Question

Girl Scout Cookies and the Snack Tax

State sales taxes often exempt food purchased for at-home consumption to help relieve regressivity. However, that exemption causes substantial loss of revenue. Furthermore, some people question the nutritional value of certain items exempted under the food label and doubt the wisdom of losing revenue in a tax structure to provide relief to such purchases. In difficult fiscal times in the early 1990's, a few states sought additional revenue by narrowing the food exemption, particularly by removing some of these questionable categories from the exempt list. These new laws and their enforcement have produced policy problems testing the resolve of the legislators and tax administration.

In the 1991 legislative session, Maine passed a package of tax changes designed to increase revenues by $300 million annually. (Total tax collections in fiscal 1990 were $1,560.9 million.) thee changes included higher income taxes, an increase in the state sales and use tax rate from 5 to 6 percent, and a revision to remove snack food from the "sales of grocery staples" category, which was then exempt from the state sales and use tax. The new law was estimated to yield $10 million annually. The new law taxed snack food, as defined by the legislature.

14-C. "Snack food." Snack food means any item that is ordinarily sold for consumption without further preparation or that requires for preparation other than combining the item with a liquid; that may be stored unopened without refrigeration, except that ice cream, ice milk, frozen yogurt, and sherbet are snack foods; that is not generally considered a major component of a well-balanced meal; and that is not defined in this section as a grocery stable. "Snack food" includes, but it not limited to, corn chips, potato chips, processed fruit snacks, fruit rolls, fruit bars, popped popcorn, pork rinds, pretzels, cheese sticks and cheese puffs, granola bars, breakfast bars, bread sticks, roasted nuts, doughnuts, cookies, crackers, pastries, toaster pastries, croissants, cakes, pies, ice cream cones, marshmallows, marshmallow creme, flavored powdered liquid drink mixes or drinks, ice cream sauces, pudding, beef jerky, meat bars and dips. (36 Maine Revised Statues 1752 [1992].

The lawmakers soon dissevered that the expansion of the sales and use tax base had some unexpected consequences, particularly with he regard to the finances of Girl Scouts. Two councils, the Abnake and Kennebec, served about 19,500 girls in Maine, and 60 to 65 percent of their revenues came from cookie sales. Because neither council was qualified to purchase inventory for resale as a registered reatiler, and then charge sales tax on each transaction, the councils now had to pay tax on their cookie purchases. That amounted to around $58,000 or almost 2 percent of cookie revenue (they paid tax on the wholesale price of about 80 cents per box).

The two councils responded differently to the new tax. Abnaki raised its cookie prices from $2.25 to $2.50, but sales fell 7 percent from the prior year. Kennebec lacked sufficient time to react, so it had to absorb about $40,000 in cookie losses. However, neither council thought the new tax was fair. Jo Stevens, executive director of the Abnaki Council, voiced the general view: "We're not selling groceries. We're raising charitable contributions." Of course, the problem for sales tax policy was, indeed, because they weren't selling groceries.

The Joint Taxation Committee was generally sympathetic. Its co-chair, Senator Stephen Bost said, "We had not intended as a committee to include... Girl Scouts in the snack tax." However, proposed legislation to exempt Girl Scout and related organizations (including the pre-popped popcorn sold by Boy Scouts) would cause a revenue loss of around $175,000 annually, and the state had no clear way to name it up. (Incidentally, candy had been taxed for some time, but candy sales by school groups and parent-teacher organizations are exempt.)

Discussion Question:

What should Maine do? Here are some options (1) do nothing - the tax is working as it should; (2) direct the Bureau of Taxation to rewrite the institution; (3) repeal the snack tax; (4) exempt sales and purchases by the Girl Scouts and similar organizations; (5) require the Girl Scouts to register as retail merchants, buy their cookies using the resale exemption, and collect sales tax on their cookie sales; and (6) exempt sales and/or purchases by all youth or charitable organizations. (You may think of other possibilities.) Use the standards for revenue policy evaluation (yield, fairness, economic effect, and collectability) to test options and provide a recommendation. Explain which approach is most consistent with the logic of sales taxation. Which parties would have an interest in the eventual outcome of the discussion? What is your overall view of the snack tax, without respect to the Girl Scout issue?

Answer 1

After a detailed study of the situation, I have come to the conclusion that I will choose option (4) exempt sales and purchases by Girl Scouts and similar organizations. Although option (6) exempt sales and/or purchases by all youth or charitable organizations is similar to option (4), there is some difference as to why I will recommend option (4). In option (6) only youth and charitable organizations are being exempted, but there might be certain organizations who are working for social welfare in any other name, for an example there are other small organizations and social services who help the poor by providing them with opportunities of small businesses similar to Girl Scouts, take an example where such organizations are helping poor people, in our discussion the sale of candy can be considered, if it is an individual who earns very little for his livelihood by selling candies supported by such organization, it will be unfair to charge him snack tax for selling he will be left with very little money for his own household and many others like him who are being helped by such organization.

If the government of Maine chooses option (4) and exempts sales and purchases by Girl Scouts and similar organizations, the yield of revenue to the government will be less but there will be a generation of income among the lower income group of the society which is good for the economy. It is only fair to exempt such organizations from sales or snack tax because they are in need of support so when instead they are charged with increased tax rate they will suffer loss and the economy and society will be affected as a whole. Suppose if they increase the price due to tax, people would be less attracted to buy the cookies and we can refer to the case of Abnaki where sales decreased by 7%. It is very cumbersome for the socially backward people and charitable organizations to register themselves as retailers and a lot of people will back out from the profession as well. The process of registration as a retailer and then filing and maintaining taxes by such people and organizations will add up to unnecessary costs and operational troubles. The collection of tax from such people and organization is also a little difficult because they are not always registered organizations. So it is not recommended to choose option (5) for the above reasons.

Other options like (1) do nothing, is absolutely not a good one to choose by ignoring the Girl Scouts and other such organizations. Option (2) direct the Bureau of Taxation to rewrite the institution; if substantial changes are made in the taxation policy apart from only exempting the Girl Scouts and other similar organizations from tax payment, this might be implemented to review the taxation policy as a whole. If Maine chooses option (4) it will lose revenue from snack tax from all the sellers of snack items which will be a loss for the state. So it is not recommended. We have already discussed option (4), (5), and (6) earlier, so to conclude, the recommended option for Maine is (4) to exempt sales and purchases tax made by Girl Scouts or other such organizations.

From the sales tax point of view, it is logical to tax the sale of certain goods and services for generating revenue. And the tax policy of Maine is helping the government to generate a lot of revenue from such implementation. But it is unfair to charge economically backward people to extra money for revenue generation in the cost of social welfare. So if the tax is implemented with exemption it will meet both the requirement of the government as well as such people and organizations, because the government is collecting sales tax from the other taxpayers especially from the snack tax. So if the sales tax is implemented with exemptions, the government, the charitable organizations and other similar kinds, like Abnaki and Kennebec, will have an interest in the outcome. The government will keep on generating revenues while maintaining social welfare by providing an exemption and the other parties will not have any sales tax liability which will increase their real income and more money will be generated for such organizations and social welfare.

If we consider the snack tax alone apart from the Girl Scouts issue, first we need to consider the taxation policy. In the snack tax policy, it has been implemented on products which were considered questionable by the consumers. So the cunning government implemented the tax on such items so that the consumers, consuming such products pay higher taxes and this will decrease the demand for such products due to increased prices, resulting in fewer people to buy the products. This will raise social welfare and while curbing the sale of unhealthy products in society. The consumer now will shift to healthy products at lower prices. So if we consider the snack tax policy, it is quite effective if implemented only on unhealthy and socially damaging products which will improve social welfare and generate revenue for the government at the same time. So the snack tax policy can be carried forward with changes in items considered as snack category from time to time.