Flip-flopping sales tax — Wacky Tax Wednesday

It can be hard to get sales tax right because change is a constant. For me, that’s part of the charm of sales tax. But I know I’d find it less charming if I had to update point-of-sale systems each time a change took effect. Were I in that position, sales tax policy reversals would probably drive me around the bend.

I’m talking about mercurial, flip-flopping sales tax policies, like when a state taxes a product or service and then exempts it, or exempts it and then taxes it. 

It happens more than you might think. Read on for some of my favorite examples.

Washington state currently taxes bottled water, but it hasn’t always.

Bottled water became exempt from Washington sales and use tax on January 1, 2004, so the Evergreen State would be in compliance with the Streamlined Sales and Use Tax Agreement (SSUTA). Then on June 1, 2010, shortly after the SSUTA was amended to allow member states to tax bottled water, Washington began taxing bottled water again.

The tax on bottled water was set to expire in 2013, but in November 2010, Washington voters took the matter into their own hands. Initiative 1107 repealed state and local sales taxes on bottled water (and candy and gum). Water therefore became exempt from Washington sales and use tax effective December 2, 2010, just six months after it became taxable. 

But hang on to your caps because bottled water became subject to Washington sales and use tax again starting August 1, 2017.

Washington does allow a sales tax refund for taxpayers who purchase bottled water with a prescription, and for those whose primary source of drinking water is unsafe. To qualify for a refund, a taxpayer must have paid at least $25 in sales tax for eligible bottled water, and the refund must be requested within four years of the end of the year in which the tax was paid.

Kentucky extended sales tax to numerous services, including “limousine services if a driver is provided” on July 1, 2018. A few years later, Kentucky House Bill 8 struck limousine services from the list of taxable services, so limousine services became sales tax exempt as of January 1, 2023. The same day, a new 6% motor vehicle rental/rideshare excise tax on limousine services providers took effect. 

Car rental, peer-to-peer car sharing, and transportation network companies (TNCs) are also subject to the 6% excise tax, as are taxicab service providers. 

Washington state did something similar with martial arts studios. The Pacific Northwest state started taxing martial arts and mixed martial arts classes and a variety of other athletic or fitness classes on January 1, 2016. I remember it well because my kids were taking taekwondo classes at the time, and the tax caused a kerfuffle at the studio. 

After the martial arts community rebelled, the Washington Legislature reestablished a sales tax exemption for martial arts classes, training, and related events effective October 19, 2017. There’s just one small catch: The exemption only applies to eligible classes provided by martial arts facilities “not operated within and as part of an athletic or fitness facility.” Washington sales tax still applies to martial arts classes and related events occurring in an athletic or fitness facility.

If you’re responsible for ensuring your business applies sales tax properly to every transaction, you need to stay on top of taxability changes. Unnoticed changes can result in getting tax wrong, which can lead to a heap of trouble. Businesses that undercollect sales tax can be held liable for the uncollected tax, plus penalties and interest. Businesses that overcollect can be sued by disgruntled customers. All told, it’s best to get sales tax right from the outset. 

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