Subtopic A: “Clothing”
Clothing is, in general, not taxable in these states.
- Massachusetts
- Minnesota
- New Jersey
- New York
- Pennsylvania
- Rhode Island
- Vermont
However, the states that don’t generally have a tax on clothing and footwear make exceptions.
For example, many of the above states that don’t tax clothing still consider accessories, fur or formalwear, athletic and recreational gear, and protective equipment to be taxable.
Other states’ tax laws set a dollar threshold on taxability. For example, in New York state items of clothing are exempt from state sales tax (and sometimes local tax) if they sell for less than $110 per item or pair.
Also, some states where clothing is generally taxable may make exceptions for clothing bought or sold by nonprofits or provided to the needy.
Some states also make exceptions when it comes to “who” wears the clothes. For example, dog clothing (and clothing worn by other pets) is generally considered taxable even in states where clothes worn by humans are non-taxable.
Be sure to read what each state has to say about clothing taxability before you set up your sales tax collection engine to collect (or not collect) sales tax on clothing.
Read more on sales tax on clothing
Subtopic B: “Digital Goods”
Each US state makes its own rules when it comes to taxing digital products.
In most cases, sales tax experts and states agree that the default should be “digital goods are taxable unless otherwise stated.”
Simple, right? Just charge sales tax on e-books, ringtones, and downloaded entertainment.
Not so fast. Some states have made a determination when it comes to digital goods on sales tax and have decided that no, these items are not taxable.
For example, many states tax digital products depending on how they are accessed. For example, a digital product might be taxed differently if it’s:
- Accessed online but not stored on your computer (example: movies, TV shows, music and other audiovisuals that you stream online)
- Accessed online and potentially downloaded, but that are no longer accessible if you stop paying a subscription fee
- Accessed online but only kept temporarily, such as a movie rented for three days through a video-on-demand service like Amazon Prime Video
Let’s look at two opposing digital goods taxability examples:
California – Digital goods are not subject to sales tax
California has ruled that digital goods such as e-books, movies, and songs transmitted over the internet are taxable. This is as long as you don’t also receive a tangible item, like a print copy of an e-book, along with the purchase. Read more about digital goods taxability in California here.
New Jersey – Digital goods are taxable
New Jersey has ruled that digital goods like movies, songs and e-books are taxable. However, digital goods accessed electronically but not delivered to the buyer’s device, such as a movie watched on a streaming service, are non-taxable. Further, digital subscriptions to magazines or access to digital images are also non-taxable. Read more about digital goods taxability in New Jersey here.
As you can see, the states that have given consideration to the taxation of digital goods at all tax them in different ways. Some states have passed or interpreted their existing sales tax laws as meaning that digital goods are taxable. Other states have passed new or interpreted their existing laws as meaning digital goods are non-taxable.
It’s also vitally important to understand that sales tax rules and laws on digital goods are subject to change. Even regulations that look settled now can change later down the line as the market and economy changes.
If you sell digital goods, it’s vital to ensure you’re applying sales tax correctly in all of the states where you have sales tax nexus.
Read more on sales tax on digital goods
Subtopic C: “Groceries”
Currently 15 US states have some form of sales tax on groceries.
Several of these states have no statewide sales tax on groceries, but allow local areas to still require a sales tax on grocery sales. For example, in Georgia, groceries are not taxable at the state level. But individual counties and other jurisdictions are still allowed to require sales tax on grocery purchases.
Example: When buying a loaf of bread in Cherokee County, Georgia, you would not be required to pay Georgia’s 4% sales tax rate. But you’d still be required to pay the 2% Cherokee County special local option tax.
Some other states tax groceries, but at a reduced rate. Missouri, for example, taxes groceries at a reduced state sales tax rate of 1.225%. But again, local areas in Missouri are also allowed to tax groceries.
Some states, like Oklahoma, tax all grocery items but allow for exceptions for nonprofits purchasing and selling grocery items.
Not everything sold at a grocery store qualifies for a sales tax exemption. As with all things sales tax, each state gets to make their own rules and laws, and that includes which items are considered grocery items and thus tax exempt.
Many states’ laws say that anything that can be bought with either state or federal Supplemental Nutritional Assistance Program (SNAP) benefits (AKA food stamps) qualifies as groceries and are tax exempt.
But generally food seen as unhealthy or without nutritional value, such as candy and soft drinks are still taxed, even in states where groceries are generally tax exempt. Alcoholic beverages are generally always taxable and may also be subject to an additional excise tax.
Prepared food (sometimes also called “food ready to eat”) is generally always subject to sales tax. But states can get so granular that sometimes they consider food items “ready to eat” if they are sold with utensils, but “grocery food” (and therefore non-taxable) if they are sold without utensils.
The key takeaway is, if you sell foods and beverages and have sales tax nexus in a state where groceries are non-taxable, always double check to be sure that the actual items you sell qualify for the state’s sales tax exemption.
Read more on sales tax on groceries
