October 16, 2013

Every now and then you hear about state and local governments wanting to tax certain items which weren’t previously taxed, based on use. For example, some areas tax a five pound block of ice sold at a grocery store, but they don’t tax a five pound bag of ice cubes. The reasoning is, the block is refrigeration, but the cubes become part of a drink.

Other tax agencies see an individual snack (such as a cupcake) as taxable, the same item in a multi-pack is not. Sure, government at all levels seems to be cash-strapped. But sometimes these proposed rules make you wonder if government officials just have too much time on their hands. Take Iowa’s attempt to pass a pumpkin tax, a few years back.

A few years back, someone in the Iowa Department of Revenue (DOR) figured out that about 750 million pumpkins are carved into jack-o-lanterns each year for Halloween. Just like a jack-o-lantern lit from within by a candle, the eyes of Iowa taxing authorities lit up with possibilities. A new source of tax revenue!

That’s why someone at the DOR drew up a notice to send to retailers across the state, instructing them thusly: You cannot simply sell a pumpkin. You must first put on your Sherlock Holmes cap and dig till you find out the true intent of the purchaser. Will this pumpkin be food? If so, no problem. But if the orange ball with a green stem will become a decoration… cha-ching! Tax that bad boy!

According to the DOR notice, pumpkins are taxable if:

  • They are advertised as decorations or jack-o-lanterns.
  • If it is understood they will be used as decorations or jack- o-lanterns.

They are exempt if a buyer completes a sales tax exemption statement, claiming the pumpkin will be used as food. They will also be exempt if:

  • The pumpkin is a specific variety used to make pumpkin pies and is advertised for that purpose.
  • It is purchased with food stamps.

When one tax expert highlighted the silliness of tax based on intent, the blogosphere picked up on the idea, and soon the Iowa DOR dropped their efforts and rescinded the taxes, and maybe found better uses for their time.

Iowa is Not Alone

Iowa DOR may have needed a push from the blogosphere to come to common sense. But at least they did relent. Washington state, on the other hand, still taxes certain candy, while not taxing other very similar candy. The difference it seems boils down to whether or not the confection is made with flour “Candy does not include any preparation containing flour and does not require refrigeration.”

By this definition, Kit Kat, Twizzler Strawberry Twist, Milk Way Bars, and Hershey Powdered Cocoa for baking are all exempt from tax. But Brach’s Milk Chocolate Covered Raisins, Milky Way Midnight Bar, and Kraft Bakers Chocolate, unsweetened, all are taxable. Go figure!

Does it Matter?

Yes, most areas are cash strapped. But maybe they could save money by sending some tax authorities home, instead of having them waste time and taxpayer money working out the taxability of candy and pumpkins.

Photo: Wildcat Dunny