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Trick or Treat! When is Candy Taxable?

Halloween is almost here! What better time to talk about candy? As a consumer you probably throw your sweet treats onto the checkout counter without a second thought about whether you'll be paying sales tax on it or not.

But if you’re a retailer of tasty edibles, you know that the tax treatment of candy is scarier than a haunted hayride.

It's All About Flour

As with so many other sales tax laws, each state has its own laws regarding candy. Some are pretty straightforward while others seem to make very little sense.

In an attempt to “simplify the tax code,” the Streamlined Sales Tax Governing Board came up with a definition of candy that has been adopted by nearly half of all states. Here’s how it reads:

“[Candy is] a preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts or other ingredients or flavorings in the form of bars, drops, or pieces. Candy does not include any preparations containing flour which require no refrigeration.” (pg. 146)

But as so many retailers have pointed out, this creates quite the conundrum. Kit Kat bars, for example -- which a normal person would call candy -- contain flour, so those are tax-free. Crispy M&Ms also contain flour (tax-exempt) but old-school M&Ms, the original kind, aren’t made with flour (taxed).

The law means that retailers have to read the ingredient list to determine the product's tax treatment.

Confused Yet?

In an effort to help, the Streamlined Sales Tax Project adopted this handy chart in 2011. Retailers in states operating under these rules were undoubtedly relieved to learn that BBQ potato chips are not considered candy. Neither is a Nestle Crunch bar, honey roasted nuts, or cough drops. Chocolate chips, however are candy, along with kettle corn. That clears it up, right?

Of course, not every state follows these guidelines. Fifteen states, including Arizona, Georgia, Louisiana, Michigan, Nevada, New Mexico, South Carolina, and Wyoming, don’t tax candy and soda at all, according to a recent report by the Tax Foundation.

Why such disparity among states? Some argue that it’s more political than practical. In February, Connecticut became the first state to propose a special tax on candy to help fight childhood obesity. After the outcry of opposition from people arguing that a state shouldn’t try to mandate what its citizens eat, the bill was amended one month later to only include a levy on carbonated drinks. Berkeley, California, became the first city to pass a soda tax last year.

Still perplexed? Take a look at the Tax Foundation’s chart to see if your state taxes candy or not. Then, figure out the particulars of the tax. If it adopted the SSTP’s definition of candy, you might be reading a lot of ingredient labels. But first, contact your state’s Department of Revenue. They can point you towards the laws and guidelines that govern the tax treatment of candy where you live.

And happy Halloween!

Avalara Author
Tim Parker
Avalara Author Tim Parker