Sunday, August 30, 2009

Small Business: Tightening the Belt--Again

Candy or food?
Confusion grows as new tax looms

Ameet Sachdev and Bob Secter Tribune staff reporters
August 2, 2009

So you think you know your candy, Mr. and Ms. Sweet Tooth? The State of Illinois begs to differ.

That regular melt-in-your-mouth Hershey's bar? Candy for sure. But the Cookies 'n' Creme spinoff? That's food, not candy, according to a new state tax law.

A Butterfinger? Candy. Butterfinger Stixx with wafer center? Not candy.

Likewise, Twix, Kit Kat and Twizzlers, are all candy-aisle staples that Illinois no longer officially considers to be candy.

And on it goes down the list of cavity-inducing standbys as the state scratches to squeeze more money out of consumers to help pay for a $31 billion public works program Gov. Pat Quinn recently signed into law.

Taxes are rarely simple, but some revisions to the state sales tax slated to go into effect Tuesday, Sept. 1, are fraught with headache-inducing complexity that could make routine grocery shopping more expensive and deciphering the register tab far more difficult.

"Good luck explaining this to customers," complained Art Potash, owner of the Potash Bros. chain of neighborhood food marts in Chicago. "Then we're the bad guy because we can't explain it to them sufficiently. ... It's a nightmare on many levels."

Retail food sales have long been taxed at a steep discount from other merchandise, and the state defined food in a way most dentists and moms never would, by including candy and soda. The new tax rules demote candy and soft drinks from the food group, making them subject to the full sales-tax freight, which can run as high as 10.25 percent in Chicago.

In practical terms, a $1 candy bar that now sells for about $1.02 with tax will cost about $1.10. under the new rules.

Confusion sets in because lawmakers, in raising the tax, also carved out gaping exceptions.

Sweets containing flour as an ingredient--and there are a lot of them--are not legally deemed to be candy, even if common sense and common taste say otherwise.
And yes, licorice-based products such as Twizzlers have flour in them.

At a minimum, the new definition could force retailers to scour the fine print on ingredient labels for hundreds of common products and then make difficult judgment calls on their taxability. Some legal experts say the complexity built into the law could make it ripe for a legal challenge.

To make things more complicated, outside Chicago the tax will vary from town to town and county to county. Interpreting the new rules may not be a big deal for giant chains such as Wal-Mart or Walgreens, which have large staffs of legal and product experts on the payroll. It's a different story for small grocers and mom-and-pop convenience shops.

"I anticipate having to make some arbitrary choices about what a high tax is and what a low tax [is]," complained Arthur Paris, the owner of Carnival Foods in Lincoln Park. "It is virtually impossible for a one-horse shop like me to get this right."

Tax law expert Mike Wynne, a former general counsel for the Illinois Department of Revenue, said the changes could run afoul of the Illinois constitution, which requires that the state set reasonable classifications to tax items at different rates.

"If you put yogurt on a piece of fruit, it becomes a candy," Wynne said of the new rules. "But if you put it on a pretzel [which contains flour], it's food.

"Illinois is hardly the first state to take on the "if it's got flour, it's not candy" conundrum. The language was copied straight from a model law drafted by a multi-state organization called the Streamlined Sales Tax Governing Board, which aims to makes sales-tax rules more uniform across the nation.

Scott Peterson, executive director of the Nashville-based group, said the organization struggled over how to define candy for tax purposes because many products that some states saw as cookies, other states saw as candy bars. "It finally came to us throwing up our hands and saying, 'What in the world can we use as a definition that would be relatively straightforward and easy for a retailer to discern?'" Peterson said.

Illinois is not a signatory to the streamlined tax compact. But Dave Vite, president of the Illinois Retail Merchants Association, said his trade group covets inter-state uniformity in tax laws and pushed lawmakers to adopt the compact's definitions of candy and soft drinks when the tax issue was up for debate a few months ago.

"When you get a lot of people making the stew, you're going to have a lot of ingredients, and sometimes it's not perfect," Vite said.

Bill Ahern, a spokesman for the non-partisan Tax Foundation in Washington, said carving out narrow taxes and exemptions creates an administrative nightmare for small retailers while giving an advantage to highly computerized retail chains that can spread costs of compliance over multiple stores.
With states pressed for cash, tax logic is becoming increasingly strained and inconsistent, Ahern argued, pointing to a New York decision that Ovaltine is deserving of a sales-tax exemption but Tang is not. Another example: Iowa officials decreed a few years ago that although pumpkins sold for pies were exempt from sales taxes, pumpkins sold for jack-o'-lanterns were not. The ruling led to protest and was quickly rescinded.

"There's no scientific basis for a lot of these taxes," Ahern said. "These are just political, arbitrary decisions that juggle what is deserving of an exemption and how much money they want to generate."

Pantagraph, the central Illinois newspaper, offers a somewhat clearer distinction on categories of the new tax:

What's going up
Starting Tuesday, taxes on alcoholic drinks will go up, and the sales tax rate on candy, soda and some hygiene products will, too. Here's a look at what consumers can expect.

Alcohol:Increased taxes will be paid by distributors, and could be passed onto consumers.

Beer: 2.6 cents more per 6-pack
Wine: 13 cents more per bottle
Hard liquor: 81 cents per fifth

Sales taxes:
The state's share of sales taxes on several items will be raised from the 1
percent rate used on food and medicine to the standard 6.25 percent. Here's some of what would be affected.

-- Chocolate bars
-- Yogurt or chocolate covered fruit or nuts
-- Honey-coated nuts
-- Lollipops
-- Breath mints
-- Gum
-- Caramel popcorn
-- Body soap
-- Shampoo
-- Toothpaste
-- Mouthwash
-- Deodorant
-- Sunblock
-- Soda
-- Sport drinks
-- Sweetened tea-- Flavored waters


We at Rogers Park Chamber of Commerce draw the line at raising the tax on bodily hygiene products. These are items that help build self-respect and, consequently, respect for others.