it costs. Yet during the back-to-school sales tax holiday that runs July 25 through August 7, 2022, clothing for people of any age is exempt only if priced $100 or less.

So, how should a retailer treat a $120 toddler’s coat sold July 30, 2022? Is it exempt under the first sales tax holiday or taxable under the second?

While sales tax holidays are an easy target, they’re certainly not the only way to showcase product taxability complexity. In home-rule states like Alabama, Colorado, and Louisiana, transactions subject to state sales tax may be exempt from local sales taxes, or vice versa. And unfortunately, that information can be hard to hunt down.

Diapers and menstrual products like tampons are subject to Colorado’s state sales tax until January 1, 2023, at which time they’ll be exempt. Yet the City of Aurora has provided a local sales tax exemption for menstrual care products since June 1, 2021, and it started exempting diapers on July 1, 2022. The city and county of Denver has exempted feminine hygiene products since July 1, 2019, and will exempt diapers and incontinence products starting October 1, 2022.

The city of New Orleans decided to exempt diapers and feminine hygiene products from a portion of the local sales tax back in 2020, but the state of Louisiana didn’t exempt diapers and feminine hygiene products from state sales tax until July 1, 2022.

Illinois normally taxes food for home consumption (aka, groceries) at a reduced rate of 1%, but from July 1, 2022, through June 30, 2023, it’s waiving the tax altogether. The full rate of sales tax continues to apply to candy, soft drinks, and food for immediate consumption, which were never eligible for the reduced rate.

To help stave off confusion for consumers, the Illinois Department of Revenue is requiring retailers, “to the extent feasible,” to include the following statement on any cash register tape, invoice, receipt, or sales ticket issued to customers: “From July 1, 2022, through June 30, 2023, the State of Illinois sales tax on groceries is 0%.” Alternatively, retailers should post the statement on a sign, no smaller than 4x8 inches, “that is clearly visible to customers.” 

If only the department had a tip to make sales tax collection easier for retailers.

Exempting diapers, groceries, and menstrual products can help make these and other essential products slightly more affordable for consumers, and that’s probably a good thing. By the same token, some tax jurisdictions choose to tax certain less healthy products at a higher rate. This is why Illinois doesn’t provide a reduced tax rate (or full exemption for candy and soft drinks, and why places like Boulder, San Francisco, and the state of Vermont have a so-called soda tax.

Honestly, you never know what a state or local taxing authority will decide to tax or exempt. In Indiana, digital photographs are generally exempt while other digital products are subject to sales tax. Electronically accessed or transferred canned or prewritten software is taxed at a reduced rate of 1% in Connecticut, but only if sold to a business for business use. The list goes on.

So, what’s a business to do? One option is to devote more resources to sales tax compliance. Another is to check out Content, Data, and Insights products from Avalara that can help you determine the taxability of millions of products.