Strange State Tax Laws You Never Knew Existed

As every business owner knows, it's important to comply with local, state and federal tax laws. But compliance can be a challenge. It's not always easy to figure out what taxes are owed on which items, even if you sell goods in one state only. If you operate in multiple states, that can complicate matters exponentially.

Tax rates and taxable item categories can vary considerably from state to state. Cities can also impose their own taxes on certain items and services. And sometimes, tax regulations just don't make much sense, which leads to confusion for business owners who are struggling to accurately collect taxes from customers. Here are seven examples of bizarre taxes found in states:

1. New York takes a bite out of bagels … but only if they're sliced or eaten in a bagel shop. In New York, bagels that are sold sliced or eaten in-store (whole or sliced) are taxable. An unsliced bagel that's eaten off premises isn't taxable, but a sliced bagel is always taxed.

2. Connecticut taxes diapers … but only for children. In Connecticut, adult diapers aren't subject to state taxes. However, consumers who purchase diapers for their children do have to pay state sales taxes.

3. New Mexico gives centenarians a free ride. If you live to be 100 and you're a New Mexico resident, you're done paying state taxes. Residents who are 100 and older don't have to pay state taxes. However, that's only if no one else claims you as a dependent.

4. Florida has a sales tax holiday … but it's very confusing. Swimsuits are tax free, but masks and snorkels are not. Sports attire is tax free, but not helmets. Printer paper is taxable, but not construction paper. The state maintains a list of seemingly random items to guide merchants.

5. Wisconsin has a baffling take on the taxation of ice cream cakes. Due to tax law revisions, ice cream cakes may be taxed, depending on whether they're categorized as a "prepared food." If ice cream and other food items are mixed and sold as a single item, they're generally taxable.

6. Iowa taxes candy … unless it contains flour. Many states tax candy, presumably to encourage healthier eating habits as well as to generate revenue. But in Iowa, only flour-free candy is taxed. Milky Ways and Kit Kat bars are tax exempt.

7. California taxes fruit from vending machines. If you buy a banana from the produce section of a California grocery store, there's no tax. However, a banana dispensed from a vending machine is a taxable item.

These are just a few examples of the many odd taxes and difficult-to-track item categories that business owners have to contend with when selling goods and services and attempting to remain in compliance. The patchwork regulations often result from legislative efforts to encourage or discourage certain behaviors or reward constituent groups (e.g., wheat farmers). Even if the goals are laudable, the resulting complexity can significantly hamper business operations.

Furthermore, even if you eliminate the additional layer of complexity imposed by obscure tax laws, complying with ordinary collection regulations is already challenge enough for many business owners. This is especially true for those who sell across multiple tax jurisdictions via e-commerce platforms like eBay, Amazon.com or Etsy.

Business owners must find a way to manage and track data and break sales tax information down by states, counties and cities. For multichannel sellers, efficiency and compliance require the ability to break out sales by channel and buyer location to ensure accurate tax collection, filing and channel management. In addition, states mandate that businesses maintain transaction histories for a number of years and may conduct an audit to ensure compliance.

Luckily for brick-and-mortar business owners and e-commerce merchants alike, there are technology tools available to streamline tax information management, storage and filing. With the right solution, retailers and e-tailers can make sure they stay in compliance with regular sales tax collection and reporting — as well as the odd taxes levied from state to state.

Mark Faggiano is the founder and CEO of TaxJar, a service built to make post-transaction sales tax compliance easier for multichannel e-commerce sellers.