20 years, 20 wacky taxes

Back in 2004, when Avalara was a scrappy new startup, the California tax authority determined popcorn sold by a chain of movie theaters operating in the state was “hot prepared food” and therefore taxable. Sales of hot prepared food are generally subject to California sales tax. 

The business disagreed, saying that “it had no intent to provide a hot food product.” After hearing the arguments, the California tax authority agreed and decided the popcorn was not, in fact, subject to California sales tax. Although the business used heat to transform inedible raw kernels into edible popcorn, the tax authority found that using a “cornditioner” to dry popcorn prior to sale did not result in hot food product. 

I’m a little surprised the taxpayer’s argument passed muster. After all, “cornditioner” isn’t even a recognized word.

Sandwiches are generally subject to New York sales and use tax, and for tax purposes, at least, a burrito is a sandwich.

Most sandwiches are subject to Massachusetts sales tax too. However, Massachusetts Department of Revenue guidance on sales tax for meals doesn’t define “sandwich” or reference burritos — and one court in the commonwealth ruled that a burrito is not a sandwich: 

“This court finds that the term ‘sandwich’ is not commonly understood to include burritos, tacos, and quesadillas, which are typically made with a single tortilla and stuffed with a choice filling of meat, rice, and beans,” reads the 2006 ruling in White City Shopping Ctr. v. PR Restaurants.

The 2006 case wasn’t over sales tax, but it begs the question: Does the Commonwealth of Massachusetts consider the burrito to be a sandwich or not?

In 2020, the Supreme Court of Ireland determined that bread used by an Irish Subway franchise was not, in fact, bread — at least under the value-added tax (VAT) law. 

For bread to qualify for Ireland’s 0% rate under the Value Added Tax Act of 1972, fat and sugar cannot exceed 2% of the weight of the flour included in the dough. The bread used by the franchise in its heated sandwiches had much more sugar than that. Ergo, the court decided it fell outside the definition of ‘bread’ and didn’t qualify for the 0% rate.

The franchise’s response? “Subway’s bread is, of course, bread.”

A somewhat similar tax dispute over marshmallows raged for years in the United Kingdom, and it may not be over yet. 

In 2019, HM Revenue & Customs (HMRC) issued a hefty assessment against a “wholesaler of American sweets and treats” that had treated its mega marshmallows as tax exempt food. HMRC maintained the mega marshmallows were confectioneries and should therefore be subject to the standard 20% VAT. The matter went to court, as these matters usually do.

The First-tier Tribunal ruled in favor of the taxpayer in 2022, deciding the mega marshmallows qualified for the zero rating, in part because of how they were marketed (e.g., as a product to be roasted). HMRC appealed.

In April 2024, the Upper Tribunal agreed with the lower court and dismissed the appeal. Whether HMRC will take its case to a higher court remains to be seen. Real money is at stake: The company was originally assessed almost £473,000, which is about $590,000 today.

In 2021, Florida’s Freedom Week sales tax holiday provided a temporary exemption for the first $500 of the sales price of canoes and kayaks, the first $100 of the price of sunglasses, the first $50 of the price of camping stoves, and on and on, down to the first $5 of the sales price of bait or fishing tackle (if sold individually). Any amount over the listed amount was subject to tax. 

In 2022, Florida offered a slew of overlapping tax-free periods. As in the previous year, the temporary exemption applied only to the first x dollars of certain products. Some of the tax-free periods had age restrictions, too: Books for children age 12 or younger qualified for the exemption while those for older children did not. 

The Sunshine State was back at it in 2023, when it offered another batch of overlapping sales tax holidays. Some products qualified for more than one sales tax holiday at one time, but different holidays had different price restrictions. For instance, a cooler priced $60 or less qualified for the disaster preparedness sales tax holidays (May 27–June 9, 2023, and again August 26–September 8, 2023), while a cooler priced $75 or less qualified for the Summer Freedom sales tax holiday (May 29–September 4, 2023). What on earth was the Legislature thinking?

Not ready to rest on its laurels, the Florida Legislature proposed a sales tax holiday for virtual currency in 2024. Thankfully, for the businesses that would have had to comply with it, this tax holiday wasn’t enacted. 

I can’t wait to see what Florida comes up with next.

It sometimes seems there are as many ways to tax coffee as there are varieties of coffee drinks — and anyone who’s been to a Starbucks knows that’s a lot. Taxability can be affected by the temperature of the coffee, and whether it’s consumed on premises or sold to go. It can depend on the percentage of taxable food sales made by the seller, and if the coffee’s sold separately or as part of a combination. Even the sweetness of coffee can affect taxability. 

All but the most even-tempered people tend to get upset when their coffee order comes out wrong. Imagine how tax authorities respond when coffee tax isn’t right. 

Is an M&M “candy”? How about a Twix? 

For the 24 states that are members of Streamlined Sales Tax (SST), M&Ms are treated as candy for tax purposes, but Twix, Kit Kats, and Red Vines are not. The reason is simple: M&Ms don’t contain flour; Twix, Kit Kats, and Red Vines do. 

Unfortunately, this doesn’t simplify sales tax compliance for businesses required to collect sales tax in states that tax candy differently than other foods. To ensure all products are properly taxed, they need to read the ingredients carefully. 

Dried cranberries are a tasty little treat once infused with sugar and oil. Unadulterated, they’re too tart for most (all?) consumers. But does adding a little sugar and oil to make a dried cranberry edible turn it into candy? Well, yes, according to the SST.

This didn’t sit well with the Wisconsin State Cranberries Association. Wisconsin is the world’s top producer of cranberries, but as a member of SST, Wisconsin was required to treat and tax dried cranberries like candy. You can imagine the PR problem this could cause.

So, Wisconsin asked the SST to allow member states to exclude from the definition of “candy” a preparation “that has as its predominant ingredient dried or partially dried fruit along with one or more sweeteners, and which may also contain other additives including but not limited to oils, natural flavorings, fiber, or preservatives.” The SST agreed in December 2020, and Wisconsin established a sales and use tax exemption for dried cranberries effective October 1, 2021 (just in time for Halloween).

With cross-border sales, the importer of record is responsible for classifying products and deciding which Harmonized System (HS) code is the best fit. Customs agents monitor imports and enforce compliance. 

HS codes correspond to tariff rates, so a misclassified product may be subject to a higher or lower tariff than it should have. Disputes often arise. 

In one instance, U.S. Customs classified a shipment of prepared fish as “not minced” and “in oil” and subject to a 35% tariff rate. The company said its products were not “not minced” or “in oil” so should qualify for a 6% tariff, or maybe a 10% or 12.5% tariff. It would happily have accepted any of these, but when the dispute ended up in court, Customs had its way. 

Remember the Snuggie, the lovable, wearable blanket embraced by Matt Damon, Jimmy Fallon, and Weezer? Would you say it’s a blanket you use or a garment you wear? It’s not just semantics. Whether you wear it or use it has a big impact on import tax.

America has had a shoe tax — a tariff on foreign-made shoes — since the 1930s. Back when most American shoes were manufactured in the U.S., the steep tariffs helped protect the interests of domestic shoemakers by raising the price of imported shoes. 

Most American shoes are Not-Made-in-America today. To sidestep the shoe tax, some sneakers have become slippers.

A few years back, we paid too much to expeditiously mail a couple of birthday cards to our daughter while she was in France. She was delighted, until she found a duty and tax invoice in her mailbox and paid €20 for her own birthday cards. 

In 2014, we wrote about how feminine hygiene products were subject to a reduced rate of VAT in the U.K., while crocodile meat and edible cake decorations were VAT free. We weren’t the only ones. 

A lot of people lobbied for a zero VAT rate for sanitary products, which are essential to the well-being of menstruating women. Many wondered aloud why those products were taxed but crocodile meat was tax free. And as of January 1, 2021, the U.K. has provided a zero rate VAT rate for sanitary products. How about that?

Slab gingerbread is subject to a zero VAT rate in the U.K., but gingerbread people decorated with chocolate are generally taxed at the standard 20% rate. That is, unless the chocolate decorations amount “to no more than a couple of dots for the eyes.”

Why, then, is chocolate body paint exempt from VAT in the U.K.? If having too many chocolate dots can turn an exempt gingerbread person into a taxable one, why can a person cover themselves with chocolate body paint tax free?

The taxability of prepared food in Michigan hinges on how much prepared food a seller sells, and whether/how the seller provides utensils to customers.

If your sales of prepared food are 75% or less of your total sales and you “make an eating utensil available,” the food item is not considered “prepared food” and is not subject to sales tax. But if your sales of prepared food exceed 75% of your total sales and you “make an eating utensil available,” the food item is considered “prepared food” and subject to sales tax.

This is one of my favorites. About a decade ago, a California yacht broker delivered a yacht to a buyer in Washington state. Instead of transferring the boat to the new owner at a dock or on land, the broker organized a water transfer at latitude N 48° 13' 36" and longitude W 122° 53' 12" — in the waters between Canada and the United States.

The buyers had to charter a separate vessel and travel three hours to the meeting place, where they boarded and took ownership of the awaiting yacht. When the Washington Department of Revenue Audit Division questioned why sales tax hadn’t been applied to the transaction, the seller argued the sale wasn’t subject to Washington sales tax because the transfer of the yacht occurred outside Washington’s territory. Oh, the lengths people will go to avoid sales tax.

Here’s another favorite. Children operating lemonade stands in Idaho and Washington have been required to get a sales tax permit, charge sales tax on their lemonade sales, and remit all applicable sales taxes. Kids in Colorado and Texas have had lemonade stands shut down by the police for not having the proper permit. 

Tax compliance eats up a lot of time and resources, and if you get it wrong, you can find yourself at audit risk. But you shouldn’t let tax compliance get you down. Consider automating tax compliance instead.