Mason Delacroix
Sales tax rates on food and alcohol vary across the United States. While most states exempt groceries from sales tax, over a dozen states do charge sales tax on food items, with rates ranging from 1% to 4.5%. States like Missouri, Illinois, and Hawaii are examples of those that levy a sales tax on groceries, with rates of 1.225%, 1%, and 4%, respectively. Additionally, some states differentiate between grocery foods and items like candy and soft drinks, taxing them differently. Alcoholic beverages are typically subject to higher sales tax rates, with rates reaching 10.25% for off-the-premises consumption in certain locations. Understanding sales tax on food and alcohol can be complex, as rates differ across states and even within local areas.
| Characteristics | Values |
|---|---|
| Location | Varies across states and cities in the US |
| Food | Grocery food is usually exempt from sales tax; "prepared food" is taxed |
| Alcohol | Alcoholic beverages are taxed at varying rates depending on the location |
| Other items | Clothing, vehicles, cigarettes, and other items may be taxed at different rates or exempt from sales tax |
| Businesses | Businesses that sell taxable items may need to register and file sales tax returns |
| Nonprofit organizations | Sales of prepared food to nonprofit organizations for fundraising may be subject to B&O tax |
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What You'll Learn
Sales tax rates in the US
Sales tax rates also differ based on the type of goods and services. For instance, sales of clothing items costing $175 or less are generally exempt from sales tax in Massachusetts. Groceries, periodicals, and prescription drugs are also typically exempt from sales tax, while restaurant meals and other "prepared food" are taxed. In some states, like Tennessee, all sales of tangible personal property are taxed, along with some "taxable services".
The tax rate on food and beverages also varies. Food for home consumption and certain personal care items are taxed at a uniform 1% local tax, while restaurant meals and prepared food sold at grocery stores may be taxed at a higher rate by cities and counties. For example, in Chicago, the maximum restaurant tax rate is 1.5%, while in Denver, the combined tax on prepared food is 8%. Alcoholic beverages are taxed at varying rates across the US. In Virginia, the tax on alcohol is 11.5%North Dakota, it is 7%.
Meal taxes, or taxes on prepared food and restaurant meals, are a significant source of local consumption taxes in the US. Policymakers are incentivized to raise the tax rate on these items due to the large number of non-residents consuming food services. However, special meals taxes may be unstable, as dining out often declines during times of crisis.
Some states and localities impose additional taxes, such as tourism taxes on restaurant and hotel sales, or surtaxes to fund specific programs or initiatives. These varying tax rates can influence business locations, as businesses may choose to operate just outside the borders of high sales-tax areas to avoid higher rates.
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Sales tax in Iowa
The state sales tax rate in Iowa is 6%. Depending on the local municipality, the total tax rate can be as high as 8%. However, the average sales tax after local surtaxes is 6.78%. Groceries, feminine hygiene products, diapers, and prescription drugs are exempt from sales tax. Food and beverages sold by weight or volume, such as deli salads and sides, are also exempt. Meals provided free of charge by a retail food establishment to its employees are also exempt from sales tax. On the other hand, sales of prepared foods, alcoholic beverages, and unhealthy foods and drinks like soda are subject to sales tax.
In addition to the state sales tax, most local jurisdictions impose a Local Option Sales Tax (LOST) of 1%. This means that the combined sales tax rate in Iowa can be up to 7%. Counties and cities can charge this additional local sales tax, and it is voted on at the county level. However, it only applies in cities and unincorporated areas within the county where a majority voted in favor. The local option tax is collected on the sale of tangible personal property and taxable services, and it is imposed when the first use of a service occurs or when the property is delivered within the local jurisdiction.
Iowa also has a 5% state excise tax on lodging, and certain cities and counties have enacted a local option hotel and motel tax ranging from 1% to 7%. This tax applies to the renting of sleeping accommodations in hotels, motels, inns, public lodging houses, and other similar places.
Businesses and individuals who wish to make a qualifying purchase tax-free must have an Iowa state sales tax exemption certificate, which can be obtained from the Iowa Department of Revenue. Retailers must collect and remit sales tax to the state, and some out-of-state retailers must do so as well, depending on whether a nexus condition exists. The seller of goods or services is responsible for collecting, reporting, and remitting the sales tax. Sales tax returns in Iowa are filed electronically through GovConnectIowa.
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Sales tax in New York
Food and beverages sold in grocery stores or similar establishments are generally exempt from sales tax. However, there are exceptions, and certain items may become taxable under specific conditions. For instance, a pound of bologna, a pound of cheese, and a loaf of bread sold separately are not taxable, but when made into a sandwich, they become a taxable food item, whether consumed on-site or off-site. Similarly, items that are heated or prepared for on-site consumption are subject to sales tax, even if they are typically sold as unheated, packaged items in grocery stores. This includes items heated using a microwave, stove, oven, or heat lamp.
To qualify for tax exemption, food must be sold in its original, unopened packaging, similar to how it would be presented in a grocery store. Examples include a sealed bag of chips, an unopened bottle of soda, or an uncooked chicken. Pre-packaged items sold in their original containers by grocery stores are generally not subject to sales tax. Additionally, meals provided to employees during their scheduled work time are exempt from sales tax, provided that the employer does not receive any payment from the employee and that the value of the meal is not considered income under federal or New York State income tax laws.
Gift certificates and gift cards are also exempt from sales tax upon purchase. Sales tax is only applied when the certificate or card is redeemed for taxable food or beverages. This provides customers with an incentive to purchase gift cards and support local businesses. It is important to note that sales tax rates, rules, and regulations can change, and New York sometimes offers sales tax holidays or exemptions for specific items or periods. Therefore, it is crucial for businesses and consumers to stay updated on the applicable tax rates and any exemptions to ensure compliance and avoid penalties.
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Sales tax in Washington
Most grocery food and beverages are exempt from sales tax in Washington. However, prepared foods, soft drinks, alcohol, and dietary supplements are taxable. Prepared food is defined as any food where the seller combines two or more food ingredients and sells it as a single item, sells the food heated, or provides utensils such as a plate, fork, knife, spoon, or glass. Soft drinks are defined as any sealed ready-to-drink beverages containing natural or artificial sweeteners but do not contain milk, milk products, or milk substitutes. Alcoholic beverages are subject to various excise taxes in addition to sales tax. Spirits, for example, are taxed at a rate of 20.5% for sales to consumers and 13.7% for on-premises retailers.
Counties and cities in Washington are allowed to charge an additional local sales tax on top of the state sales tax. However, Washington does not allow local jurisdictions to collect a local sales tax on online and out-of-state purchases. In these cases, the buyer is supposed to pay a 6.5% sales tax themselves as the Washington Use Tax.
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Sales tax on food and alcohol in other countries
Sales tax rates on food and alcohol vary across different countries. In the US, federal taxes on beer are levied based on production volume, with small producers paying $3.50 per 31-gallon barrel, medium-sized producers and importers paying $16, and large producers paying $18. Table (still) wines with 16% or less alcohol by volume (ABV) are taxed at $1.07 per gallon, with higher rates for fortified and sparkling wines. Distilled spirits are taxed the most heavily at $13.50 per proof gallon, with a proof gallon being defined as a gallon of 50% ABV alcohol. Federal excise taxes are also levied per "standard drink", with beer taxed at $0.054, wine at $0.042, and spirits at $0.127. Alcohol sales in the US are also taxed at the state and local levels, with Tennessee, Alabama, and North Carolina deriving the highest share of their general revenue from alcohol taxes.
In other countries, excise taxes are levied on alcoholic beverages. For instance, in Australia, the excise tax on the most sold brand of beer is 17.73% of the retail price, while the tax on the most sold brand of distilled spirits is 56.50% of the retail price. Wine is taxed at a flat rate of 29% of the wholesale price. According to the WHO's 2023 report, the average excise tax rates for beer and spirits across 148 countries were 17.2% and 26.5% respectively, with total taxes on beer and spirits being 29.0% and 39.6%. The report also found that excises on spirits are typically higher than beer, except in Japan. The range of excise taxes on beer and spirits varies significantly, from 2.12% in China to 40.06% in Norway for beer, and from 9.16% in Brazil to 68.51% in Norway for spirits.
While some countries levy specific excise taxes on alcoholic beverages, others implement Value-Added Tax (VAT), which is a consumption tax applied to goods and services purchased by consumers. VAT is favoured over traditional sales taxes as it only taxes the added value gained at each stage of production, avoiding the cascade effect of sales tax. Countries that implement VAT include those in the European Union (EU), with a minimum standard rate of 15%, as well as Hungary with the world's highest standard VAT rate of 27%, Sweden with a 25% rate, and Andorra with the lowest rate of 4.5%. Countries outside the EU, such as Bahrain, can have VAT rates below 15%.
In terms of sales tax on food, countries with VAT typically apply reduced rates to food items to enhance their affordability and accessibility. This is also true for other essential items such as children's clothing and books.
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Frequently asked questions
In Washington, most grocery-type food is exempt from retail sales tax. However, "prepared food," "soft drinks," and "dietary supplements" are taxed. "Prepared food" is defined as any food where the seller combines two or more food ingredients and sells it as a single item, sells the food heated, or sells the food with eating utensils.
In New York, food or drink sold for on-premises consumption is taxable, whether it is sold hot or cold. Food sold for off-premises consumption is not taxable.
In North Dakota, the state sales tax for alcohol is 7%.
In Kentucky, the state sales tax for alcohol is 6%.
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