Picture this: an evolving sales tax landscape throughout the United States where sales tax rules resemble a puzzle, and being up to date on the Southeast region is the missing piece for compliance success. Let’s explore some recent and upcoming changes and dive into key updates affecting the taxation of food and groceries as well as sales tax changes related to disaster relief.
We’re putting a magnifying glass on some of the key recent sales tax changes to help those with business operations in the Southeast or those who make sales in Southeastern states keep up.
As usual with sales tax, it varies across the states! The taxation of grocery food has always been a tricky one. Whether it’s about the ethics around taxing essential human needs or the confusing classification of products. For example, a Twix bar might be commonly thought of as a candy bar, but because it has flour in it, many states classify it as a cookie which means it could be classified as “grocery food” and not be taxed the same as “candy”.
Food is not always subject to sales tax; in fact, it is very commonly exempt or partially exempt. Variations of new sales tax exemptions related to items that are necessities, like food, have been trending and increasing in popularity across the country. Grocery food (unprepared food for human consumption) has been exempted or partially exempted in many of the states. While many states have exempted groceries for a long time, it’s become a trend in Southeastern states like Alabama which has maintained a full sales tax on groceries to implement sales tax cuts.
Effective September 1, 2023, Alabama’s state-level sales and use tax rate on food for home consumption decreased from 4% to 3%. The state has plans to further lower the rate if certain requirements are met (if the state’s Education Trust Fund meets a specified growth requirement). Tennessee has been decreasing its sales tax on food over the last decade. The state took their food exemptions a step further determining that an online forum (taxpayer) that connects customers to Tennessee food sellers qualifies as a delivery network company that is not required to collect Tennessee sales and use tax on sales made through the online forum. Georgia, North Carolina, and Tennessee participate in the Streamlined Sales Tax program, which requires the states to follow the definitions of food per the Streamlined Sales and Use Tax Agreement. This allows the states to determine the taxability of the different categories following the standard definitions. Food and medical products are allowed to have an alternative rate under the Agreement. All three of these states have an alternative rate for grocery food – Georgia exempts grocery food, including candy, bottled water, and soft drinks from the state rate. However, the local tax still applies when sold to an individual (not a business). North Carolina imposes a reduced state rate of 2% on food and food ingredients as well as bottled water. Tennessee imposes a reduced state rate of 4% plus the local taxes on food and food ingredients – but candy, soft drinks, and bottled water are all subject to the full state and local rates. It is a thrill to see how different states approach this tax policy. Knowing that Georgia is the home to Coca-Cola, it isn’t surprising that soft drinks are included in the reduced-rate category of food.
With an increase in natural disasters hitting across the world, the Southeast has felt it greatly. States such as Alabama, Florida, Georgia, and North Carolina have been victims to various degrees of recent hurricanes, storms, flooding, and other destruction. In some cases, states have had no choice but to act and take steps to help businesses mend themselves.
In early 2023, the Alabama Department of Revenue (ALDOR) offered tax relief to Alabama taxpayers who reside or have a business in federally declared disaster areas in Alabama where damage was caused by severe weather. The state extended their tax payment deadlines, including penalty and interest relief during the extension period. They did require a waiver to be filled out to get the extension.
Florida does the most in terms of tax relief related to natural disasters. The state offers around $1 billion in tax relief, by means of gas tax and sales tax holidays throughout the year. Their series of week-long (and a year long!) tax holidays covered products such as disaster preparedness, children’s clothing, home improvement tools, and school supplies. The full list of Florida’s sales tax holidays can be found in our Sales Tax Holiday Chart.
The Southeast region is one that has fully embraced the sales tax holiday concepts – not just for disaster preparedness but for a range of categories. Florida wins for the broadest coverage, the most complicated, the longest duration with the least lead time. In fact, there are products that were included in both the Freedom Summer Sales Tax Holiday and the Disaster Preparedness Sales Tax Holiday but with different rules with overlapping dates. How can businesses manage this mess? Time will tell once the audits start!
Taxation of digital products has become increasingly common across the United States as the world has become increasingly digital. States have been busy implementing big changes in just the past few years. Some have pursued taxing specific types of digital goods and services to generate new revenue streams while others are looking at bold aggressive changes. However, it is not common in the Southeast… yet.
The state of Georgia is the latest state to embrace the taxation of digital products. Effective January 1, 2024, sales of specified digital products, other digital goods, and digital codes sold to an end user in Georgia are subject to Georgia sales and use tax, provided that the end user receives or will receive the right of permanent use of such products, goods, or codes and the transaction is not conditioned upon continued payment by the end user. The tax will apply regardless of whether possession of the specified digital products, other digital goods or digital codes is maintained by the seller or a third party.
As a full member of the Streamlined Sales Tax Governing Board, Georgia must abide by the definitions for these products – which it has. Interestingly, the same digital products that are conditioned on continued payments will remain exempt.
Staying informed about sales tax updates in the Southeast is essential for businesses to maintain compliance and streamline their operations. By understanding changes in the taxation of food and groceries, as well as sales tax adjustments due to disaster relief, businesses can adapt their strategies accordingly. Remember, staying proactive and seeking expert guidance can significantly benefit your business in navigating these complex tax landscapes.