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New Ideas on Taxing Thirst, Sweet Tooth; Revisions Coming on 'Soft Drinks,' 'Candy'

Posted on: Tuesday, 6 September 2005, 15:00 CDT

Iced tea and flavored water will be added, but seltzer, fur coats and Milky Way bars will be deleted from the list of what's covered by New Jersey's 6 percent sales tax next month when a new law designed to improve tax collections in the Internet age takes effect.

Consumers may or may not notice the changes, but some store owners are scrambling to prepare for the new law, which adopted uniform definitions of common words and phrases such as "soft drinks,""candy" and "clothing."

The definitions were developed by tax experts from more than 40 states, and 17 other states have already adopted them. The law is not designed to raise or lower taxes because the states, counties and cities that charge sales tax still would still be free to decide whether to impose a tax on clothing, for example, once they agree on what clothing is.

But applying standard definitions is forcing changes because public officials tend to use the tax code as a political tool, singling out some products for taxation that may be somehow unpopular, while protecting sacred cows.

Take clothing, which the new law defines as "all human wearing apparel suitable for general use." Clothing and shoes are and will stay exempt from sales tax in New Jersey. But the new definition means tax collectors have to treat wool coats and nylon parkas the same as fur coats, so that effectively repeals a provision dating back at least 25 years that taxed fur clothing.

Also being burst is New Jersey's fixation on bubbles. The current law taxes carbonated beverages such as seltzer, Coke and Pepsi, but exempts non-carbonated beverages such as iced tea, milk, water and juice.

Hard as it is to believe, tax experts didn't see what the big deal was with bubbles. So the new law deals only with "soft drinks," which are defined as non-alcoholic beverages that contain natural or artificial sweeteners but no milk, milk products, milk substitutes, or more than 50 percent fruit or vegetable juice.

The effect of that definition is that come October, Snapple will be taxable, along with flavored water containing artificial or natural sweeteners, while seltzer joins bottled water and juice as exempt.

Think the Division of Taxation is splitting hairs here? Well, let's talk about candy. You know what candy is. But can you define it? Extra credit if you can think of a definition that doesn't include licorice.

The tax experts did. Under the law, 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." The definition specifies, however, that candy does NOT include any preparation containing flour or requiring refrigeration, presumably to distinguish it from chocolate chip muffins and ice cream, which will remain tax exempt along with other groceries.

The no-flour rule means that Milky Way and Twix bars and most licorice, which are currently taxed as candy, will be exempt because they contain flour, according to the Division of Taxation. Who knew?

It may seem arbitrary to make these distinctions, but if government is going to tax one thing and not another, it has to define what those things are, and sometimes that means delving deep into minutiae. The goal of the streamlined sales tax project is to keep the minutiae consistent as more and more products are sold over the Internet and more and more companies do business in multiple states.

Tom Vincz, a spokesman for the state's tax office, said multistate retailers were involved in developing the definitions, and New Jersey and other states involved in the streamlined sales tax project will be working with the vendors who help retailers program their bar code readers.

Still, there's some anxiety at the New Jersey Food Council, which represents supermarkets and food producers. High on the council's list of concerns is the new definition of "prepared food," which will be taxable.

Generally, New Jersey has not taxed food sold at the supermarket, but it has taxed food sold in restaurants for on-site consumption or takeout. But as supermarkets have been stocking more and more ready- to-eat meals, there were bound to be conflicts and the new law has brought them into focus.

Perhaps a new ruling was overdue, because under the current law you would pay sales tax if you bought a bucket of chicken at KFC, which is clearly a restaurant, but you wouldn't pay if you bought one of those roasted chickens that smell so good when you walk into the A&P.

Under the new definition, prepared food covers any food sold heated, and it also covers any food sold with napkins and utensils. Does that mean that filling up a container of salad at the salad bar at the supermarket is taxable if you get napkins but tax-free if you don't?

These are the kinds of questions that will hopefully be ironed out when the food council meets with the taxation division this month, according to Linda Doherty, council president.

"Some stores stock 40,000 items. Our concern is having to go through every item by ingredient to determine if it's taxable," Doherty said. "We're going to need some guidance from the state."

Source: Record, The; Bergen County, N.J.

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