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The hidden sales tax risks in food and beverage

If you sell food or drinks, your biggest sales tax risk is a quiet one,sitting in your product catalog right now: a SKU coded to the wrong tax category.

Food and beverage is one of the most tangled taxability verticals. For example, raw chicken and rotisserie chicken are often taxed differently. So are a Twix and a Hershey’s bar or a bottle of water and the same bottle with a splash of sweetener. To a shopper they’re nearly identical. To a state department of revenue, one is exempt and the other is taxable,and getting it wrong, across multiple states and thousands of orders, is how a small coding decision becomes a real liability.

The good news is, it’s fixable. This guide explains what businesses need to know to ensure they remain tax compliant as they manage taxability for food and beverage sales.

Is food taxable? It depends on the state.

Here’s the honest answer to the question every food seller eventually asks: there’s no one rule. Whether your product is taxed comes down to three things working together: what the product is, how it’s sold, and where the sale happens.

Groceries are taxable or non-taxable based on state guidelines and policies. A sales tax on grocery items is often considered regressive, because lower-income households spend a larger share of their income on food. So over the past few years, states have steadily moved away from taxing food bought for home consumption. The result is a country that mostly exempts groceries, but with enough exceptions, reduced rates, and local add-ons to keep any multistate seller on their toes.

States with no sales tax on groceries

The majority of states give unprepared groceries a break. More than 40 states plus Washington, D.C. either fully exempt unprepared food from state sales tax or have no statewide sales tax at all. Five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) have no state sales tax, so groceries are untaxed at the state level by default. (Alaska is unique; it has no state sales tax but lets local governments impose their own, so a grocery sale in Juneau can still carry a city tax.)

The momentum is clearly toward exemption. Oklahoma dropped its 4.5% state grocery tax in August 2024. Kansas finished phasing its grocery tax down to 0% on January 1, 2025. And on January 1, 2026, both Arkansas and Illinois eliminated their state grocery taxes.

But watch the fine print, because this is exactly where sellers get tripped up. When Illinois removed its 1% state grocery tax, it simultaneously authorized local governments to impose a 1% local grocery tax by ordinance,and hundreds of municipalities did. So a product that’s exempt at the state level can still be taxed at checkout. 

Georgia works the same way: groceries are exempt from the 4% state rate but still subject to local taxes. The lesson is that ‘no state grocery tax’ almost never means ‘no tax.’ You have to check the local rate, too.

States that tax all food items

A shrinking group of states still apply a statewide tax to groceries, and a seller with tax obligations in any of them can’t treat food as automatically exempt. As of 2026, about a dozen states still assess some type of sales tax on grocery items, although several states tax this purchase at a reduced rate.

The spread is wide. Idaho taxes groceries at its full 6% rate (and offsets it with an income-tax credit for residents). Mississippi reduced its grocery rate from 7% to 5% in July 2025. On the lower end, Missouri taxes groceries at just 1.225%, Utah at a combined 3%, and Alabama dropped its state grocery rate to 2% in September 2025 — though Alabama’s local rates still stack on top, so a shopper in some cities pays close to 9% on food.

For a seller, the takeaway is simple but unforgiving: in these states, ‘it’s just food’ is not a defense. You need to know each state’s specific grocery rate and apply it correctly.

Food taxability by state

The table below shows the taxability status of groceries in every state; this highlights how laws change in every state, and highlights the importance of understanding the details of food taxation.

State	Groceries ARE taxable	Groceries NOT taxable
Alabama	✅ (Tax rate lowered to 2% in 2025)
Alaska		✅
Arizona		✅
Arkansas		✅(Prepared foods, candy, etc. are taxable)
California		✅
Colorado		✅(Non-taxable at the state level, however, local areas can assess sales tax.)
Connecticut		✅
Florida		✅
Georgia		✅(Sales tax is not applicable at the state level, but cities may assess tax. Prepared food, alcohol, dietary supplements, drugs, OTC drugs and tobacco are taxable)
Idaho	✅(Residents can claim an exemption on their income tax)
Illinois	✅(Only taxed at 1%, but candy, soft drinks, alcohol and prepared foods are not included in this low tax rate.)
Indiana		✅
Iowa		✅
Kansas		✅
Kentucky		✅(Food and ingredients are exempt, but alcohol, soft drinks, vending machine foods, tobacco, prepared foods, candy and dietary supplements are taxable.)
Louisiana		✅(Municipalities and cities may impose sales tax, however.)
Maine		✅(Only applies to ‘grocery staples.’)
Maryland		✅
Massachusetts		✅
Michigan		✅
Minnesota		✅
Mississippi	✅(Taxed at a rate of 5%.)
Missouri	✅(Taxed at a rate of 1.225%.)
Nebraska		✅
Nevada		✅
New Jersey		✅
New Mexico		✅
New York		✅(New York has multiple ‘considerations,’ however.)
North Carolina		✅(Exempt from sales tax but subject to local taxes capped at 2%.)
North Dakota		✅
Ohio		✅(As long as the food is consumed off-premise.)
Oklahoma		✅(Alcohol, ready-to-eat foods and deli foods are taxable)
Pennsylvania		✅(Alcohol is taxable.)
Rhode Island		✅
South Carolina		✅(Unprepared food exempt but may be subject to local taxes)
Tennessee	✅(Taxed at 4% and also taxable at the local rate)
Utah	✅(Taxed at a state rate of 1.75% and local taxes can bump the total tax to 3%.)
Vermont		✅
Virginia	✅(Taxed at 1.5%; local areas can add 1% to the total tax.)
Washington		✅
Washington, D.C.		✅
West Virginia		✅
Wisconsin		✅(Some snacks may be taxable)
Wyoming		✅

What counts as prepared food for tax purposes?

This is where the same physical product can be exempt or taxable depending entirely on how you sell it and where a lot of F&B sellers unknowingly under-collect.

Most states that have adopted the Streamlined Sales Tax (SST) definitions use a clean three-part test. Food is ‘prepared,‘ and therefore taxable, if any one of these is true: the seller sold it heated or heated it; the seller combined two or more ingredients into a single item; or the seller provided eating utensils (a plate, fork, spoon, cup, napkin, or straw). Only one of the three needs to apply.

SST enables states to simplify how they manage sales tax, allowing member states to agree on certain rules/policies. Currently, 23 states participate, including Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming. Tennessee is an associate member. 

That third test, sometimes called the ‘fork rule,’ is the one that surprises people. A cold, unassembled item that would otherwise be an exempt grocery can become taxable simply because a plastic fork or napkin went in the bag. The logic is that a utensil signals the food is meant to be eaten right away rather than taken home and prepared and immediate-consumption food is what states intend to tax.

The practical result: identical ingredients, opposite tax treatment. A sealed package of raw chicken is an exempt grocery item. The same chicken cooked and sold hot at the deli is taxable prepared food. A loaf of bread, sliced cheese, and deli meat bought separately are groceries; assembled into a sandwich, they’re prepared food. The transformation is in the preparation and presentation, not the contents. 

While many states have adopted this logic to define prepared food, each state can create their own definition of a prepared food item, so sellers should check each state’s specific definition.

A delivery service that got it wrong

Consider a hypothetical that mirrors a common pattern. A regional meal-delivery brand sells chilled, fully cooked dinners that customers reheat at home. Because the meals ship cold and the customer does the final heating, the company classified everything as exempt grocery food and collected no tax on it across the states where it had nexus.

The problem is the combination test. Each meal is two or more ingredients assembled by the seller into a single item, which meets the SST definition of prepared food in many states regardless of temperature at the moment of sale. The ‘we ship it cold’ instinct only protects you against the heating test; it does nothing about the combination test. A classification built on one test while ignoring the other two is exactly the kind of gap that sits quietly until an audit surfaces it across every order, in every state, going back years.

Soda, candy, and the grocery staple gray zone

Even in states that fully exempt groceries, two categories are routinely clawed back into the taxable column: candy and soft drinks. And the definitions states use to draw those lines are, frankly, strange enough to catch experienced sellers off guard.

Under the SST definition, candy is a preparation of sugar or sweeteners combined with chocolate, fruits, nuts, or other flavorings, in the form of bars, drops, or pieces — but it specifically excludes anything that contains flour or requires refrigeration. That single carve-out produces the most counterintuitive rule in all of food taxability: if a product contains flour, it’s often legally ‘food’ (exempt) rather than ‘candy’ (taxable).

The textbook example: a plain Hershey’s bar has no flour, so it’s taxable candy. A Kit Kat, Twix, or Milky Way contains flour in its wafer or cookie layer, so in many states it’s treated as exempt food. Two products sitting inches apart on the same shelf, taxed differently  and a correctly configured system will code them differently, which is correct, not an error.

Soft drinks have their own definition. A ‘soft drink’ is generally a non-alcoholic beverage with natural or artificial sweeteners that contains no milk or milk substitute and is not more than 50% juice. That’s why plain bottled water is usually exempt while sweetened water is taxable, why a juice that’s 51% juice can be exempt while a 49%-juice drink is taxable, and why a sweetened milk-based beverage (like chocolate milk) may dodge the soft drink category entirely. None of this is intuitive, and all of it lives in your product codes.

When a snack brand’s product codes created liability

Picture a fast-growing snack brand with a mixed catalog: granola bars, trail mix, chocolate-covered nuts, and a line of fruit chews. To keep things simple, the team coded the entire snack line as exempt food in every state.

Under the SST candy definition, that’s a problem in several states. The chocolate-covered nuts and the fruit chews are sugar-based pieces with no flour, taxable candy in states that tax candy. The granola bars that list flour as an ingredient are food. The team’s one-size-fits-all coding over-collected on nothing and under-collected on the candy items, in every candy-taxing state where the brand had nexus. 

Because a brand like this typically sells the same SKUs everywhere, a single wrong code is the same mistake replicated across dozens of jurisdictions and every transaction.

Alcohol and special district rates

Alcohol is its own world, and it’s where sellers most often assume the standard sales tax rate applies when it doesn’t. Beyond ordinary sales tax, alcoholic beverages carry per-gallon excise taxes that vary by beverage type and by state, plus,and this is the part that can impact sellers harshly,special local and district rates layered on top.

Some jurisdictions apply a distinct, higher rate to alcohol than to other goods. Washington, D.C., for instance, taxes most goods at 6% but applies a 10.25% rate to alcohol sold for off-premises consumption. Several states impose a separate ‘liquor-by-the-drink’ tax on on-premises sales: 15% in Tennessee, 10% in Kansas, 5% in South Carolina entirely separate from the general sales tax. And 17 states are ‘control’ states where the government itself controls liquor sales and effectively prices the tax in.

For an alcohol seller, the trap is treating alcohol like any other taxable product and applying a single statewide rate. The real obligation is a stack: the right state rate, the right excise treatment, and the right local or special-district rate at the exact point of sale.

An alcohol brand that missed district-level rates

Imagine a direct-to-consumer wine brand shipping to customers in several states. It set up its tax engine with each state’s general sales tax rate and felt covered. What it missed was the layer underneath: jurisdictions where alcohol carries a special district or local rate above the general rate, and on-premises versus off-premises distinctions that change the math.

Shipping into a single metro area where the alcohol rate runs a few points above the general rate, multiplied across thousands of orders, quietly accrues a shortfall on every sale. The brand isn’t ignoring tax, it’s collecting the wrong amount, which is just as much a liability as collecting none.

How to audit your own F&B product catalog

Here’s a practical, four-step audit you can run on your catalog now, before a state runs it for you.

Step 1: Map every SKU to a product category

Start with a complete list of everything you sell and assign each item to a precise taxability category: unprepared grocery, prepared food, candy, soft drink, bottled water, dietary supplement, or alcohol. 

The whole risk in F&B lives in the difference between ‘snack’ and ‘candy,’ or ‘beverage’ and ‘soft drink.’ Pull the actual ingredient label where it matters,the presence or absence of the word ‘flour’ determines candy versus food.

Step 2: Check your nexus states’ definitions

For every state where you have sales tax obligations, physical or economic nexus, confirm how that state treats each category. A SKU that’s exempt in one state may be taxable in the next, and a state’s grocery exemption rarely extends to candy, soda, or prepared food. Check the taxability status of each item in the states where you have met a nexus threshold.

Step 3: Validate your rate logic at the district level

Confirm that you applied local and special-district rates at the precise point of sale,the local grocery tax that survived a state exemption, the elevated alcohol rate in a particular metro, the reduced grocery rate in a state that taxes food at less than its general rate. This is the layer most manual setups miss, because it’s invisible until someone reconciles thousands of transactions against the rate that should have applied.

Step 4: Review exemption certificates if selling B2B

If you sell wholesale or to other businesses, your exemption certificates are also important. A resale or exemption certificate that’s missing, incomplete, expired, or lacking a signature is treated by auditors as no certificate at all,which means the tax liability for that ‘exempt’ sale falls back on you. Validate every required field, store them digitally, and track renewal dates. A single missing signature on a large sale can turn an exempt transaction into an assessment.

Why F&B misclassification can be common and costly

Misclassification is common for an understandable reason: the categories are genuinely counterintuitive, the definitions hinge on details like flour and forks, and the rules change every year. Each mistake or misclassification compounds tax liability. 

A single miscoded SKU isn’t a single error becomes a repetitive error as it’s used on every order with that product. in every state where you have nexus, for as long as the code has been wrong. And auditors don’t review every transaction; they test a sample, calculate an error rate, and extrapolate it across the entire audit period. One misclassified product type in the sample becomes a material liability projected across years of sales. On top of the back tax, states routinely add penalties and interest, penalties commonly run from 5% to 25% of the tax due, and in some states higher,so the final number can rival or exceed the tax you originally failed to collect.

Automation alone doesn’t save you. A tax engine applies rates flawlessly to whatever category you feed it, but if the SKU is coded as exempt food when it’s taxable candy, the engine will confidently calculate the wrong tax forever. Accurate product classification is the input that makes everything downstream correct. Getting the category right is not a step you can skip on the way to compliance; it is compliance.

This is where using TaxJar simplifies the process, as the system applies accurate, up-to-date product tax categories to your SKUs from the start, so the classification feeding your tax calculations is correct before a single order goes out the door. And because TaxJar’s categories are maintained and updated as state rules change, you’re not relying on a code someone set once and forgot,catching a miscategorized product early, on your own terms, instead of years later, across every order, in an auditor’s sample. 

Finding and fixing a misclassified SKU on your own terms is inexpensive. Having a state find it for you, across every order and every jurisdiction, is not.

Not sure if your product codes are costing you? TaxJar’s product classification tools help food and beverage brands get it right, across every state. See how TaxJar handles product taxability.

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