RETAILERS PREP FOR NEW SALES-TAX LAWS FOR SOME BEVERAGES 2004-06-28 (2)

LUCIA MOSES

WEST DES MOINES, Iowa -- Retailers in Iowa and a handful of other states are scrambling to ready their cash registers by July 1, when a new legal definition of food will declare bottled water non-taxable while adding taxes to other beverages and foods.

The changes are the result of the 42-state Streamlined Sales Tax project, a four-year-old effort designed to allow states to collect sales tax on Internet and catalog purchases. Part of the project is making the definition of food consistent across those states.

Figuring out which items become newly taxable, and reprogramming their cash registers to reflect the changes, is causing headaches for retailers and their state trade associations. Because similar products get different tax labels, the new food rules -- which are subject to each state's interpretation -- can seem to defy logic.

For example, candy is tax-exempt if it contains flour. So while a Snickers bar is taxable, a Kit Kat bar, made of wafer cookies, isn't.

"You have to go through each candy bar and check the ingredients," lamented Jerry Fleagle, president of the Ohio Grocers Association, Columbus. "It's just very time-consuming." The association posted a list of the changes on its Web site, with the caveat that it isn't comprehensive.

One of the biggest categories to become tax-exempt is bottled water, of which 6.4 billion gallons were sold last year. Drinks containing milk products or less than 50% juice, meanwhile, become taxable.

Already, much confusion has been caused by the new definition of prepared foods, which some interpreted to mean that if a supermarket deli provided utensils, all its food was taxable, even if not bought for immediate consumption.

Shoppers in Minnesota, which enacted the streamlined sales tax three years ago, seethed when they had to pay new taxes on fresh bakery items and chocolate baking chips. "That created monumental chaos," said Nancy Christensen, executive director, Minnesota Grocers Association, St. Paul. An exemption was made for baked goods following the outcry.

Yet Iowa retailers said they had no plans to go out of their way to tell shoppers about the coming changes, noting the news media has covered the issue extensively.

"Beyond getting our registers programmed, I imagine that's probably about all we will do," said Chris Friesleben, communications specialist for Hy-Vee here, with 103 of its 193 supermarkets in Iowa. While new candy taxes "might throw people for a loop," she said, few products change tax status.

Also planning no consumer education is Dahl's Food Markets, with 11 Des Moines-area stores.

"All you do is confuse the customer," said Ross Nixon, chief operating officer. "They're not going to care anyway. They're not buying water because there's no sales tax."

In Indiana, where the new tax rules have been in effect since January, most retailers took the passive approach and reported no consumer backlash, said Joe Lackey, president of the Indiana Grocery & Convenience Store Association, Indianapolis. "People are used to sales taxes. They don't pay much attention to them," he noted.

An exception was Martin's Super Markets in South Bend, Ind., which hung signs explaining the 50%-juice rule where juice drinks are sold in its 16 Indiana stores, said Doug Baumgartner, director of operations services. Martin's singled out beverages because that was the category most affected by new taxes.

"We were anticipating that [shoppers] would notice," he said. "We have some shoppers that are very alert on sales tax, so we try to stay ahead of them."

Depending on how tax-aware their consumers are, retailers may want to consider taking similar steps before implementing new food taxes, said Elizabeth Tansing, director of state and government relations for Food Marketing Institute, Washington.

"There will be a whole new tax that consumers haven't paid before," she said, "and unfortunately, retailers are the first line of defense."