Is it Time to Level the Tax Playing Field when it Comes to Food?

Kelsey O'Gorman
November 20, 2020

By Kelsey O’Gorman & Denise Hatem

In the United States, food is the third-largest expense for lower-income households, after housing and transportation. For higher-income households, food ranks fifth, following housing, transportation, pension contributions and health care. While income disparity can skew percentages of spending on essential items such as food and housing, there are also several taxes on the books that can increase the cost of food among those with the least amount of income to absorb the higher prices. This is an example of how the nuances of tax regulations can affect daily lives. Even though the differences may be subtle, the impact can be significant for those affected.

To make food more affordable for all, many states exempt food purchased for home consumption. State-enacted exemptions for food generally include items such as fresh produce and meats but typically exclude prepared foods and candy. Practically speaking, this means ingredients needed to prepare meals from scratch may be exempt from sales tax while certain prepared meals, often purchased by those who don’t have the access to or ability to prepare meals from scratch, are not.   

However, even in states with food exemptions, narrow definitions of “food” fail to ease the burden of sales tax in food deserts, defined as communities with limited access to healthy and affordable food.  Food deserts resulted from complex societal transformations, including the rise of sales tax. When states began enacting sales tax legislation, independent grocers in more urban areas suffered administrative difficulties and costs, forcing many to close. By contrast, chain grocery stores in high-income suburban communities were able to easily absorb these costs.

Failure of independent grocers left a void in lower income communities that was filled by fast-food restaurants and convenience stores. Today, United States Department of Agriculture (USDA) studies indicate that more than 23 million Americans live in low-income areas more than one mile from a large grocery store, and 2.3 million of those households do not have access to an automobile. Therefore, they are more dependent on convenience stores and fast-food establishments that offer limited food choices that are normally taxed.

This raises the question – why is there a taxability difference between unprepared food and prepared food? If the intention behind the food exemption is to lessen the burden on lower income families, shouldn’t “food” include any item made for consumption? This is the narrative that has been growing throughout the past few years. If the definition of food is expanded to include both unprepared and prepared food, it would level the playing field by placing less of an emphasis on food ingredients and meals made from scratch. 

Sovos is on a mission to Solve Tax for Good®, and we mean good in every sense of the word – so businesses can prosper and communities can thrive. As part of that mission, our regulatory team of more than 100 lawyers and experts tracks the trends, changes, discrepancies and implications related to tax legislation every day, in more than 100 countries. Get the latest updates in regulatory analysis news here.

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Author

Kelsey O'Gorman

Kelsey O’Gorman is a Regulatory Counsel at Sovos. Within Sovos’ Regulatory Analysis function, Kelsey focuses on global sales tax and VAT issues, supporting both the tax determination and reporting engines. Kelsey received her B.A. in Psychology from University at Buffalo and her J.D. from Roger Williams University School of Law. She is a member of the Massachusetts Bar.
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