Maine's food tax far too complex

Amber Waterman/Sun Journal

"The people don't understand how bad they're getting screwed by this system," said Mark Ferguson, managing partner at Poland convenience store The Village Kitchen, about Maine's tax on food. "And in a lot of cases the politicians don't either."

Faced with mounting pressure from aggravated Mainers who had long blasted the state's snack tax as far too complex, confusing and unfair, the Legislature dumped the tax in 2000.

Taxed:

* Prepared foods, including rotisserie chicken, sandwiches and individual salads.

* Water, iced tea and soft drinks.

* Candy

* Diet supplements, including vitamins and protein bars.

Not taxed:

* Grocery staples, including fruits, vegetables, raw meat and fish.

* Whole pies or cakes.

* Bread.

* Six or more doughnuts, muffins, cookies, bagels and pastries.

Depends:

* Small containers of milk and juice are taxed at 7 percent if sold at a store in which 75 percent or more of gross receipts are from the sale of prepared food. (Pizza shop, sandwich shop, etc.)

* Potato chips, pretzels and popcorn are exempt from tax. However, small bags (less than 6 ounces) must be taxed at 7 percent if sold by a store that falls under the 75 percent rule above. They are taxed at 5 percent as candy if they are coated in chocolate, yogurt, caramel or carob.

* Granola bars, cereal bars and breakfast bars are tax free if the first ingredient listed on the package is granola, cereal, oats, fruit juice or fruit extract. If a sweetener, such as chocolate or sugar, is listed first, the bar is considered candy and taxed at 5 percent at a grocery or convenience store and 7 percent at a store that falls under the 75 percent rule.

* Bottled water is taxed at 5 percent unless sold by a store that falls under the 75 percent rule, in which case it's taxed at 7 percent. Bottled water is not taxed at all if delivered to your home.

* Deli case items, including cold cuts, cheese and potato salad, are not taxed. However, deli platters that contain cold cuts, cheeses and other items are taxed at 7 percent.

* Single serving of pies and cakes, as well as one to five doughnuts, muffins, cookies, bagels and pastries, are taxed when prepared by the retailer.

* All ice cream is tax exempt in grocery stores. Ice cream less than a quart is taxed at 7 percent when sold by a business that falls under the 75 percent rule. 

* Fruit baskets are generally tax free, even if they contain a "minor number" of candy or other taxable items. If a basket contains "taxable items of significant value," the seller must either tax those items separately or tax the basket as a whole.

No longer would families have to pay more for lunch-box staples such as granola bars, crackers and pretzels, lawmakers promised. No longer would annoyed shoppers have to wonder why a blueberry muffin was taxed but an English muffin was not. No longer would businesses have to spend an inordinate amount of time and money making sure they could distinguish the long list of taxable foods from the long list of non-taxable foods.

Or that was the goal.

Fast forward to 2012.

Maine's snack tax is gone, but in its place is a tax on . . . snacks. Sometimes. And baked goods. Sometimes. And juice, poultry and ice cream. Sometimes.

Today, the purchase of five bakery doughnuts can be subject to sales tax; six are tax free. A small container of milk is tax free at the convenience store but taxed at a sandwich shop. Ham and cheese are tax free when bought at the deli counter, but a deli platter of ham and cheese at the same place is taxed.

Even an official tax-free status is no guarantee of tax freedom. Of 10 stores recently surveyed by the Sun Journal, two charged tax on items that shouldn't have been taxed.

Experts say the post-snack tax system was supposed to be more fair, offering individual sales tax scenarios to cover individual situations.

But some people say Maine's food sales tax is still just broken.

"The people don't understand how bad they're getting screwed by this system," said Mark Ferguson, managing partner at the Poland convenience store The Village Kitchen. "And in a lot of cases the politicians don't either."

To tax or not to tax

Maine's snack tax was enacted in 1991 when lawmakers and then-Gov. John McKernan needed money to get the state out of a budget crisis. A 6 percent tax was levied on dozens of foods, including crackers, cookies, pretzels, muffins, frozen yogurt and ice cream.

The tax raised $15 million or $16 million a year for the state, but it proved wildly unpopular almost immediately. Opponents said the definition of "snack" seemed arbitrary, lumping saltine crackers with potato chips and levying a tax on cheese and breadsticks packaged together but not cheese and breadsticks sold separately. Some Mainers resented what felt like government interference with their food choices. Some business owners said they were spending too much time, money and effort to ensure they were taxing everything correctly.

The Legislature first considered repealing the tax in 1993, just two years after it was enacted, but that proposal failed. So did proposals brought in 1995, 1997 and 1999. Opponents were finally successful in 2000. The Legislature repealed the snack tax just as a citizens' petition cleared the way for a referendum vote on the issue.

By January 2001, a family's $1 box of crackers no longer cost $1.06.

Although the law was repealed and rules changed, some items — such as vitamin supplements, water and candy — remained taxed. Items considered "grocery staples" were largely not taxed, though there were taxable exceptions based on the food's ingredients or package size. School meals, hospital meals, meals for the elderly and food bought through the program formerly known as food stamps were all sales tax free. 

There were also new rules for businesses, including one that required stores for whom prepared food comprised 75 percent or more of their gross sales — think sandwich shops, pizza joints and bakeries — to charge 7 percent tax on some items rather than the 5 percent tax grocery and convenience stores were allowed to charge. 

So while that $1 box of crackers for the family no longer cost $1.06, a $1 bag of pretzels could cost $1, $1.05 or $1.07, depending on its size, where it was bought and whether or not the pretzels were chocolate covered.   

"The sales and income tax codes are littered with attempts to adjust the rate of tax and the base of tax to achieve fairness defined as 'appropriate to the individual circumstance,'" said Charles Colgan, former state economist and a professor of public policy at the University of Southern Maine's Muskie School of Public Service.

But while the goal was to make the system as fair and individual as possible, Colgan said, it's meant the "very inconsistent treatment of taxes."

That inconsistency can lead to confusion and mistakes.

The Sun Journal recently shopped at 10 area food sellers, including convenience stores, grocery stores, a pizza joint and a farm stand, purchasing one or two food items at each place. Most places charged correctly. But two of the 10 — 20 percent of those surveyed — charged tax on items that should have been tax free.

One was the Lewiston House of Pizza, which charged 7 percent tax on a family-sized bag of potato chips. Although the pizza place must, and did, charge 7 percent tax on bags of chips less than 6 ounces (what the state calls a single serving), Maine rules consider large bags to be a "bulk grocery staple" and thus tax free.

Lewiston House of Pizza's owner declined to comment, but said it was a mistake he would fix.

The other tax error occurred at Dad's Place, a popular Mechanic Falls convenience store. There a small bag of Doritos was taxed 5 percent when it should have been tax free.

When the Sun Journal shopper expressed surprise at the charge, the Dad's Place cashier said the state levied tax on convenience-size bags. That is incorrect. Although small bags are taxed 7 percent — not 5 percent — at pizza joints, sandwich shops and other places that mostly sell cooked and prepared food, state rules consider all sizes of the chips to be a "grocery staple" and tax free when sold at a grocery or convenience store, such as Dad's Place.

After the purchase, Dad's Place owner Larry Roy said he didn't realize his store was taxing the chips. It was a mistake made, he said, when the item was entered into the store computer.

"I carry 1,000 SKUs, you know what I mean?" he said. "If you saw the program that we had to do, to be honest with you . . . It's like 15 little boxes you either check or you don't check, whether it's food stamps or whether it's not, whether it's taxed or it's not, whether it's promotion."

Although Roy, who has owned the store for 10 years, has a computer program for product prices, he has to figure out on his own what's taxed and what's not. And because some manufacturers regularly change packaging and product size, which affects whether an item is taxed or not, he can struggle to keep up.

"I can't scan this and have it tell me whether it's supposed to be taxable or non-taxable," Roy said, plucking a bag of chips from a store shelf. "New items come in, so I get a SKU and I look at it and it's like, 'Well, is that single bag? Is that a bigger bag? Is that a bigger bag that's on sale?'" 

'So many ifs'

Peter Beaulieu, director of the sales, fuel and special tax division at Maine Revenue Services, wasn't completely shocked to learn that two of 10 local businesses taxed food incorrectly.

"I would probably say (that error rate) is normal, especially in the food area. If they're not keeping up with our information, I can see where they might be making some mistakes," he said.

Beaulieu's department occasionally gets calls from consumers complaining they've been taxed when they shouldn't be. When that happens, someone from the department educates the business in question about what's taxable and what's not. The consumer can also return to the store for a refund if one is warranted.

Shoppers may be owed more than a handful of pennies. A 7 percent charge can add $3.50 to the price of a $50 item that shouldn't be taxed, such as bulk packages of raw steak or fish.

However, it's more common for Maine Revenue Services to get calls from business owners trying to figure out whether the food they're selling is taxable or not, even though the rules haven't really changed for more than a decade. 

Beaulieu said he believes business owners are "pretty well accustomed" to the food sales tax system by now, but he acknowledged the rules can be tricky. 

"There are so many 'ifs' in the food industry because of the 75 percent rule, because of the bulk grocery staples and the six doughnut rule," he said. "It has all these different things happening in the food area that it's not just the simple 'all food is exempt' or 'all food is taxable.' The bright line isn't there necessarily."

Some business owners say they're doing OK without that bright line.

Brandi Cushman is chairwoman of the Maine chapter of the New England Convenience Store Association and is responsible for the grocery items, snacks and other food sold by South Paris-based C.N. Brown's 78 Big Apple convenience stores in Maine, New Hampshire and Vermont. She said the snack tax was much worse. 

"Right now I don't think it's that difficult," she said.

Still, she and her price book administrator, Dan Lurette, remember arguing with sales tax auditors a few times since 2001, particularly when the tax system was new. At one point early on, they said, they argued with three people, including an audit supervisor, over containers of ice cream.

"They insisted we should be charging sales tax on it," Lurette said. "That was a specific item that was repealed."

He was right.

But he isn't always.

"The last time I argued I was wrong," Lurette said.

Lurette estimated he spends 20 percent of his time dealing with sales tax for Maine, Vermont and New Hampshire, though New Hampshire's tax in very limited. Like Roy at Dad's Place in Mechanic Falls, he has to figure out the tax rate for each item as it comes in and put it into the computer system by hand.

Although Cushman thought the snack tax was harder to deal with, Lurette thinks the current system is more difficult. Not that he would want something different.

"I'm very old. What change there is, the harder it is to adapt to it," he said. "I know what the status quo is now, so I would almost hate to see change."

Others loathe the current system enough to want something different.

Ferguson, at The Village Kitchen in Poland, has gotten so upset with Maine's  current sales tax system that he said he's complained repeatedly to state officials and lawmakers. He is frustrated by the tax he calls "punitive" to Mainers and businesses.

"The people of Maine don't realize how punitive these taxes are on them and how much it costs them," Ferguson said.

He spends so much time trying to keep the sales tax straight that in 2011 he asked a local legislator to submit a bill that would reimburse store owners for the time, money and effort it takes to collect sales tax for the state.

That bill died.

The legislator, Rep. Mike McClellan, R-Raymond, said he plans to submit the bill again if he wins re-election. 

Whether that happens or not, Ferguson would like to see something done to make the system both fair and streamlined.

So would Roy. He, for one, wouldn't mind if someone came up with a new system that looked a bit like the old one — Maine's snack tax.

"Chips, whether they're a single serving or a family bag, if you're going to tax them, tax them," he said. "And if you're not, you're not."

ltice@sunjournal.com

When a discount isn't a (tax) discount

Have a coupon? Using a store rewards card? Buying something on sale?

You might be taxed on the full price of what you're buying, whether it's food, clothes or something else. Or you might be taxed on the lower sale amount. It depends.

And it isn't always easy to tell when a store is doing it right.

Maine rules require stores to charge sales tax on an item's full value if the discount comes from the manufacturer. Example: A $2-off manufacturer's coupon makes a $10 box of diapers $8. Although the shopper pays $8, the tax is based on $10.

Stores must tax the lower price when they discount the item themselves. If that $2-off coupon had come from the store — in its flier, for example, or presented as a reward for frequent shopping — the tax would be based on $8, not $10.

The state's reasoning: Manufacturers reimburse stores for the value of the coupons they put out and the seller "is made whole for the entire transaction." Sellers don't get reimbursed when they discount the item themselves and accept a lesser amount for the item.

Rite-Aid's Minot Avenue store in Auburn recently calculated tax correctly in a Sun Journal survey. On a buy-one-get-one-free cat food store promotion, it charged 5 percent sales tax on the can it charged for but not the can it gave away for free.

Petco, however, had some problems with its free cat food offer.

To get a free can of cat food, shoppers had to go to Petco's website, click on "Petco Coupons" and print off a coupon that said "Petco Pals Coupon" in large print and "Petco coupon" in fine print. Shoppers also had to present their Petco Pals Reward Card to get the discount.

It seemed like a discount given by Petco. In that case, no sales tax should have been charged for a free item. But Petco's Auburn store charged 5 percent.

Petco spokeswoman Lisa Epstein said there was a mistake and the discount was actually from the manufacturer.

"It turns out there is an error in the coupon," she said. "It's not visually correct because it doesn't say. It says 'Petco coupon' versus 'manufacturer's coupon.' We're working on pulling that coupon right now."

Within 24 hours, Petco did change the coupon. But shoppers still had to go to Petco's website and click on "Petco Coupons." The new coupon said "Pals Rewards" in large print and showed the Petco logo bold in red. It still told shoppers they had to present their Petco Pals Reward Card to get the discount. The only thing that alerted shoppers to the fact it wasn't a Petco-provided discount was "Shopper's discount (mfr)" and "Sales tax not included" at the bottom in fine print. 

Sometimes shoppers don't even have that.

Petco often offers discounts to customers who sign up for its store rewards card. Discounts can be steep, saving customers 10 percent to 50 percent on large bags of pet food, flea and tick medications, crates and pet accessories.

But while customers might assume that's a store discount because they're using their store loyalty card to get it, they might be wrong. And they might be paying more tax than they expect.

That's because discounts, like some at Petco, can actually be funded by manufacturers, even if shoppers aren't presenting a manufacturer's coupon.

"Some Pals discounts are chosen and offered by Petco, in which case they act like a store coupon and are only taxed on the discounted price," Epstein wrote in an email. "Other discounts are selected and offered by the manufacturer, in which case the manufacturer reimburses Petco for the discount and the customer is charged sales tax on the original price of the item. We inform our customers on our circular and Petco Pals materials that sales tax is not included."

So how is a customer to know whether the discount is from the store or the manufacturer and whether the item is supposed to be taxed at the full price or the discount?

"I'm not sure about that," Epstein said.

It's legal for stores to base sales tax on manufacturer-funded discounts that might not be readily obvious to shoppers. Peter Beaulieu, director of the sales, fuel and special tax division at Maine Revenue Services, said Petco seems to be calculating tax the right way.

Still, he said, "I can see where the consumer doesn't know whether it's Petco offering the discount or it's Nutro dog food, the manufacturer of Nutro, offering the discount."

"The customer won't know," he said. "Not without asking."

ltice@sunjournal.com

For questions about Maine's sales tax or to report a business you believe may have taxed you incorrectly, call Maine Revenue Services at 624-9693.

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Comments

Steve  Dosh's picture

Maine's food tax far too complex

Ms. Tice 12.06.10 noon
Whelp. .the food is complex these days , too
" Any third rate engineer can make something more complex . It takes a first rate engineer to make it simple again ." -- E . F . Schumacher , Small is Beautiful , 1 9 7 3 . h t h ? Steve not http://www.adm.com

 's picture

TAX

Go back to the five cent tax ???? That might fix it lol

Laurel Frost's picture

World News

Well, we made FARK: http://www.fark.com/

 's picture

i found it. it's #20 going

i found it. it's #20 going down and says fail by it.

Laurel Frost's picture

Well, I FOUND this story on

Well, I FOUND this story on FARK, and now I CAN'T seem to find it on FARK.... I wonder why that is?

Laurel Frost's picture

Well, I FOUND this story on

Well, I FOUND this story on FARK, and now I CAN'T seem to find it on FARK.... I wonder why that is?

Steve  Dosh's picture

. .ƒail ?  :)

. .ƒail ?  :)

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