WASHINGTON — Call it the great “take ‘n’ bake” pizza sales tax dilemma.
States are grappling with whether sales taxes should be charged for pizzas or other food assembled uncooked in restaurants and sold to consumers who then cook the food elsewhere.
Is that pizza considered prepared food, like that sold by pizza restaurants? Or is it a grocery item, like the frozen pizzas in supermarkets? In most states, food that’s sold ready-to-eat is taxed; food sold in the grocery store and cooked at home is not.
That sounds as complicated as the “candy” definition states had to settle. After grappling with that one for years, the Streamlined Sales Tax Governing Board, which attempts to regularize sales taxes among states, decided that candy is defined as something without flour in it, and candylike items made with flour as an ingredient are defined as “food.” Most states tax candy or snacks, but not food. So, a Twix bar is food and a Hershey bar is not, at least according to the official tax definition.
That leads back to the pizza issue and Papa Murphy’s Take ‘n’ Bake Pizza company, which raised it. The company has stores in nearly 40 states with different policies, and wants the issue settled.
Right now, the 24 states that subscribe to the Streamlined Sales Tax Governing Board’s guidelines are split on whether to tax the pre-assembled but uncooked pizza sold in restaurants, even though a board committee decided uncooked pizza is prepared food.
It may seem like a small thing. But states are seeing sales taxes decline as more purchases are made on the Internet (most are untaxed) and are looking in usual places for taxes on services or other places for revenue. The “take ‘n bake pizza” debate could be the one of many potential controversial levies on goods and services.
Janet Guenzel, a Papa Murphy’s 15-year franchise owner, said taxing her pizza would definitely hurt business. In her letter to the tax board, Guenzel said, “No Papa Murphy’s Take & Bake pizza can be consumed in our stores. We have no ovens!! No tables, no chairs, no eating utensils, no napkins, etc. The pizza can also NOT be consumed in a customer’s vehicle (such as a fast food burger) or any other premise without an oven.”
Another question that hangs in the balance is whether customers can use food stamps to buy the uncooked pizzas. In general, the federal program prohibits using food stamps to pay for prepared food. Guenzel said 40 percent of the business at one of her stores comes from food stamps.
States already tax groceries to varying degrees, according to the Federation of Tax Administrators.
Alabama and Mississippi tax food purchased in supermarkets, the only states to do so without either offering credits for the poor or lower tax rates for food.
Six states tax groceries at lower rates than other goods: Arkansas, Illinois, Missouri, Tennessee, Utah and Virginia.
Five states — Hawaii, Idaho, Kansas, Oklahoma, and South Dakota— tax groceries fully but offer credits or rebates.
Thirty-two states don’t tax food purchased in supermarkets.
Five states and Washington, D.C. don’t have sales taxes at all.
The Tax Foundation, an anti-tax think tank, said the sales tax base on overall goods has shrunk from 60 percent of the U.S. economy in the 1960s, to 30 percent today. As a result, states are looking elsewhere for revenue, including taxing services and expanding the tax on goods.
According to the foundation, 21 states tax repair services, 19 tax landscaping, 18 tax cleaning services, six tax lobbying, three tax legal services and two tax medical services. Uncooked food for purchase is one of those areas states are examining. But what falls into the taxable category and what doesn’t?
“It’s a very, very, very difficult line to draw,” said Michael Mazerov, senior fellow at the Center on Budget and Policy Priorities, a progressive think-tank which studies state tax issues. “I know this because 16 years ago, I was on (another) multi-state tax commission, and I tried to write a definition of ‘prepared food’ that made some sense. It was extremely difficult then and now, with the evolution of the food industry, it’s even harder.”
It is unclear how much revenue taxing uncooked pizza would bring to states due to multiple laws governing taxation of food and the varying number of “take ‘n’ bake” pizza outlets in the states.