This month’s featured article from TEF.

How the Grinch Taxed your Christmas Candy

by Amy K. Frantz

As the holidays approach and you stock up on candy canes or chocolate Santas, do you know if you paid sales tax on that candy to the state of Iowa?  Here in Iowa, most food is exempt from sales tax, while candy is taxable.  But the definition of what is “candy” may surprise you.

The Streamlined Sales Tax Project (SSTP) came about in response to a U.S. Supreme Court ruling that “a state may not require a seller that does not have a physical presence in the state to collect tax on sales into the state.  The Court ruled that the existing system was too complicated to impose on a business that did not have a physical presence in the state.”[1]  The SSTP created uniform definitions for states to use in determining what is or isn’t taxable.  Iowa adopted changes to its sales-tax laws in 2004 to comply with the requirements of the SSTP, making us one of 24 states that participate in the project.[2]

The definition of “candy,” and thus taxable, as opposed to “food,” that is generally exempt from sales taxation was difficult to determine for the members of the Streamlined Sales Tax Governing Board.  “Scott Peterson, executive director of the Nashville-based group, said the organization struggled over how to define candy for tax purposes because many products that some states saw as cookies, other states saw as candy bars.  ‘It finally came to us throwing up our hands and saying, “What in the world can we use as a definition that would be relatively straightforward and easy for a retailer to discern?”’ Peterson said.”[3]

The SSTP determined the definition of candy to be, “a preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts or other ingredients or flavorings in the form of bars, drops, or pieces. Candy does not include any preparations containing flour which require no refrigeration.”[4]  However, if “the flour is added only to exclude its sale from tax” then it is taxable.[5]

This definition creates some interesting results.  “Kit Kat bars, Milky Way bars, M&M Crispy (blue packages), [and] Reece’s sticks will be exempt from tax because they contain flour….  Brach’s Bridge Mix will be exempt (has flour), but Brach’s Chocolate Stars will be taxable.”[6]  Chocolate covered raisins or peanuts would likely be “candy” and taxable, while chocolate covered pretzels (which contain flour) could be considered “food” and exempt from the sales tax.  Marshmallows are taxable, but marshmallow crème is exempt from taxation.  Cotton candy is not considered candy and is exempt from taxation, unless it is “taxable as prepared food.”[7]

The purpose of the Streamlined Sales Tax Project was “to simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance.”[8]  However, in some cases, such as candy, determining what is taxable and what is exempt from taxation is anything but simple.

Amy K. Frantz is Vice President of Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] “About Us,” Streamlined Sales Tax Governing Board, Inc., <http://www.streamlinedsalestax.org/index.php?page=About-Us> (November 3, 2014).

[2] Ibid.

[3] Ameet Sachdev and Bob Secter, “Candy or food? Confusion grows as new tax looms,” The Chicago Tribune, August 2, 2009, <http://www.chicagotribune.com/business/chi-090802candy-food-taxes,0,7082646.story> (February 15, 2010).

[4] “Streamlined Sales Tax Update,” Iowa Grocery Industry Association, <http://www.iowagrocers.com/index.cfm?page=60 > (November 3, 2014).

[5] “Iowa Sales Tax on Food,” Iowa Department of Revenue, <https://tax.iowa.gov/iowa-sales-tax-food > (November 3, 2014).

[6] “Streamlined Sales Tax Update.”

[7] “Iowa Sales Tax on Food.”

[8] “About Us,” Streamlined Sales Tax Governing Board, Inc.