Food taxation refers to the taxes levied on the sale of food items typically found in grocery stores. In California, most raw and basic grocery items meant for home consumption are exempt from sales tax. However, the state does impose sales tax on unhealthy snack foods like chips, candies, and cookies as well as prepared/hot foods from restaurants and fast food chains.
The current food tax rate in California is 7.25% which applies to taxable food products like alcoholic beverages, carbonated drinks, and junk food. The revenue generated from food taxes goes towards funding essential public services in the state. By taxing unhealthy foods and exempting daily groceries, California promotes healthier eating habits among its residents. The differential tax treatment also supports the state’s large agricultural industry by keeping basic food prices affordable.
While the approach benefits consumers, it has impacted food businesses selling taxable items. The state uses financial, health, economic and agricultural reasons to justify its unique food tax policies.
What Is Food Tax?
Food tax is a type of tax levied on the sale of a wide variety of food items usually found in a typical grocery store. In the United States, the tax is levied on both raw and packaged food items. The government spends the food tax dollars on public service needs.
How Does Food Tax Work in California?
In general, no taxes are levied on the sales of most food products meant for human consumption. However, there are a few exemptions related to the sales tax treatment of certain food products, such as packaged foods, restaurant meals, and foods sold for instant consumption.
Which Foods Are Taxable in California?
Certain non-essential and unhealthy snacking items, such as chocolates, candies, chips, pastries, sugary cereals, cookies, fast food, and energy drinks, are taxable in California. Other than unhealthy junk foods, alcoholic beverages, carbonated soft drinks, and even kombucha tea (when alcohol in it is more than 0.5%) are taxable.
Which Foods Are Not Taxable in California?
Most basic food items used for home consumption are exempt from California’s sales tax. The exemption applies to dairy products, grains, bread, baby foods, basic condiments, nuts, seeds, eggs, fruits, vegetables, and other daily-use basic foods and beverages.
What Are the Exceptions to the Rule of Non-Taxable Foods in California?
The state of California treats the taxation of certain food, like groceries, a little differently than other states. While most grocery items are exempt from sales tax in California, ‘hot prepared food items’ are taxable at 7.25%.
California also runs several programs aimed at helping low-to-moderate income-earning families in California, which can indirectly reduce the food tax burden.
For instance, the CalFresh food stamp program provides low-to-moderately low-income earning families with funds to buy eligible food items. No sales tax is imposed on these funds.
How Much Is the Food Tax Rate in California?
In California, the current statewide base food tax rate is 7.25%. This rate applies to most of the taxable food products in California.
How Does Food Taxation in California Compare to Other States?
California has more favorable food tax rates than other states in the United States.
- Unprepared, raw, and basic groceries are exempt from California sales tax. Some states levy taxes on these food items.
- Food items sold for immediate consumption are subject to a full sales tax rate in California. The tax rate varies among other states for foods sold for immediate consumption.
- In California, certain food products feature reduced tax rates for low-income families. Not all states in the United States offer such low-price food tax benefits.
Why Does California Have a Different Approach to Food Taxation?
California has a different approach toward food taxation for various reasons, including financial, economic, and policy-related factors.
Financial Reasons
Even though most basic home-consumption food items are exempted from the state food tax, California’s large population contributes greatly towards tax revenue from taxable food items.
The revenue generated from food taxation by the state of California is used to fund many essential public operations, including healthcare, education, defense, infrastructure, transportation, and more.
Historical Reasons
California has a long history of not charging taxes on most food items to reduce the tax burden on residents. The state has been retaining the consumer-friendly policy to keep the prices of food more affordable for the masses.
Agricultural Reasons
The state of California has always been in support of agricultural activities because it’s one of the leading producers of crops and food products. The tax exemption on most food products is the state’s way of supporting the agricultural industry.
Health Reasons
The state is encouraging healthier eating habits by levying taxes only on unhealthy junk foods and not on basic food products that are a necessity. Since taxes are not levied on nutritious foods, they will be more affordable than junk food.
What Is the Impact of Food Taxes on Consumers and Businesses in California?
By imposing taxes on junk food, the state is promoting healthy eating habits among the residents of the state. In this manner, the state is discouraging the consumption of unhealthy food items in California.
By reducing spending on junk food items, consumers can allocate more of their income to necessary items, boosting their standard of living in the process.
On the flip side, the reduced consumption of higher-taxed food items has impacted certain food businesses, especially restaurants, fast food centers, and other shops that sell food for immediate consumption.
Some of the businesses have adjusted the price of the foods to accommodate the tax, which has impacted their profit margins to a certain extent.
How Can You Determine If Your Grocery Items Will Be Taxed?
To determine if your grocery items will be taxed or not, it’s best to check the state’s official website to look for information related to sales tax and associated exemptions for groceries.
Like California, most states have tax exemptions on basic food items, such as raw fruits, vegetables, bread, milk, etc. However, there can be exceptions. Restaurant meals and other packaged food items are usually taxed.
That said, some programs for low-income families or seniors may provide temporary tax relief from taxes levied on prepared foods and restaurant meals.
You can also ask the store employee about food taxes on the items you are purchasing. The store employee may be knowledgeable enough to distinguish between taxable and non-taxable food items.
Alternatively, you can check the food purchase receipt. Most store receipts will include a sales tax breakdown, which will help you determine which grocery is taxed and which is not.
If you are still unsure or have complex questions related to the taxation of grocery items, it’s better to consult a tax professional who is well aware of the food tax laws.
Are There Any Proposed Changes to Food Taxes in California?
Several elements of the proposed budget will impact the California state income tax, such as new credit for businesses involved in climate innovation, credit for pre-development costs for new green energy technologies, and more.
Few of the proposed changes have met with swift opposition from the democratic government. So, the proposals are a long way from becoming a rigid law. That said, the proposed budget will have little to no impact on food taxation in California because the proposed changes are mostly related to non-food taxes.
