Washington to Remove Exemptions for Candy and Bottled Water

SB 6143 signed into law by Governor Gregoire on April 23, 2010 includes several provisions that will generate additional revenue for the state including an economic nexus standard for income taxes. [See Washington Legislature site on SB 6143 and Deloitte summary for more information on the entire bill.]

SB 6143 also removes the sales tax exemption for candy and bottled water. Washington, like most states, does not apply sales tax to most food items. Generally, this is done so that the tax doesn't apply to "necessities of life." However, as noted in this blog and 21st Century Taxation reports, this is a poorly targeted exemption because high income individuals spend a lot more on food than do lower income individuals so the exemption provides a greater tax break to higher income individuals. Also, any exemption from the general rule complicates a law because definitions are needed to distinguish between taxable and non-taxable items.

SB 6143 and its change in exemptions is a good example of the complexity of exemptions. Here are some excerpts from this new law:

"Until July 1, 2013, the exemption of "food and food ingredients" provided for in subsection (1) of this section does not apply to prepared food, soft drinks, bottled water, candy, or dietary supplements. Beginning July 1, 2013, the exemption of "food and food ingredients" provided for in subsection (1) of this section does not apply to prepared food, soft drinks, candy, or dietary supplements."

""Candy" means a preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts, or other ingredients or flavorings in the form of bars, drops, or pieces. "Candy" does not include any preparation containing flour and does not require refrigeration."

""Bottled water" means water that is placed in a sealed container or package for human consumption. Bottled water is calorie free and does not contain sweeteners or other additives except that it may contain: (i) Antimicrobial agents; (ii) fluoride; (iii) carbonation; (iv) vitamins, minerals, and electrolytes; (v) oxygen;(vi) preservatives; and (vii) only those flavors, extracts, or essences derived from a spice or fruit. "Bottled water" includes water that is delivered to the buyer in a reusable container that is not sold with the water." Tax won't apply though to "sales of bottled water for human use dispensed or to be dispensed to patients, pursuant to a prescription for use in the cure, mitigation, treatment, or prevention of disease or other medical condition."

So, cookies are not taxable, but candy is. A bottle of plain water is taxable, but not one with enough sweet flavoring to add a few calories. This illustrates another issue with exemptions, they can violate the neutrality and equity principles. The law change may lead buyers to prefer sweetened bottled water over plain bottled water. This is also odd because how is sweetened bottled water a necessity of life?

The simplest, more efficient way to go would be to tax all food and provide relief to low-income taxpayers via a refundable income tax credit. This would also raise more revenue than the current system and that revenue could be used to either lower the sales tax rate a bit.

What do you think?