If You Eat or Sell Food and Hate Sales Tax, This Post is for You.

Background

Michigan has a 6% sales tax (if you weren’t aware of this, stop reading this post and pick up a newspaper).  Sales taxes, when compared to taxpayers’ incomes, are regressive.  This is because people with low incomes spend a higher portion of their incomes than do high income people.  Therefore, lower income people pay a higher percentage of their incomes in sales tax.

Quick Example:  Joan makes $100,000 per year and spends $80,000 annually.  She pays sales tax of $4,800 (6% * $80,000).  Her sales tax as a percent of her income is 4.8% ($4,800 / $100,000).  Jim makes $30,000 and spends $28,000 per year.  He pays sales tax of $1,680.  His sales tax as a percent of his income is 5.6%  Notice how Jim (who has a lower income) pays a higher percentage of his income in sales taxes—this is regressivity. 

One way that the state tries to ameliorate the regressivity problem is by exempting food from sales tax since food is a larger budget item in lower income people’s budgets.  The problem is that EVERYONE’s food purchases (rich or poor) becomes exempt from sales tax.  Hey, government is doing the best it can.

The Meat & Potatoes of the Post

Food and food ingredients are exempt from sales tax; however, prepared food is still subject to sales tax.  The Michigan Department of Treasury just issued a bulletin explaining how to distinguish prepared food from food exempt from sales tax.  (PAY ATTENTION THOSE OF YOU WHO BELIEVE A FEDERAL SALES TAX WILL SIMPLIFY THE TAX SYSTEM).

Prepared food is:

• food sold in a heated state or that is heated by the seller
• two or more ingredients mixed by the seller for sale as a single item
• food sold with eating utensils provided by the seller (knives, spoons, forks, napkins) (presumably sporks are also included).

Prepared food does not include:

• food that is only cut, repackaged, or pasteurized by the seller
• raw eggs, fish, meat, poultry, and foods containing those raw items requiring cooking by the consumer
• food sold in an unheated state by weight or volume as a single item, without eating utensils
• bakery items (cakes, rolls, muffins, etc.) sold without eating utensils.

Example:  John has a bakery.  The bakery has a small eating area.  A woman comes in and buys a pie.  The pie is put into a box and taken home by the woman without eating utensils.  The pie is not prepared food and is exempt from sales tax.  A couple then walks into the bakery and orders the same type of pie.  They are going to eat the pie in the eating area and receive forks and napkins with the pie.  The pie is now prepared food and is subject to sales tax.

Example 2:  Jody has a small grocery store that sells some cooked food.  She sells fried chicken to customers.  Since the chicken is sold in a heated state, it is prepared food subject to sales tax.  Now let’s say she freezes the chicken after cooking it, and sells frozen chicken by the pound to customers without eating utensils.  The chicken is now sold in an unheated state and is no longer prepared food—it is now exempt from sales tax.  If she hands them a fork by accident it’s subject to sales tax 🙁

Other Items of Note in the State’s Bulletin

Bottled water is exempt from sales tax.

Ice for human consumption is exempt.  Bagged (crushed or cubed) is presumed for human consumption.  Ice sold in block form is presumed not for human consumption.

Bakery items are not subject to tax if sold without eating utensils.  If the baker sells a donut with a napkin, it becomes subject to sales tax (the napkin is an eating utensil).

Delicatessens.  Food sold in an unheated state by weight or volume as a single item, without eating utensils, is not prepared food and is exempt from sales tax.  Therefore, deli trays of cheese & crackers, lunch meats, or vegetables & dip, sold in an unheated state without eating utensils are exempt. 

Alcoholic beverages are subject to sales tax.

Sealed Non-Alcoholic Beverages.  Not prepared food so long as they are not sold in a heated state or with an eating utensil (cup) provided by the seller. 

Food purchased under the federal food stamp program is not subject to sales tax.

Vending Machines.  Food or drink which is heated or cooled mechanically, electrically, or by other artificial means to an average temperature above 75 degrees Fahrenheit or below 65 degrees Fahrenheit before sale are subject to sales tax (unless they are exempt as non-prepared food).  Vending machine sales of prepackaged gum, cookies, crackers and chips are exempt from sales tax if sold at room temperature.

Example:  You buy a cooled can of soda from a vending machine.  It is cooled below 65 degrees, but sealed non-alcoholic beverages are not prepared food so it is still exempt.  You buy a cup of coffee from a vending machine?  It is taxable because it is heated above 75 degrees and it is not in a SEALED container.

Conclusion and Call to Action

There you have it.  A brief overview of one of the exemptions from sales tax (there are many others).  The complexity of the sales tax tends to surprise some people, but it can give the complexity of the income tax a run for its money.  My call to action is for you to panic and write insulting letters to your representatives.

Fine Print: This posting contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.