April 2010

Is There Flour in That “Candy?” The Iowa Department of Revenue Wants to Know!

by Amy K. Frantz

Many of us are eating chocolate bunnies and other Easter candy this month. As you pop another chocolate egg in your mouth, 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 brought together “representatives from state and local governments and private-sector businesses and organizations”[2] to create 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 23 states that participate in the project.

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]

What the SSTP decided was that candy containing flour, “any type and any amount – soy, rice, wheat flours, etc.,”[4] is considered “food” and is tax exempt, “unless the flour is added only to exclude its sale from tax.”[5]  This definition creates some interesting results.  Twix, Kit Kat, Milky Way, and M&M Crispy (but not regular M&Ms) all contain flour and are considered “food” and not “candy” by the Iowa Department of Revenue, and are exempt from the state sales tax.[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.

The Iowa Department of Revenue lists “licorice” as one example of taxable candy.[7]  However, Twizzlers’ Strawberry Twists contain flour and thus would be exempt from sales tax.  Perhaps we also need the Department of Revenue’s definition of “licorice.”  According to Hershey, the makers of Twizzlers, “while people may consider all TWIZZLERS Candy to be licorice candy, the strawberry, chocolate, and cherry-flavored TWIZZLERS Candy do not contain licorice extract.”[8]

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.”[9]  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 Research Vice-President at 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> (March 26, 2010).

[2] “What is the Streamlined Sales Tax Project?” Iowa Department of Revenue, <http://www.iowa.gov/tax/educate/SLSTFAQ.html> (February 15, 2010).

[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] “What is the Streamlined Sales Tax Project?”

[5] “Iowa Sales Tax on Food,” Iowa Department of Revenue, <http://www.iowa.gov/tax/educate/78516.html> (February 15, 2010).

[6] “Iowa Sales Tax on Items Sold at Farmers Markets,” Iowa Department of Revenue, <http://www.docstoc.com/docs/1053340/Iowa-sales-tax-and-farmers-markets> (February 15, 2010).

[7] “Iowa Sales Tax on Food.”

[8] “Licorice and Glycyrrhizic Acid,” Hershey’s General Nutrition Information, <http://www.hersheys.com/nutrition/licorice.asp> (March 29, 2010).

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