INDIANAPOLIS (WISH) — Have you been incorrectly charged at the checkout? Six months after I-Team 8 first exposed problems with Indiana sales tax collection, a new investigation reveals confusion at the cash register has only grown. Some critics now believe the state is purposely allowing it to happen.
Indiana sales tax is set at 7 percent. It’s supposed to be added on to each product when you pay.
But, last year, I-Team 8 found exceptions to those rules have left many retailers confused and consumers paying the price, potentially by millions of dollars every year.
THE TAX TEST
It was supposed to be a tax-free trip.
In early October 2013, I-Team 8 visited 20 Indianapolis area grocery and convenience stores as a test to see if retailers were following recently updated law changes regarding sales tax. That law, known as Information Bulletin #29, makes most non-prepared foods, like groceries, tax free.
But, it also allows for a myriad of confusing exemptions. And, no category is more confusing than candy.
Most candy is deemed taxable. But, several specific brands — including Nestle Crunch, Twix and Kit Kat — are designated as non-taxable.
Our test was simple: we bought taxable and non-taxable candy at all 20 stores, then checked the receipts. Nine of the stores charged sales tax when they shouldn’t have. Two more stores did not charge sales tax when they should have.
That means more than half of our purchases resulted in incorrectly calculated and incorrectly charged sales tax.
When we went back to the stores for answers last fall, many owners pleaded ignorance. Most also vowed to immediately fix the problem.
But, when I-Team 8 returned for a “re-test” in August 2014, just two of the stores had actually followed through on those promises: Jack’s Place Phillips 66 station on West 16th Street and Brown Hen Citgo on College Avenue.
The same candy bars we bought last year still included a 7 percent sales tax at: Kroger in Broad Ripple, Big Lots on Allisonville Road, Hoosier Mart Shell on 82nd Street, and multiple Circle K Shell convenience stores. Each candy bar brand is specifically mentioned, by name, as a non-taxable product in Information Bulletin #29.
We were also charged sales tax on those same non-taxable candy bars at two smaller convenience stores: Chuck’s Market on Massachusetts Avenue and Mike’s Midway Market on Shelbyville Road.
Chuck’s Market owner Chuck Dorman said he was unaware of any recent updates to sales tax law.
“I’ve never seen this,” he said, thumbing through Information Bulletin #29. “But, I believe I’m doing this correctly. I charge a tax on all candy and soft drinks. All candy bars should be taxable. It don’t make sense that a Twix is not.”
Information Bulletin #29, issued in 2012, was intended to make sales taxes on food easier to understand. But, some say it did just the opposite.
“It says in there clearly that baking chocolate is not taxable,” said Indiana Grocery and Convenience Store Association President Joe Lackey. “But, then they turn around and say chocolate chips for baking are taxable. It contradicts itself right there in writing. It makes no sense. And, we try to explain that to the consumer, and the consumer says, ‘Have you lost your mind?’”
It’s precisely the question Jim Bruggenschmidt asked.
He went shopping after watching I-Team 8’s investigation last fall, and then closely checked his receipts.
“I noticed a discrepancy where I was charged a tax on some accounts, and on others I wasn’t charged a tax at all,” he told I-Team 8. “And, these were the exact same products at different stores. And, they were not just candy.”
The examples began to add up: from snack cakes at Kroger to protein bars at Marsh and energy bars at Circle K.
Information Bulletin #29 says they’re all supposed to be tax free.
But, Bruggenschmidt’s receipts showed he was charged sales tax on them anyway.
“I thought there was probably a real simple explanation for it,” he said. “But, the more I’ve read on it, I’m not sure there is. They all contain flour, and flour isn’t supposed to be taxed. But, they’re all being taxed at 7 percent. I’m not sure it’s deliberate. But, it’s definitely confusing.”
I-Team 8 asked Kroger, Marsh, and Circle K to explain why Bruggenschmidt had been charged tax on the products. None of the chains responded to multiple requests for comment.
I-Team 8 also found those same results mirrored at other stores.
We were charged sales tax on flavored bottled water at Chuck’s Market, Big Lots, Kroger, Marsh, Bud’s Supermarket on Shelby Street, and a Dollar Tree store on Keystone Avenue.
But, we were not charged sales tax on flavored bottled water bought at a Safeway Foods on Shelby Street or at an ALDI store on West Washington Street, despite the fact that they contained the same artificial sweeteners.
The ALDI store, however, did charge sales tax on coconut water. Its only listed ingredients are water and “natural flavor.”
“This could be big,” Bruggenschmidt said, pointing to his receipts. “It could be big. And, that’s why I want to get it corrected, because I think there is a possibility it’s happening at a statewide level.”
“This is not an Indiana problem,” responded Lackey, of the Grocery Association. “This is a national problem. And, it’s not being cleared up. It’s being made worse.”
Indiana is one of 26 states that belong to the non-partisan “streamlined sales tax governing board.” Its members, not the Indiana legislature, now determine which products are taxed.
Each member state appoints delegates to vote on sales tax rules. Indiana’s current delegates are Sen. Luke Kenley (R-Noblesville), Rep. Milo Smith (R-Columbus) and Indiana Department of Revenue Commissioner Mike Alley.
Kenley says he shares retailers’ frustrations over the confusing direction from the state.
“The problem is: new products come out. For example, in recent years, flavored water got to be an issue. Is that taxable, or not? It’s too open to interpretation. And, I think the Department of Revenue needs to step in and probably do some additional education,” Kenley said.
Lackey said that direction would be welcomed.
“Now, anything sweetened is taxable, which also applies to some baby foods that are sweetened,” he said. “And, people say, ‘That’s not right! Baby food shouldn’t be taxable!’ Well, it is, because it’s sweetened.”
Yet, all the stores included in I-Team 8’s new tax tests did not charge sales tax on baby food or baby formula, including those that contained artificial sweeteners. Many of those same stores, however, charged sales tax on flavored water that contained the exact same artificial sweeteners.
I-Team 8 discovered a little known loophole in state law that may help explain why.
‘WHEN YOU’RE UNSURE, TAX IT’
While Indiana law allows retailers to keep a portion of sales taxes they collect, all but a fraction of a percent is supposed to be remitted to the state.
Lackey, of the Grocery Association, said that includes any sales tax that may have been incorrectly collected.
“If a retailer over-collects tax, it isn’t to their benefit at all,” he told I-Team 8. “All of that tax gets paid. So, it’s to the benefit of the state of Indiana. Because, there’s no penalty in Indiana for over-collecting tax. As long as you pay it to the state, then that’s perfectly legal. Under-collecting, however, then the retailer is liable.”
That has resulted in an “unwritten policy” that retailers should err on the side of over-taxing, rather than under-taxing, Lackey said.
“We’ve been told [that] directly,” Lackey said. “I’ve never seen that [in writing], but it’s [well understood]. And, I’ve told my retailers that: when you’re not sure, tax it. Because, you’re safe that way. If you just go ahead and tax it all, nobody at the state level is going to complain.”
Incorrectly charged sales tax likely adds up to millions of dollars in collected revenue that the state of Indiana isn’t entitled to every year, Lackey said. But, exactly what that figure is remains unclear.
Last fiscal year, state auditors identified more than $18.3 million in sales taxes that weren’t properly collected from the 925 gas stations and convenience stores they audited. The previous year, the state found $9.1 million in improperly collected sales taxes from 623 stores.
Those are likely just a drop in the bucket.
State records show Indiana currently has 131 tax auditors charged with keeping tabs on more than 200,000 businesses. Last year, records show auditors only opened the financial books on about 3,500 stores — or about 1 percent.
Lackey believes the “extra” revenue the state is garnering from incorrectly collected sales tax has resulted in an intentionally sluggish response to calls to force retailers to get sales tax calculations correct.
“They don’t want to give up any revenue,” Lackey said. “They can’t afford to give up any revenue. When you’re in a fiscal situation where the state has limited resources, they really lean on the Department of Revenue to collect every cent they possibly can. And, in doing that, they kind of turn their auditors loose and say: use your imagination. The problem is that the businesses suffer. And, when the businesses suffer, they have to pass those costs back on to the [consumer].”
Indiana Department of Revenue Commissioner Mike Alley shrugged off that accusation.
“I totally disagree with that,” he said. “Our objectives are collect the amount of tax that should be paid. Not more, but not less either.”
Still, Alley admits additional clarification on the sales tax law is needed.
“In some cases, that requires further education of our retailers. It [may] encompass making changes — legislative changes — and defining what is, and what is not. Our objectives from the department’s perspective is: let’s create as simple a regime as possible, as low of rates as possible, and by doing so, you’ll create better compliance,” Alley said.
Proposals have been introduced to the Streamlined Sales Tax Governing Board that Senator Kenley believes would clear up some of the confusion, including one that would only exempt candy that lists flour as a main ingredient. Those proposals, however, have fallen on deaf ears, Kenley said.
“I would like just a clear definition: tell me which is which. And, we keep working at that. But, it may be one of those sore areas where it’s hard to get to, particularly when you have new products that come out. The [Streamlined Sales Tax Governing Board] thinks they’ve been through this, and they’ve got it settled between business and industry,” he said.
For now, it appears checkout confusion continues, and consumers are the ones left paying the price.
Any consumer who believes they have been charged sales tax incorrectly has the right to fill out this form, and ask for a refund.
“The official response is: the consumer has the right to appeal for a refund from the state of Indiana,” Lackey, of the Grocery Association said. “But, I would be curious to see how often that really happens.”
I-Team 8 requested financial information that would show the number and amount of those refunds multiple times from the Department of Revenue, but has yet to receive any data.
“I think we should work to fix this on the front end so that doesn’t have to happen,” Lackey said. “It’s time to fix the problem.”