Sales Tax on Hot Chocolate

One of my favorite weekly reads is the Leonard Letter. Bill Leonard is one of the elected members of the Board of Equalization. Mr. Leonard notes,

“Late last year an article entitled “Why Is Buying Hot Chocolate So Confusing?”appeared in a tax journal. It was bandied about as an example of how difficult it is for California retailers to comply with the state’s sales tax law. I asked the Board of Equalization staff to respond to the article and have now reviewed a 3 ½ page letter attempting to explain when hot chocolate is taxable. That it takes 3 ½ pages to answer what should be a simple yes-or-no question gives you a window into the absurdity that is state tax law.”

The letter that Mr. Leonard references is here. The question arises as sales tax was collected on hot chocolate sold at a Starbucks inside a Target store but not inside a Safeway (grocery) store nor in the lobby of the Bank of America building in downtown San Francisco. From the letter:

“Sales and Use Tax Regulation 1602, Food Products, (copy enclosed), provides that generally tax does not apply to sales of food products for human consumption except as provided in Regulation 1503, 1574 and 1603. “Food products” include among other items, coffee, tea, noncarbonated and nonalcoholic beverages, breads, bakery products, pizzas, candy, confectionery, chewing gum and cookies. Generally, tax does not apply to sales of the above items except when they are sold under circumstances as provided in Regulations 1503, 1574 and 1603.”

After nearly three pages of legalese the author of the letter notes, “Based on the information presented in the article, it is not clear why sales tax was collected by Starbucks on the sale of the hot chocolate.”

And some legislators want to extend sales tax to services. Oh, joy….

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