A simpler sales tax for bakeries – Wacky Tax Wednesday

Texas sales tax policy no longer penalizes “society types” who prefer to eat their cookies and doughnuts with a knife and fork.

Savoring a tasty treat is one of life’s simple pleasures, but in many states, there’s nothing simple about the taxability of baked goods. Somehow, over the years, incredibly sophisticated tax rules have been adopted for the humble cookie, doughnut, and muffin. As a result, bakeries sometimes accidentally tax items that should be exempt, or exempt goods that should be taxed.

As of Sept. 1, 2017, bakeries in Texas should no longer have that problem.

Fed up with how challenging it was to properly determine the taxability of their products, some bakers in the Lone Star State joined forces with the Texas Retail Association to craft a bill that dramatically simplifies the taxation of bakery sales. House Bill 4054 was unanimously approved by both chambers of the Texas Legislature (whose members sampled an assortment of baked goods during deliberation) and signed by Gov. Greg Abbott on June 1, 2017.

Bill sponsor Rep. Jim Murphy (R-Houston) told the Texas Tribune that many of his colleagues were surprised to learn there was an issue with bakery sales tax. He explained, “A lot of my colleagues, when I told them what the law was, they said to me, ‘No really, Jim? That can’t be the law.’”

They must not spend much time perusing state sales tax codes.

The former, confusing law

Prior to Sept. 1, Texas law (Section 151.314) taxed:

Food sold in a heated state or heated by the seller
Two or more food ingredients mixed or combined by the seller for sale as a single item

But it exempted:

“Bakery items sold without plates or other eating utensils, including bread, rolls, buns, biscuits, bagels, croissants, pastries, doughnuts, Danish, cakes, tortes, pies, tarts, muffins, bars, cookies, and tortillas” [emphasis mine]

It was a sales tax policy open to misinterpretation. Would a muffin be taxable if served in a sack when fresh out of the oven and warm, but exempt if served in a sack later that day after cooling? How would a slice of pie be taxed if served, room temperature, in a box with a fork on the side? How warm is warm enough to make a treat taxable? And what to do with the fact that all bakery goods are comprised of “two or more food ingredients mixed or combined by the seller for sale as a single item?”

Murphy noted, “A lot of [bakeries] were taxing things that shouldn’t be taxed.”

The new, simplified law

As of Sept. 1, says Murphy, “If it’s bought at a bakery, it’s tax exempt. It’s that simple.”

HB 4054 exempts “bakery items sold by a bakery, regardless of whether the items are:

heated by the consumer or seller; or
served with plates or other eating utensils”

It defines “bakery” as “a retail location that primarily sells bakery items from a display case or counter, predominantly for eating off the premises.”

The measure also exempts “bakery items sold at a retail location other than a bakery.” However, this exemption applies only “when the retailer does not provide plates or other eating utensils with the bakery items and does not heat the bakery items.” Therefore, confusion may persist at these other retail locations.

Murphy told the Tribune that the new law is multicultural, extending the exemption to kolaches, tortillas, and pan dulce. These are described in the text of the bill as “similar items.”

I don’t know about you, but I try to put all complicated matters aside when diving into a baked treat, including sales tax concerns. As a consumer, that’s my prerogative. Yet sellers don’t have that luxury. They need to keep sales tax sales tax top of mind — or find a solution, like tax automation software, that will simplify sales tax compliance for them.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.