WRAL Investigates

N.C. tax code taxing even for experts

Posted October 6, 2008

— Lobbying by a Cary bakery convinced lawmakers to change the tax code for more consistency in figuring sales tax on bread, but the state tax code still contains varying sales taxes that confuse shoppers and merchants alike.

La Farm Bakery pushed for three years before the tax code was amended by the Artisan Bakers Bill this year. The bill, which takes effect in January, exempts small bakeries from paying the 4.75 percent state sales tax and any local taxes on prepared foods.

"There was a lot of confusion as laws along the way were introduced around baked goods," said Missy Vatinet, owner of La Farm Bakery.

Vatinet had been charging customers the local 2 percent sales tax on food since she opened her shop in 1999 until the state Department of Revenue slapped her with a notice of $150,000 in back taxes in 2005. Revenue officials said she should have been charging 7.75 percent in sales tax for prepared food, noting Wake County charges an extra 1 percent sales tax on such items.

The accountants Vatinet hired and various state tax investigators couldn't agree on whether bread and other baked goods from a bakery qualified as prepared foods. The tax code defines prepared foods as anything that is sold hot or heated by the retailer, mixed or combined by the retailer or sold with eating utensils provided by the retailer.

What incensed Vatinet the most was that Department of Revenue officials said the same loaf of bread she had to charge 7.75 percent sales tax on could be sold through a supermarket and be subject to only the 2 percent food tax.

"Why would I want to purchase (a) coffee cake here when I could go to Whole Foods and buy it for 5 percent less sales tax?" she said. "I think that tax code is very difficult."

She's not the only person confused by quirks in the code.

"To ask me if I actually know what is and what's not (taxed), I can't tell you," shopper Carmen Diddley said.

Soft drinks and candy, for example, are charged at different rates, depending on their ingredients.

Candy that includes flour or requires refrigeration, like Twix, Kit Kat and Nestle Crunch, is taxed at the 2 percent rate, while other confections carry that plus the full 4.75 percent state rate and any other local sales taxes.

Soft drinks used to be subject to the full sales tax only if they were carbonated. Now, all drinks that contain sweeteners, including Gatorade, sweetened iced tea and flavored waters, are taxed at the 6.75 percent rate.

"It's 6.75 (percent) tax (or) a 2 percent tax. I have no idea (what's charged on which items)," shopper Gennie White said.

State Rep. Nelson Dollar, R-Wake, said large chunks of North Carolina's tax code need to be fixed.

"Tax code can get very convoluted and very complicated and, frankly, we need to streamline and simplify our tax policy and tax regulations in this state," Dollar said. "Tax policy should be fair. It should be as low as possible to meet the services that (the) state requires, and it should be uniform across a broad area so that one group of businesses is not being penalized over another."

Some lawmakers have called for taxing services as well as products, but Dollar said he's opposed to that  change in the code.

"We do not need in this economy to be adding more taxes to hairdressers and other professional services that people buy every day. We certainly don't need in this economy to be raising the number of things that are taxed in the state," he said.

Lawmakers and Department of Revenue officials need to align their priorities, Vatinet said, so small businesses like hers aren't punished. She said she had to put a planned expansion on hold for three years while the baked-goods sales tax issue was resolved.

"I think it's important our other divisions of government also have this same common philosophy that we're looking to create a business-friendly environment to grow our state because there's other states who are (doing so)," she said. "If we don't, these businesses are going to go to other states."


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  • FE Oct 7, 2008

    Tax Man - Your point is well taken, but most of the taxes being discussed here are not federal taxes (such as an excise tax) but rather state and local taxes.

    The legislature/counties/cities of NC have figured out they can nickel and dime via taxes just about everything that involves a transfer of money. Add in the local "projects" - remember how Raleigh residents paid for the Civic CenterS and the RBC Center - and the burden becomes greater.

    I will give honorable mention to the legislature for their Highway Use Tax - paid upon purchase of a motor vehicle for "the PRIVILEGE of driving on the state highways." Since it is NOT a sales tax, the vehicle purchaser cannot even possibly deduct it as an itemized deduction.

    And I sadly fear things will get MUCH worse after the upcoming election!


  • chfdcpt Oct 7, 2008

    I may be giving away my age...

    I remember when I could go to the grocery store, and there was almost no sales tax. Of course, there were no delis in the stores then.

    Fast forward 30+ years. I am paying NC tax on my phone, satellite, electricity, water/sewer, diapers and child supplies, clothing, first aid items at the drug store, any type of food (be it raw, cooked, from the store or the restaurant), gasoline, natural gas for heating, repairs on my car, any repair done to my house or appliance,funeral services to bury my loved ones, and let us not forget the internet sales tax.

    Between Jim Hunt, Mike Easly and the legislature, they have not met a tax they did not approve of.

  • Seeminglyopposed Oct 7, 2008

    Working pt in the retail industry, when the taxes come up on the register at times, I am amazed. Some of them are terrible.

    And as long as these tax rules and regulations are where not even tax attorneys can decipher them, they know they will continue to get small business with these out of the air back taxes. I know this woman did not run up this tally in just one year. So they just figured out, she was not charging enough? More penalities, fees, etc. to line of the pockets of the same ones who really don't understand it themselves, but hey, who cares they pay taxes same as we do, however they receive more back when we pay them to reline their pockets even better, to help them pay again the same taxes that we do. LOL What a continuous cycle.

  • Tax Man Oct 6, 2008

    The tax codes all are terrible - they are a hodgepodge of attempts to generate revenue without having certain political buddies having to pay any - up to lobbyists and political donors. If you donate a lot to the state legislators you will get tax breaks for your industry - you don't see them charging sales taxes when you go to the doctor or see an attorney - but look at the bread case - just plain dumb. If you have a sales tax it should be on ALL sales at the exact same rate. No exceptions! Actually there should be only one federal sales tax - the Fair Tax - and the states should all get their proportionate share from the feds based on population. Make it easy, keep the taxes low - get rid of the income tax, the capital gains tax, the franchise tax, the property tax - just have one simple consumption tax - the Fair Tax.

  • Ripcord Oct 6, 2008

    The tax code is the result of totally incompetent people in the state legislature. Only a total overhaul (read: simplification) will fix this (unless the state income and sales tax is replaced with a flat consumption tax).

    But you can be certain that no matter what, 5 years from now, 10 years from now, this same conversation will be repeated. State politicians use the tax code to buy votes. PERIOD. Reforming it would endanger those votes. In the end, self interest and pathological stupidity will rule the day.

    I challenge ANY member of the state legislature to post a competent, coherent reply to my post that explains how they are going to solve this problem. Lets hear it.

  • whatusay Oct 6, 2008

    NC will soon find a way to tax the air we breathe. Cut government spending and lower taxes, or at least make them look like they were drawn up by competent politicians...But, that is an oxymoron.

  • benjaminrequena Oct 6, 2008

    It's definitely backwards thinking, but this abomination of a tax code is a prime example why I'm apathetic to the current election and politics as a whole.

  • Hip-Shot Oct 6, 2008

    "Should five per cent appear too small,
    Be thankful I don't take it all.
    'Cause I’m the taxman,
    Yeah, I’m the taxman.

    (if you drive a car, car;) - I’ll tax the street;
    (if you try to sit, sit;) - I’ll tax your seat;
    (if you get too cold, cold;) - I’ll tax the heat;
    (if you take a walk, walk;) - I'll tax your feet."

  • FE Oct 6, 2008

    This entire sales tax issue is a prime example of NC legislature double talk - "we don't tax food, but......"

    There is a "tax difference" between buying a candy bar at the checkout stand and buying a box of the same candy bars.

    My favorite is there is also a tax difference on the SAME FOOD if you go to a Wendy's and a) eat the food there or b) take it home.

    And then there is the "sales tax" on cell phone usage, cable charges, and more and more and more.


  • whatelseisnew Oct 6, 2008

    colliedave - that is correct you are taxed higher if you eat there. I hear the next step is they are going to put an air measurement device on our backs and charge us a per breath fee.