Why is sales tax so wacky? - Wacky Tax Wednesday

If you follow U.S. sales and use tax at all, you probably realize that it can be wonderfully wacky. The question is, “Why?”

The curiously complex nature of sales tax is largely attributable to two things: 1) the distinction between essential and luxury items and 2) state sovereignty.

State sovereignty

Working under the rubric of the United States Constitution and the federal government, state legislators create their own laws and policies. Enter sales tax.

Florida’s sales and use tax laws are different from California’s; Washington’s are different from New York’s. Every state imposes its own exceptions, exemptions, policies, rates, regulations, and rules, and that’s as it should be. Unfortunately, this creates a compliance nightmare for anyone doing business in more than one state (and in states that permit home rule, policy differences start at the local level).

Essential vs luxury items

Sales tax wackiness also stems from a distinction between essential and luxury items. Beginning in the 1930s when many states first imposed sales taxes, lawmakers taxed items considered a luxury but not items considered essential. The country was still recovering from the Great Depression, and states figured that if a person had enough money to dine out, that person could afford to pay a little more for the meal in the form of sales tax. Exceptions were often granted for food purchased for home consumption — essential stuff. The essential/non-essential distinction has grown over the years, making sales tax more taxing.

The upshot

45 states (plus the District of Columbia) with sales tax have some wonderfully wacky sales tax laws.

Tax Facts: Grab Bag

1. Autos sold to blind veterans are exempt in Arkansas
2. Colorado had a sales tax holiday for pot in 2015
3. DC taxes health clubs and yoga but exempts candy and potato chips
4. Illegal drugs are subject to sales tax in many states
5. Money is taxable in some states
6. Oregon entices travelers with tax-free shopping, but use tax applies
7. Taxability may hinge on the intention of a seller
8. There are at least 6 different sales tax rates in the city of Denver
9. Yoga at a gym is taxable in Washington; yoga at a yoga studio is exempt
10. Some addresses in North Castle, New York, have a White Plains sales tax rate
11. Clean house once in Wisconsin and tax applies; clean regularly and charges are exempt
12. Charges to trim a tree in Texas are taxable unless the tree is under power lines
13. Hawaii gives you $3,000 per tree to maintain exceptional trees on your property
14. Order a whole bagel to go in New York and it’s exempt; have it sliced and tax applies
15. Edible cake decorations and exotic meat are exempt in Britain
16. In Utah, you pay more tax for donuts sold with a fork.
17. Marshmallows are taxable in Indiana; marshmallow crème is exempt
18. Pedialyte is taxed like soda in Vermont; bottled Frappuccino is exempt
19. Different tax rates apply to the components of one suit
20. Slippers are taxed less than shoes

Tax Facts: Customs duty and import

State individuality makes compliance challenging, but at least it has entertainment value.