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Sunday, October 3, 2021

Recipe for Sales Tax on Food in Minnesota - Too Complex!



Our tax laws are generally more complex than necessary. Most of this complexity is due to special rules where we try to give some types of taxpayer or activities special treatment. While there might be good reasons for the tax exception, there usually are simpler alternatives.

A recent news update from the Department of Minnesota included a Prepared Food Flow Chart. The first question is whether the seller heated the food or mixed or combined two or more food ingredients into a single item. That alone doesn't sound too complex but likely results in "yes" to most prepared food including cooking an egg in a pan that has butter in it. But there is more. Despite combining food, if the item is a bakery item but no utensils rae provided or needed (and if needed not made available), then the bakery item is not subject to sales tax. Also see the DOR's Fact Sheet 102D on prepared food.

I encourage you to look at the chart. Nice job by the DOR in trying to simplify the law created by the legislators.

What would be simpler? Tax all food purchased by a consumer. Provide relief to low income individuals through an income tax credit such as a larger EITC. If the federal government continues sending the advance child tax credit monthly, states should look into how they can provide funds to increase these amounts to advance the food sales tax credit.

Or, the entire sales tax system can be changed from being assessed at point of consumption to being computing using a formula approach of Income less Savings = Consumption. This could be a schedule attached to your state income tax return. Individuals below a specified income tax level would be exempt.  And there could be a graduated rate structure. And there would no longer be any sales tax compliance by sellers and businesses would no longer pay sales tax. There could still be sales tax applied to vehicles to help buyers who want to finance that (and the registration process can handle the sales tax collection). Also, if needed to help with revenue, perhaps businesses pay sales tax when they purchase vehicles. For more on this idea, see a 2017 paper on it I wrote with two of my econ fellow faculty. 

What do you think?


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