Our Halloween-month look at tricky items for sales tax continues here with a few items it’s hard to live without…
Clothes. Clothing is taxable in most states and the District of Columbia. Some states (of course) have special sales tax rules for clothing.
California, Idaho and Tennessee exempt only clothing sales for some nonprofits, for example. South Carolina, Ohio and Virginia exempt some protective clothing. Minnesota, Pennsylvania, Vermont and Rhode Island and New Jersey do just the opposite for protective and some other specialized clothing.
The price influences sales taxability in other states like Connecticut and Massachusetts while there’s motion to raise the sales tax exemption for clothing in New York.
Added complication: Clothes are also included in many states’ sales tax holidays.
Food. Figuring sales tax on food depends on where and how the food is sold. Thirteen states tax groceries. Some states tax food at the full rate, some offer subsequent discounts or tax credits. Restaurant food is almost always taxed at the rate of the local/state sales tax.
Sales tax complications can often depend on the state of the economy. Relieving the burden of sales tax on groceries, for instance, has become a political tool during inflation. States like Kansas and Tennessee are among the latest to pass such exemptions. But in Alaska – which has no state-wide sales tax – trying to exempt groceries from sales tax has hit a roadblock in that municipalities want and need the revenue.
Other states only offer a discounted sales tax on groceries. Prepared or ready-to-eat food is generally taxable – and the inclusion of one prepared-food item can make an entire subscription meal box taxable that otherwise contains non-taxable groceries.
Software. If your business sells software or software-as-a-service (SaaS), you deal with one of the most complex sales tax situations. And over the last few years many states have changed their tune on the taxability of technology, digital goods, software and SaaS.
Furthermore, what is “software” these days? How is it delivered? Are there maintenance or support services included? Are those services optional or mandatory? These questions all factor into determining whether sales tax applies to these revenue streams.
SaaS is currently the predominant delivery method for tech/software companies, followed by electronically downloaded software. Each delivery method can have a different sales tax treatment in each of the states. Software delivered via CD still has the most states that tax it, while electronically downloaded software has fewer. SaaS is currently taxable for sales tax purposes in roughly half the states.
(Check out our webinar “Tax Talk with TaxConnex – Taxability of Digital Goods or Service.”)
Upcoming in our Tricky Series: Baked goods and – of course for Halloween – candy. Stay tuned.
Sales tax is more complicated than ever, and everyone who says they’re simplifying sales tax is still leaving the hardest parts – and the liability – up to you. Rely on sales tax experts to maintain your compliance. Contact TaxConnex to learn what it means when sales tax is all on us.