Will South Dakota exempt food and drink?
Food is top of mind for many Americans at this time of year, so it seems the right time to examine new proposals to exempt food and drink from South Dakota sales and use tax.
South Dakota stands out from other states because its sales and use tax applies to just about every retail transaction: services, food for home consumption, you name it. There’ve been numerous failed attempts to reduce or eliminate the tax on groceries over the years, but the moment for change may have arrived: Inflation is forcing consumers to tighten their belts, and the state has a healthy budget surplus.
Governor promises to eliminate the grocery tax
In September, Governor Kristi Noem pledged to eliminate the sales tax on food in her next budget, if reelected. Long a vocal proponent of exempting food, her opponent Representative Jamie Smith urged her to call a special session to repeal the tax before the November election. Noem declined, saying she didn’t have the votes needed to repeal the tax.
She may have been right. Although some lawmakers support repealing the grocery tax, the South Dakota Legislature had a couple of chances to exempt food during the 2022 session and didn’t.
Legislature didn’t provide a grocery tax exemption in 2022
One opportunity was Senate Bill 166, which sought to phase out the tax on foods eligible for the Supplemental Nutrition Assistance Program (SNAP). The measure was deferred after the Senate Taxation Committee passed it in a 5-2 vote.
A second chance arose when the House hoghoused Senate Bill 117 in March 2022. If you’re unfamiliar with the term, “hoghouse” is when everything after the enacting clause of a bill is struck and an entirely new bill replaces it.
So, SB 117 was introduced as an act to repeal an annual report, engrossed by the House State Affairs Committee as an act to repeal and revise certain fees, and engrossed by the full House as an act to revise the gross receipts tax on certain foods. The final measure was approved by 47 members of the House and 22 members of the Senate, but rejected by 22 representatives and 9 senators.
The support of the governor could help a new bill make it to law in 2023. “This is the right tax cut at the right time,” Noem wrote on September 30, 2022, “and I look forward to getting it done.”
If not, there may be another way.
Voters could get a chance to weigh in
A proposed initiated constitutional amendment that overrides existing law and prohibits the state, or municipalities, from collecting sales or use tax on anything sold for eating or drinking by humans except alcoholic beverages or prepared food (i.e., food that is sold heated or with utensils).
An initiated measure that prohibits the state, or municipalities, from collecting sales or use tax on anything sold for eating or drinking by humans, except alcoholic beverages or prepared food.
The ballot proposals bring up an interesting point: Could South Dakota exempt food from state sales tax while allowing municipalities to apply local sales tax to food? Should it?
Conflict over local taxes on food
In comments filed along with the proposals, the attorney for Richard Weiland wrote that the attorney general got the ballot proposals wrong: Weiland wants to prevent the state — not municipalities — from taxing food and drink.
He added that the Legislative Research Council’s fiscal note specified that “municipalities could still tax anything sold for eating or drinking by humans.”
But that’s not quite the full story. The initiated amendment that Weiland submitted to the Legislative Research Council (LRC) wasn’t the same as the version he ultimately submitted to the secretary of state. The version presented to the LRC read, “Beginning July 1, 2O25, the State could see a reduction in sales tax revenues of $119.1 million annually from no longer taxing the sale of anything sold for eating or drinking by humans except alcoholic beverages and prepared food. Municipalities could continue to tax anything sold for eating or drinking.”
But according to Scott Peterson, the Avalara vice president of Government Relations and a former director of the South Dakota Department of Revenue Sales Tax Division, no municipality may tax something exempted by the state unless the state gives them specific authority. “It is disingenuous for the proponents to say that municipalities will be able to tax food given that it takes an act of the Legislature to allow that to happen. I think an argument can be made that if the state is prohibited from taxing food that also keeps them from allowing any other government to tax food.”
In a letter filed with the proposal, Reed Holwegner of the LRC asked if it was Weiland’s intention to prohibit municipalities from taxing food and drink. “By using the term ‘state’ in the proposed statutory language, municipalities would not be prohibited from enacting a local ordinance requiring a tax on the purchase of food and beverages. Is this the intent of the proposal? If not, a rewrite of the language may be necessary.”
Holwegner also pointed out in the fiscal note that the language of the initiated amendment “is ambiguous.” He made several recommendations to clarify the language. Most were rejected by Weiland.
“It would have made more sense to do exactly what the LRC said to do,” said Peterson. “Local governments may tax food if the state exempts food, but only if the state grants them that authority. And how can the state grant local governments the right to tax food when this initiated measure prohibits the state from taxing food?”
Why South Dakota’s uniform tax base matters
Under current law, municipal sales and use taxes apply to all sales of products and services that are subject to South Dakota’s state sales tax: Municipalities don’t have the authority to tax transactions that are exempt from state sales tax. Per Chapter 10-52-2 of South Dakota law, an incorporated municipality may not levy tax on the sale, use, storage, and consumption of items taxed under chapters 10-45 and 10-46, “unless such tax conforms in all respects to the state tax on such items with the exception of the rate, and the rate levied does not exceed two percent.”
But as Scott Peterson notes, it’s the state that makes that decision, and the state has the authority to change it. “Once upon a time cities in South Dakota could exempt groceries or tax them at a lower rate, and many did.”
Peterson also brought up South Dakota v. Wayfair, Inc., the U.S. Supreme Court decision that freed states to tax remote sales. “The court cited uniform definitions as one of the positive components of South Dakota’s sales tax.” That’s because the burden of sales tax compliance is lessened when local jurisdictions tax or exempt products the same as the state.
“If this proposal passes as written, it could put South Dakota out of compliance with the Streamlined Sales and Use Tax Agreement (SSUTA, or SST), if SST pursued the issue,” Peterson continued. However, he said the Legislature could amend the initiated measure without altering its intent in order to keep the state compliant with SST.
But it may not come to that. To make the 2024 ballot, the initiated constitutional amendment would need the signatures of registered voters equal to 10% of the total vote for governor in the last gubernatorial election. The initiated measure would need half that amount (5%).
The last time this was attempted, in 2004, a majority of voters decided to keep the sales tax on food. Initiative 1 would have exempted food from state and local sales and use taxes and allowed the state to be SST compliant.
Voters may not want to exempt food and drink
Several comments filed along with the proposals were against the proposed exemption.
One person suggested the tax be eliminated only for “foods with nutritional value,” adding, “It is senseless to exempt soda, chips, and candy from sales tax.” Another wrote, “Keep that tax. It works. Look around, you will see that most people are eating a little better than they should.”
Stacy Kooistra, the city attorney of Sioux Falls wrote to say eliminating the local tax on food and drink would “significantly impact both our general fund and capital fund,” resulting in the reduction of services and capital investments.
More information about 2024 potential ballot questions can be found at the bottom of this secretary of state page.
Other states are cutting or reducing sales tax on food
South Dakota isn’t the only state interested in reducing or eliminating the sales and use tax on groceries. Indeed, some states that tax groceries have already cut or slashed the tax on food.
Illinois suspends state sales tax on food
Illinois normally taxes food at a reduced rate of 1%. Between July 1, 2022, and June 30, 2023, the 1% state sales and use tax is suspended. Local taxes remain in effect.
Kansas phases out state sales tax on food
Kansas is phasing out the state sales and use tax on food as follows:
- The rate drops from 6.5% to 4% effective January 1, 2023
- The rate drops from 4% to 2% effective January 1, 2024
- The rate drops from 2% to 0% (fully exempt) effective January 1, 2025
The measure (HB 2106) also sunsets the food sales tax credit offered by Kansas at the end of tax year 2024, but it doesn’t affect local sales taxes.
For Kansas sales and use tax, “food and food ingredients” includes bottled water, candy, dietary supplements, soft drinks, and food sold through vending machines.
Virginia eliminates state sales tax on food
Virginia will eliminate the 1.5% state sales tax on food purchased for home consumption starting January 1, 2023. Local sales tax will continue to apply.
Oklahoma’s still trying
The governor of Oklahoma has been urging the Legislature to repeal the grocery sales tax, but his efforts to date have failed.
It will be interesting to see what transpires with the options on the table in South Dakota. If the state does end up exempting food, we’ll let you know at Avalara Tax Desk. If you need help managing sales and use tax, consider automating tax compliance.
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