Food and Sales Tax: Let’s Dig In

The taxability of food can make your head spin… Rules differ across states based on the littlest details of the product – Food, food ingredients, prepared food, groceries, hot food, cold food, etc.  

Who knew that as a sales tax professional, you had to be so in touch with the nuances of food types!? Let’s dig into the details of the taxation of food… both the sweet and the sour.  

Taxability of Food 101 

When it comes to sales tax on food, it’s not always as simple as you might think. Different states have varying rules regarding the taxability of prepared and unprepared foods, with many nuances depending on the type of food, how it’s sold, and even where it’s consumed. 

Prepared vs. Unprepared Foods 

One of the key distinctions many states make is between prepared and unprepared foods. Generally speaking, prepared foods, such as meals sold at restaurants or ready-to-eat items, are taxable, while unprepared foods, like groceries, are often exempt from sales tax. However, the specifics can get a little tricky. 

For instance, New York applies sales tax to prepared foods meant for consumption off the premises unless they are sold in an unheated state and in their original form and packaging. This means that in some cases, the taxability hinges on whether the food is heated or not when sold. Additionally, California and South Carolina consider whether seating or utensils are provided. If a store offers seating or provides utensils, that meal is typically subject to sales tax. 

Reduced Sales Tax Rates for Groceries 

In some states, unprepared or grocery foods are taxed at a reduced rate rather than being fully exempt. For example, Missouri taxes grocery foods at a reduced rate of 1.225%, while Illinois taxes groceries at a rate of 1%. However, Illinois distinguishes between grocery foods and items like candy, soft drinks, and prepared foods, which do not qualify for the reduced rate. Notably, Illinois will eliminate its state sales tax on grocery foods for human consumption, effective January 1, 2026 – and allow local jurisdictions. 

Special Classifications: Candy and Soft Drinks 

States that are part of the Streamlined Sales and Use Tax Agreement (SST) have adopted specific definitions for certain food categories, such as candy and soft drinks, which are generally treated differently from other food items. According to the SST, candy is defined as a preparation of sugar or sweeteners combined with ingredients like chocolate, fruits, or nuts, but does not include items containing flour or those requiring refrigeration. Soft drinks, on the other hand, are non-alcoholic beverages that contain sweeteners, but they exclude drinks with milk, milk substitutes, or more than 50% fruit or vegetable juice. 

By understanding these distinctions, businesses can better navigate the complexities of food taxation and avoid costly errors when collecting and remitting sales tax. Whether selling at a grocery store, a café, or online, knowing how to classify food for sales tax purposes is essential for staying compliant with state laws. 

Streamlined Sales Tax 

Managing sales tax across multiple states can feel like an overwhelming task, especially with each state having its own unique set of rules. This is where Streamlined Sales Tax (SST) steps in to help simplify the chaos. By creating consistent definitions for commonly taxed items, SST allows you to more easily navigate the complex web of sales tax regulations, particularly when it comes to food and dietary supplements. 

One key area where SST offers clarity is in the definition of “food and food ingredients.” According to SST, this category includes substances in various forms (liquid, solid, frozen, dried, etc.) sold for ingestion or chewing by humans, consumed for taste or nutritional value. However, it excludes “alcoholic beverages” and “tobacco,” which are often taxed differently. States participating in SST have the option to exclude specific items from this category, such as bottled water, candy, dietary supplements, and soft drinks—each of which is mutually exclusive. This uniformity helps you stay consistent in how they classify and tax these products across different states. 

The distinction between “prepared food” and other food types also gets clarified under SST. For example, “prepared food” includes items sold in a heated state, food mixed or combined by the seller for sale as a single item, or food sold with eating utensils provided by the seller. This may seem straightforward, but there are exceptions. For instance, items like bakery products (think donuts, cakes, and croissants) and unheated meat or seafood sold by weight can be taxed differently based on whether they are sold with or without utensils. The primary goal is to ensure consistency in sales tax treatment, which is a significant relief for businesses that otherwise need to juggle varied rules from state to state. 

SST also steps in to clarify the taxation of dietary supplements. These are defined as products intended to supplement the diet and must contain ingredients like vitamins, minerals, herbs, or amino acids. Importantly, dietary supplements must be labeled with a “Supplement Facts” box, making it easier for sellers to determine their taxability. This standardized definition ensures that businesses can accurately tax these products, regardless of the state they’re operating in. 

By establishing these clear definitions and classifications, SST mitigates much of the confusion that comes with multi-state sales tax compliance. Whether you’re selling prepared foods, bakery items, or dietary supplements, SST’s guidelines help reduce the guesswork and allow businesses to stay compliant while focusing on growth. Check out their resources on their website. 

A Case Study on Oklahoma 

Oklahoma recently removed their state level tax on food! 

The governor of Oklahoma has signed a bill that reduced the state sales tax rate on food and food ingredients to zero percent effective August 29, 2024. The bill also restricts any increases in local sales taxes from affecting food and food ingredients until June 30, 2025. 

The zero rate does not apply to alcoholic beverages, dietary supplements, marijuana products, prepared food, or tobacco. The state definition of food and food ingredients qualified for the exemption does include bottled water, candy, and soft drinks. Prepared food is defined as “food sold in a heated state or that is heated by the seller, two or more food ingredients mixed or combined by the seller for sale as a single item, or food sold with eating utensils provided by the seller, including plates, knives, forks, spoons, glasses, cups, napkins, or straws.” As a Streamlined Sales Tax member state, the bill also included adoptions of the Streamlined Sales Tax product definitions for these items. “Food and food ingredients” means substances, whether in liquid, concentrated, solid, frozen, dried, or dehydrated form, that are sold for ingestion or chewing by humans and are consumed for their taste or nutritional value.  

States across the country are evaluating eliminating sales tax on essential items including not only food but also menstrual products, infant products and incontinence products.  With the recent inflationary price increases, efforts to manage the cost for these necessities has grown. 

Navigating the complexities of sales tax can be a daunting task, especially when dealing with multiple states and varied rules for food, prepared items, and dietary supplements. Thankfully, programs like Streamlined Sales Tax help bring consistency and clarity to these often-confusing classifications. By understanding the key definitions and tax treatments—whether it’s prepared foods, bakery items, or dietary supplements—you can mitigate risks, avoid costly errors, and ensure your business remains compliant. Staying on top of these guidelines not only simplifies your sales tax obligations but also gives you more time to focus on growing your business.