Illustration by Jesse Lefkowitz.
Not so long ago, a San Francisco tax lawyer and habitual hot chocolate drinker named William Weissman was puzzled as to why he paid sales tax at some Starbucks, but not others. So, he did what habitual hot chocolate-drinking tax lawyers do, and penned an article titled "Why Is Buying Hot Chocolate So Confusing?" for the niche periodical State Tax Notes.
A few months later, Weissman was surprised to receive an unsolicited response to his article from the California Board of Equalization addressing his "concern that the application of sales tax is unexplainably inconsistent." The "explanation" stretched to nearly 2,000 words over four pages and liberally referenced half a dozen enclosed government tax publications and regulations. A key point was broken down into six subsections, the last of which contained a sub-subsection.
One thing the explanation did not include, however, was an explanation. "It is not clear why sales tax was collected by Starbucks on the sale of hot chocolate," the letter concludes. It is clear, however, that California's rules governing food taxation are demonically complicated and cluttered with reams of arcane and arbitrary regulations. This could, of course, describe any number of government programs — but, in the realm of taxes relating to food, matters quickly veer into the surreal.
Like 30 other states, California exempts "food for home consumption" from sales tax. Giving consumers a daily tax break has been an easy sell politically — 25 states have ceased taxing food in the past 40 years. In addition to leaving many billions of dollars on the table, states now find themselves plunged into the bizarre role of defining exactly what constitutes "home consumption" — and, more basically, "food."
As a result, California's government has spent vast amounts of time and effort determining that sales tax is due on a sandwich a convenience store clerk warms in a microwave for a customer, but not on a sandwich a customer warms in the store's microwave — a price difference of 8.5 percent in San Francisco and up to 9.75 percent in other California counties.
Among many hundreds of rulings, California's Board of Equalization has decreed that, specifically, a product called "Dr. Chen's Secret Sauce" is food (as are "Tom and Jerry Eggnog Batter" and communion wafers), and therefore exempt from tax; aloe vera juice is a dietary "adjunct" and therefore taxable; and honeybees' royal jelly could be either, depending on the description on its packaging, and may or may not be taxable.
Carbonated water and most carbonated juice drinks are taxable; carbonated 100-percent juice is not taxable; but carbonated alcohol-free wine is. The lengthy rulings behind these decisions eerily resemble voluminous dispensations within the Talmud regarding the finer points of consuming milk and meat. Hearings before the Board of Equalization determining that the sale of the very same batch of carrots would or would not require collection of sales tax if the buyer is a homeless shelter (no), a racetrack (yes), an ostrich farm (no), or a zoo (maybe) take on the absurd specter of medieval trials in which animals were accused of human crimes such as fraud or theft.
"It could be viewed as comical in a lot of contexts," says San Francisco tax attorney Robert Wood, who has argued cases before the BOE. "But not if you're the one paying." Debates over how to ring up cake decorations or seltzer lose their humor for retailers facing the Scylla of a government audit if they under-collect on sales taxes and the Charybdis of a class-action lawsuit if they over-collect.
Apart from the obvious political boon of giving taxpayers a break on one of life's daily necessities, the state entered this administrative quandary with, ostensibly, the best of intentions. California's base sales tax rate of 7.25 percent — the highest in the nation — is collected whether the buyer is Joe Six-Pack or Joe Millionaire. Poorer people, not surprisingly, spend a higher percentage of their money on food than richer people do. A flat sales tax is "regressive;" that is, forking over a static percentage of one's money is harder on the poor than the wealthy. Exempting purchases of food for home consumption is meant to somewhat ameliorate this. This it does — but in perhaps the most wasteful and inefficient manner possible. In order to provide limited relief to its poorest residents, the state allows every last person to benefit, even the wealthiest of the wealthy, buying caviar-stuffed lobster tails from exclusive upper-class markets that make Andronico's look like Grocery Outlet. Breaks aimed at aiding the underprivileged are being snapped up by the well-to-do. Research by Indiana University's professor John Mikesell, one of the nation's foremost sales tax scholars, indicates a full 45.5 percent of the tax relief provided by food exemptions benefits households earning upward of $70,000. (In a reality check for San Franciscans — who enjoy a median income a shade higher than this — the nationwide median household income is around $49,900).
The consequences of food tax exemptions are hardly peanuts — California and its 30 like-minded states forgo 20 to 25 percent of their potential sales tax revenue. In 2009-10, California collected $42.2 billion in sales tax. In the current year, California's Department of Finance estimates revenue losses from exempting food and bottled (non-carbonated) water to be nearly $10 billion — with much of this money staying in the pockets of people who would be difficult to categorize as requiring "tax relief." This comes at a time when programs aiding the needy — the very people California aims to benefit by limiting food taxes — are being systematically dismantled due to lack of funds. Other states have implemented intriguing — and lucrative — solutions to this conundrum. But California continues to give up billions, while still grappling with applying exemptions based on whether foods are hot or cold, carbonated or flat, or served to a human, cat, or wildebeest.
"It's just baloney," says Mikesell. "Which would not be taxed," he quickly adds. "Unless it were served in a sandwich."