Digesting the complicated topic of food tax

The taxability of food for home consumption is an increasingly complex area of sales tax law. Small businesses often need help understanding all the different rules that apply in this area.

For public policy reasons, many US states afford special rules on food for home consumption. These policies are generally intended to remove the burden of sales tax on essential, staple food items. Many states exempt food for home consumption from sales tax entirely, while other states impose a reduced sales tax rate instead.

What makes this area trickier is that there are nuances across state laws when it comes to determining which items actually qualify as food for home consumption.

What is food for home consumption?

Individual states are responsible for defining the rules related to food and beverages in their state. But food for home consumption is generally defined as groceries and other foods that are not prepared prior to purchase and foods that are not consumed on-premises.

Many states, including the Member States of the Streamlined Sales Tax Agreement (SST) , exclude prepared food, dietary supplements, and alcoholic beverages from the definition of food for home consumption. Candy and soft drinks are also frequently not included as food for home consumption.

States that exempt food for home consumption

Below is an overview of states that provide some form of an exemption for food for home consumption:

• Arizona exempts food items sold by a qualified retailer and intended for home consumption, but note that food for home consumption is still subject to local sales tax in a handful of Arizona cities.
• California exempts food products sold for home consumption, including candy and fruit and vegetable juices. Carbonated beverages are taxable.
• Colorado exempts most grocery items from state sales tax, but note that many local jurisdictions are allowed to impose a sales tax on groceries.
• Connecticut exempts food products for home consumption, but taxes candy and soft drinks at the regular state sales tax rate.
• Florida exempts general groceries.
• Georgia exempts food and food ingredients from state (but not local) sales tax when such items are sold to individual consumers for off-premises consumption.
• Indiana exempts food and food ingredients if they are sold unheated and without eating utensils provided by the seller. Candy and soft drinks are taxable.
• Iowa exempts food for home consumption but taxes candy and certain beverages, including juice-flavored beverages with 50% or less fruit or vegetable juice.
• Kentucky exempts food and food ingredients for home consumption, but taxes candy and soft drinks.
• Louisiana exempts food sold for preparation and consumption in the home from state — but not local — sales tax.
• Maine exempts grocery staples, which the state defines as food products ordinarily consumed for human nourishment.
• Maryland exempts sales of food for home consumption from a substantial grocery or market business, meaning the sales of grocery or market food items total at least 10% of all sales of food for the business.
• Massachusetts exempts food products for home consumption.
• Michigan exempts food and food ingredients for home consumption.
• Minnesota exempts groceries for home consumption, but taxes candy and soft drinks.
• Nebraska exempts food and food ingredients for home consumption, including candy.
• Nevada exempts unprepared food and food ingredients.
• New Jersey exempts food and food ingredients purchased for home consumption, but taxes candy and soft drinks.
• New Mexico offers a deduction from the state gross receipts tax for receipts from qualifying food sales at retail food stores as defined under the federal food stamp program.
• New York exempts food and food products sold by food stores.
• North Carolina exempts qualifying food and food products from state (but not local) sales tax but applies a reduced 2% local sales tax on such items. Candy and soft drinks are fully taxable at all levels.
• North Dakota exempts food sold for home consumption, but taxes candy, chewing gum, soft drinks, and fruit drinks containing less than 50% pure fruit juice.
• Ohioexempts most food items, but taxes fruit or vegetable juice with fruit or vegetable content of less than 50%, alcoholic drinks soft drinks.
• Pennsylvania exempts most food items for home consumption, but taxes soft drinks and breath mints.
• Rhode Island exempts general food for home consumption.
• South Carolina exempts unprepared food that’s purchased with USDA food coupons, but local taxes still apply.
• Texas exempts most food items for home consumption, but taxes candy and soft drinks.
• Vermont exempts food sold for home consumption.
• Washington exempts most food sold for home consumption.
• Washington, D.C., exempts most food sold for home consumption, including fruit and vegetable juices.
• West Virginia exempts general food for home consumption, including candy, breath mints, chewing gum, and beverages containing at least 50% fruit or vegetable juice.
• Wisconsin exempts food for human consumption, but taxes candy and soft drinks.
• Wyoming exempts general food for home consumption, including candy, breath mints, and chewing gum.

As you’ve likely noticed, there are a lot of states that exempt food for home consumption. If your state of interest wasn’t on this list, don’t panic. It may be on the next one.

States that provide a reduced food tax rate

Exemptions are great, but not all states provide a food tax exemption for home consumption. Still, some states do offer a reduced rate on food for home consumption.

• Arkansas provides a reduced sales tax rate of 0.125% on common food items purchased at the grocery store. Local sales tax rates are also applicable.
• Illinois provides a reduced rate of 1% on food for human consumption that is to be consumed off the premises where it’s sold. Alcoholic beverages, soft drinks, candy, and food that has been prepared for immediate consumption do not qualify for the reduced rate.
• Missouri provides a reduced rate of 1.225% for food for home consumption.
• North Carolina applies a reduced 2% local sales tax on qualifying food and food products. Alcoholic beverages, tobacco, soft drinks, candy, and food that has been prepared for immediate consumption do not qualify for the reduced rate.
• Tennessee provides a reduced state rate of 4% for eligible food and food ingredients. Local sales tax rates still apply.
• Utah provides a reduced rate of 3% for eligible food and food ingredients.
• Virginia provides a reduced rate of 2.5% (1.5% state and 1% local) for food purchased for home consumption.

While not as great as a full exemption, these reduced rates can still be helpful for consumers and reduce the amount they need to spend. You’ll notice a few states are still missing from either list, so let’s take a look at the next group of states.

States with food tax credits and rebates

Taxes can’t be too straightforward. (How boring would that be?) So, there are a few states that have food rebates or credits, which can be used to lessen the financial burden of buying groceries.

• Hawaii taxes food at the regular state tax rate, but allows exemptions to be claimed during tax filing for those within certain income brackets.
• Idaho offers a food credit similar to Hawaii, which is based on your income level. The credit averages $100 per individual, per year.
• Kansas has a food credit, but it’s limited to those 55 and older, those with permanent disabilities, or those with a dependent under 18 who lives with them. There are also income restrictions on the credit, which can disqualify those who meet the prior criteria.
• Oklahoma has a sales tax credit that can be used on groceries. This credit is available to certain income groups that meet additional criteria.

Simplify managing the rules

Set up your business with a software that can take all of the food for home consumption rules noted above (for every state) and automates them to seamlessly and effortlessly calculate the right tax, at the right rate, for every transaction you enter.

This is particularly useful for businesses with offices that purchase food, or any business involved in food or grocery sales.

• Automation saves you time and money. You won’t be focusing on researching the tax rules and rates for every transaction. Instead, you can focus on making more sales and growing your business. Take that, food tax.

Avoiding an upset stomach

Understanding the ins and outs of taxes, even food taxes, is an important part of taking your small business to the next level . By understanding food taxes, you can avoid misfiling taxes, take advantage of exemptions if you qualify, and understand the impact of operating your business in another state that has different food tax laws.

Food taxes are easily more complicated than many other types of taxes. Much like state taxes, nearly every state approaches food tax differently, exempting one thing while taxing another, and so on.

If your business deals with food, don’t let yourself get overwhelmed with all the above information. Focus on the states you do business in and go from there. Just like eating, you’ll only get an upset stomach if you overdo it and gobble up too much information at once.