How reducing the sales tax rate on food can complicate Alabama sales tax compliance — Wacky Tax Wednesday

Alabama cut the state sales tax rate for many food products from 4% to 3% on September 1, 2023. However, some food products are still subject to the full 4% state sales tax. What’s a seller to do?

To qualify for the lower rate, a food or beverage must be eligible for the federal Supplemental Nutrition Assistance Program (SNAP). This seems straightforward, but there can be more to it than meets the eye. In short, SNAP applies to “any food for the household” — except those that don’t qualify for SNAP.

The following foods qualify for SNAP and Alabama’s 3% food sales tax rate:

• Breads and cereals

• Dairy products

• Fruits and vegetables

• Meat, poultry, and fish

• Other foods such as snack foods and nonalcoholic beverages

• Seeds and plants that produce food for households to eat

The following foods do not qualify for SNAP or the 3% state sales tax rate in Alabama:

• Alcoholic beverages (beer, liquor, wine)

• Food that’s hot at the point of sale

• Live animals (except shellfish, fish removed from water, and animals slaughtered prior to pickup from the store)

• Pet foods

• Vitamins, medicines, and supplements

Some other goods typically sold at grocery stores, like cleaning products, paper products, and tobacco products, also don’t qualify for the lower sales tax rate.

There are some categories of food and drink that may or may not qualify for the reduced rate because of the ingredients, where the product is sold, or some other factor. For example:

Alabama’s reduced state sales tax rate generally applies to bottled water whether still or carbonated, flavored or not. Yet bottled water with a supplement facts label is subject to the full 4% state sales tax.

Coffee sold hot doesn’t qualify for Alabama’s reduced sales tax rate because neither hot foods nor foods sold for immediate consumption are eligible for SNAP. But what about cold coffee drinks?

Fountain iced or frozen coffee containing milk and sweetener that’s sold by a grocery store would generally qualify for the reduced rate. On the other hand, bottled coffee with a supplement facts label likely wouldn’t qualify for the reduced rate.

Being fruit, a pumpkin qualifies for SNAP and therefore Alabama’s lower sales tax rate. This is true whether the buyer carves it into a jack-o’-lantern or puts it in a pie. All pumpkins are edible, after all, even if some varieties make for better eating than others.

However, some pumpkins are exempt from Alabama sales tax altogether. Alabama provides a sales tax exemption for pumpkins sold by the person or corporation that planted, cultivated, and harvested them — think your local pumpkin patch. In 2016, the Alabama Tax Tribunal determined a corn-maze business should have collected sales tax on some of the pumpkins it sold to school groups, because they were grown by another farm and purchased for resale.

They can, but it’s probably not worth it for them to do so.

Alabama allows eligible out-of-state sellers to collect, report and remit a flat 8% Simplified Sellers Use Tax (SSUT) on all sales into the state, rather than the actual sales tax rate in effect at each point of delivery. This can greatly simplify sales tax calculation, collection, and remittance for businesses selling into jurisdictions throughout the state because Alabama is a home-rule state; many local governments administer their own local sales and use taxes.

Depending on where they live, Alabama consumers who purchase from SSUT-registered sellers may pay a higher or lower rate of sales tax for online orders than they would at the shop down the street.

If the sales tax rate is higher than 8%, the lucky consumer pays a lower rate: The collection and remittance of the simplified sellers use tax relieves the seller and the purchaser from any additional state or local sales and use taxes on the transaction.

If the sales tax rate at the point of delivery is lower than the flat 8%, the unlucky consumer pays a higher rate when a seller collects SSUT. However, consumers located in an area where the sales tax rate is lower than the flat 8% SSUT rate can request a refund of overpaid taxes from the Alabama Department of Revenue.

The SSUT rate for food didn’t change on September 1; it remains 8%. So, any remote business wishing to collect the lower food tax rate would have to stop collecting the SSUT and deal with Alabama’s complicated local sales and use taxes instead. For most sellers, it’s probably not worth the hassle.

If you sell a variety of products to consumers all over the United States, you know how much time sales tax compliance can eat up. It can be surprisingly difficult to figure out whether a transaction is taxable, and at what rate, and that’s just one of many sales tax tasks on your plate.

In addition to helping businesses calculate, collect, and file sales and use taxes, Avalara can help you answer tricky taxability questions. Learn more about Avalara Tax Research.