Marshmallow Tax Gets Just Desserts

For years, New Yorkers have complained that there was nothing sweet about an inequity in the state's marshmallow tax. Small marshmallows enjoyed tax-exempt status, while their larger brethren were taxed.

Not any more. New York is rescinding its sales tax on the big marshmallows, and now both puffy desserts can compete for consumers on a level playing field.

The state Department of Taxation and Finance says that by June 1, sales taxes will disappear on large marshmallows as the state revises what the department called its "hypertechnical" reading of tax statutes.

Under that interpretation, big marshmallows were deemed to be candy and, as such, subject to sales taxes. Mini-marshmallows, marshmallow bits and marshmallow fluff, meanwhile, were categorized as "food" and exempt from sales taxes.

For more than two years, Governor George Pataki has held out that distinction as a prime example of out-of-control government red tape in New York that can be especially damaging to business interests.

"It's more a symbolic move than anything," Kevin Quinn, a spokesman for the state tax department, said. "It is symbolic of this administration's and Pataki's efforts to reduce bureaucratic red tape and to make government smarter and more efficient."

But New Yorkers apparently eat a lot of big marshmallows, too. According to state calculations, about $250,000 in state sales tax revenue will be lost by rethinking where big marshmallows should be categorized and another $250,000 will be lost to local governments who add their own sales tax levies on top of the state's 4 percent charge.

The state Food Industry Alliance has been complaining about the marshmallow tax inequity and other anomalies in state tax law for several years according to an Albany lobbyist for the food merchants' group, Michael Rosen.

For instance, shampoo is generally considered soap in New York and is taxable, Rosen said. But Head and Shoulders and similar products are deemed medications, and are exempt from sales taxes.

Sometimes, the way a product is packaged makes a difference to the tax collector, Rosen said. When Twix, the chocolate-covered wafer, is sold in a multi-pack it is regarded as a cookie and is not taxable. But when it is sold individually it is considered to be a candy, and is taxable.

Similarly, when multiple doughnuts are sold in a bag for off-premises consumption they are non-taxable in New York. But when they are bought separately, they are regarded as a ready-to-eat food and are taxable.

These distinctions drive food merchants "crazy," Rosen said.

"And, of course, it leads to mistakes because reasonable people can look at them and make logical conclusions which can be wrong," he said.

Merchants have been calling for years for New York State to simplify the sales tax rules, according to the food merchant lobbyist.

"We would just like them to pick a rule and hen standardize it," Rosen said. "I don't think consumers care so much whether it is taxable or non-taxable. They just want to know what the rule is."

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