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Product Taxability Sales Tax 101

Sales Tax on Holiday Food Gifts, Explained

by Jennifer Dunn

What better way to send a gift to that hard-to-buy for family member or friend than a little comfort food (or drink!) this holiday season. If the ads flying into my digital and physical mailboxes from companies like Milk Bar or The Honey Baked Ham Company are any indication, then eCommerce stores are preparing for a holiday season full of socially distanced fun and good food.

But then sales tax has to step in and complicate matters. Shipping food to other states, or packaging different foods up into a gift basket, can add extra strife to what is supposed to be a straightforward eCommerce gift sale.

Did you find this post because you are wondering why you were charged sales tax on a gift? When ordering online, sales tax is charged at the recipient’s ship-to address. So for example, if you live in a state like California where a delicious coconut pie is tax exempt, but order an item shipped to a state like Alabama where that pie is not tax exempt, then you’d still be required to pay sales tax on that item.

Let’s look at the most common sales tax pitfalls that online sellers face when selling food at the holidays, and how to conquer them. 

Am I required to charge sales tax in the gift recipient’s state?

If you don’t have sales tax nexus in a state, then you are not required to collect sales tax when shipping an item to a state. For example, if you only have sales tax nexus in the states of Florida and Georgia, but your customer asks you to ship the item to Arkansas, then you’re not required to collect sales tax from the buyer.Find out more about where online sellers have sales tax nexus here.

Is the food item included in the gift taxable in the recipient’s state?

In this case, say you do have sales tax nexus in the state where the food gift is shipping to. Depending on the food item and state sales tax laws, you still may not be required to collect sales tax on the gift. 

As you can see from this map of grocery taxability, grocery items are only fully taxable in six US states. In other states, they are either completely tax exempt or taxed at a reduced rate. So for example, if you are shipping a food item, like flour, that every state considers a grocery item, then you’d still be required to charge the full sales tax in some states and abide by various sales tax exemption laws in other states. 

Things get a little trickier when it comes to popular gift basket items like baked goods or candy. Fortunately, baked goods like cakes and pies are generally considered to be grocery items. These baked goods generally abide by the state’s rules for grocery items (as long as they are not being consumed on the premises, which doesn’t apply to baked items shipped as gifts.) 

Candy and soda are another story, though. Many states that consider “groceries” tax exempt don’t consider candy and other sugary, snacky items to be “groceries” for tax purposes. Instead, they might consider groceries tax exempt, but still require that retailers collect the full state and local sales tax rate on candy bars or sodas.

You can read more about which states consider candy taxable and non-taxable here.

Before shipping your food gift, be sure you understand how the state in question categorizes that particular food item so you don’t get tripped up on sales tax. You can learn more about sales tax in each state here.

How should you handle gift baskets with multiple items?

Say the gift basket your online store’s merchandising masters have dreamed up consists of cupcakes, chocolates and assorted teas. While this sounds like a winner to me, it can be a bit of a nightmare when it comes to sales tax. That’s because, in some states tea is taxed (or not taxed) as a grocery item, chocolate is taxed (or not taxed) as candy, and cupcakes are taxed (or not taxed) as baked goods. 

So how much sales tax would you charge on a gift basket made up of items with varying taxability?

The answer is, as it almost always is when it comes to sales tax, it depends.

In this case, how you tax gift baskets depends on the state. The state of Massachusetts, for example, has released specific guidance around the taxability of gift baskets. In their guidance, online sellers have a couple of options. They should either:

  • Determine how much of the sales price of the gift basket pertains to taxable items and then only charge sales tax on that amount. (Example: You sell a basket half full of taxable chocolates and half full of non-taxable hot tea. You’d only charge sales tax on half the price of the basket.)
  • Charge sales tax on the entire gift basket

In many cases, charging sales tax on the entire gift basket is the simpler call here, and that’s what many sellers choose to do. However, we always recommend checking individual state guidelines when it comes to selling combined taxable and non-taxable products in one package.

How to Field Sales Tax Rate Questions from Customers

While this has become less common as buyers become accustomed to buying gifts online, you may still get the occasional customer service question from a buyer about a sales tax charge.

This often occurs when a buyer lives in a state with no, or low, sales tax, and buys a gift to ship to a friend or relative who lives in a state with a high sales tax rate. After all, if you’re accustomed to living in one of the four states with no sales tax and paying the sticker price for everything, it can be quite a shock to see 4%-10% sales tax added on!

In this case, we’ve found its best to explain to your customer that sales tax is charged at the gift’s “ship to” address rather than the buyer’s billing address. This is because, in eCommerce, the item’s ship to address is considered the point of sale. Hopefully this explanation will ease any customer concerns when it comes to buying holiday food gifts.

What if I’m shipping alcohol?

Provided that shipping alcohol is legal in the gift recipient’s state, alcohol sellers generally have to deal with not just sales tax but also an additional excise tax levied by federal, state or local governments. Learn more about excise taxes on alcohol here.

We hope this post has made it simpler for you to make someone’s holiday wish come true with a delicious (if maybe not nutritious) gift. 

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