The recent “Free-Bleeding” protests occurring throughout the U.K. brought to light an interesting and important distinction in the way American states apply a sales tax to purchased items. The designations that American states create to define products as luxury goods, essential goods, or nonessential goods determine how the state’s sales tax will be applied to a certain item or whether any sales tax will be applied at all. While some may consider these sales tax designations financially benign for lower-priced items, the designations are crucial to ensuring a fair application of a state’s sales tax.
Products considered to be a “luxury” good often have a higher sales tax rate or an additional tax applied in tandem with the state’s preexisting sales tax rate. Expensive jewelry, yachts, and other high priced or valuable items are all products that are typically classified as luxury goods and taxed at a higher rate. The objective of the luxury tax parallels the objective of America’s federal income tax system in that the wealthy are targeted for higher tax rates. However, unlike the federal income tax system, a luxury tax is applied to an individual’s spending rather than to an individual’s earnings. Moreover, rather than being a federal tax, the luxury tax is applied to products on a state by state basis. This means that each state has autonomy in determining what products to define as luxury products that are subject to an increased tax rate.
Likewise, each state has autonomy in classifying products as “essential” or “nonessential” goods. In contrast to a luxury good, the distinction between an essential and nonessential good does not involve an additional tax or increased tax rate. Rather, the essential and nonessential distinction determines whether any sales tax will be applied at all. Products considered nonessential typically require the payment of a sales tax. Depending on which state the product was purchased in, sales tax rates can range from 2.9% to 7.5% (only four states have no sales tax as of 2015). However, most states provide a sales tax exemption for products that are considered essential goods, such as clothing or food.
Determining a product’s tax rate by utilizing a luxury, essential, or nonessential classification system is important in that the designations have a direct impact on an individual’s financial situation. Perhaps more importantly, the designations can have an impact on the fair application of a state’s sales tax. For example, New York enacted a “mansion tax” that applies an increased sales tax rate to any home sold for $1 million or more. This seems logical, as most people would consider a home over $1 million a luxury good. However, Alabama applies a luxury tax onto the state’s preexisting sales tax rate for a deck of playing cards. This comparison may seem nonsensical, but this is precisely why the tax distinctions between luxury, essential, and nonessential goods are important.
The previous example alone illustrates that disagreement exists, and there is a bit of absurdity in defining products as luxury, essential, or nonessential goods. It is just this type of absurdity that the European Free-Bleeding protests are combating. Unlike the U.K., tampons are not subject to an additional or increased type of luxury tax in the United States. However, in all but five states, tampons are deemed a nonessential item, and therefore require the payment of a sales tax. The Free-Bleeding protests have sparked a discussion in the United States that focuses on the fair application of a state’s sales tax. For example, why is it that only five states provide sales tax exemptions for tampons, but fifteen states provide sales tax exemptions for candy? Why do more states provide sales tax exemptions for incontinence items than tampons? The Free-Bleeding protesters, and the protest supporters throughout America, are spreading awareness and combating these types of unfair exemption differences.
The goal sought by the protesters and supporters alike is that tampons should be classified as an essential good, thus making the product exempt from sales tax. Just last year Canada passed a bill that did exactly this. However, the fight to make tampons a tax exempt product in the United States will likely prove itself to be a much more difficult and time-consuming effort. Instead of persuading one government entity to exempt tampons, the remaining forty-one states that have a sales tax and currently do not provide sales tax exemptions for tampons must be persuaded independently. However, the awareness of sales tax fairness that arose from the Free-Bleeding protests has moved to the United States and has helped make citizens and lawmakers alike aware of the need for sales tax fairness. New York, for instance, has recently begun drafting legislation to exempt feminine hygiene products from the state’s sales tax. Far from being meaningless rhetoric, the essential, nonessential, and luxury good designations have real-life implications on citizens’ financial situations and the fair application of a government’s sales tax. As such, a state’s sales tax designations require a considerable amount of thought and should reflect the interests of the citizens the tax designations impact.
Published on January 25, 2016.