I am a bit confused about retail sales taxes. Today I bought $4 worth of goods (PowerAde and pudding) and the tax was $0.01, even though my state (Maryland) has a sales tax of 6%.
Why do some goods appear to be tax-free or taxed below the normal rate? Could someone please explain how this works?
Grocery food is not subject to sales tax in Maryland, but some food is taxed depending on category or preparation. So you must have had a combination of grocery and taxable foods. One of the cheaper items you purchased was subject to a whopping penny of sales tax.
In general, food sales are subject to Maryland's 6 percent sales and use tax unless a person operating a substantial grocery or market business sells the food for consumption off the premises and the food is not a taxable prepared food. A grocery or market business is considered to be "substantial" if the sales of grocery or market food items total at least 10 percent of all food sales.
States have made sales tax more confusing by expanding some categories and shrinking or eliminating other categories.
In days of old there were taxes on items, and specific taxes on other small categories such as fuel and cigarets . In many states there were taxes implemented state wide, and in other cases they only applied to a specific city or region.
As time went on taxes could be raised to bring in more money for the state or local government, but these tax increase were seen as unfair to the poor. So now the states are modifying and tweaking the tax rates. Some items are tax free, some have a low tax, and some are at the full tax rate.
This can get confusing because the type of store can also play a factor. A bag a chips from a grocery store can be treated differently than a bag of chips from a hotdog stand. Some states have also added special taxes on snack foods.
In general, purchases they want to encourage (staples from the grocery store) are tax free or low tax, items they don't want to encourage (snacks) are fully taxed. You can also be sure that they will treat luxury items as fully taxed.
A new frontier of taxation are ones designed to tax people who don't live there. They have added taxes on restaurants and hotels. Since they are paid by tourists, the people most likely to pay them don't have a voice in setting the rate.
States are now wanting to tax services as a way to make up shortfalls in taxing.
Don't expect consistency from state to state, or year to year.
Oh by the way that penny tax was for something that cost 17 cents or less, unless that item had a lower tax rate. The receipt should clearly identify the taxable items, and their tax level.
