Across the country, there are big differences in how states tax sales of vitamins and dietary supplements.
This is because there are many factors at play, including whether the supplement is considered a food or a drug, and whether it requires a prescription or is sold over the counter. What’s more, different states have different rules about how taxes apply to these categories.
This complexity creates challenges for companies that sell vitamins and dietary supplements — because a failure to collect and remit sales tax as required could lead to audits and penalties.
This article will help you understand the rules, so you can make sure you're fulfilling your obligations.
Why e-commerce sellers and health retailers must understand tax rules for vitamins and supplements
Americans buy more than $35.7 billion worth of vitamins and supplements every year, and the market is growing. That's a lot of sales — and a lot of potential sales tax to collect.
Across the U.S., all but five states have a statewide sales tax, and even within the five that don't, some local jurisdictions do impose sales tax.
Businesses must collect taxes on sales of taxable products if they have economic or physical nexus in an area where they make a sale.
- You establish economic nexus in a state if you do a certain volume of sales there, such as selling more than $100,000 worth of products or completing at least 200 transactions in a year (thresholds vary from state to state).
- Having physical nexus in a state means you have some type of physical presence there, such as a warehouse, a shop, or employees.
If you have economic or physical nexus in a state and you sell taxable goods there, it is your obligation to register to collect sales tax, file tax forms with the state, collect sales tax, and remit payments to the local tax authority.
If you don't collect sales tax when you're required to, you could be audited and face fines and penalties.
So if you sell vitamins or supplements online and do enough business to meet nexus thresholds, you might need to know the tax rules for vitamins and supplements in dozens of different states.
How are vitamins and dietary supplements taxed?
From state to state, there are many variations in how vitamins and dietary supplements are classified and, therefore, taxed.
In most cases, classifications are based on the product’s label and/or ingredients.
For example:
- In many states, vitamins and dietary supplements are classified as food, and food products usually aren't taxable. New York is one of those states, with the New York Department of Revenue stating that "food and food products sold by food stores are not taxable. This includes products that are used as dietary foods and health supplements."
- In some states, dietary supplements have their own category. This is the category that is treated the most inconsistently, with some states taxing supplements and some making supplements exempt. For example, while the Washington State Department of Revenue makes clear that "sales of dietary supplements are subject to retail sales tax," Vermont does not tax supplements.
- Dietary supplements may be classified as medicines or tonics. This is the case, for example, in Massachusetts. Some states tax medicines, some don't, and some base taxability on whether the medicine requires a prescription or not.
- Dietary supplements may be classified as general personal property. In Arizona, for example, "dietary supplements such as vitamins or protein supplements" are "items that are currently not considered to be food for human consumption." There is no special separate classification for them, beyond just general retail items.
In states that classify vitamins and supplements as nontaxable, there are usually certain products that are excluded from this category. In New York, for example, this includes carbonated beverages, sports drinks, and energy drinks.
Labeling matters
In many states, the label on a product impacts how it is classified:
- Items with a nutritional label are usually considered food. For example, the New York Department of Revenue says, "The label of a dietary food must have a statement describing the product's nutritional and dietary properties."
- Items that the FDA requires to have a Supplement Facts box are usually classified as supplements. In this case, the item may or may not be taxed depending on whether supplements are exempt in the state
- Items with a Drug Facts box are considered drugs. Drugs or medicines are exempt from sales tax in many states; however, in some locations, these items are nontaxable only if they require a prescription.
Some items have both a Nutrition Facts label and a Supplement Facts box; when this is the case, they are often treated food. For example, in Washington State, if an item has both labels, it's considered a nontaxable food.
The ingredient list matters
The ingredient list can also make a difference. For example, in some states, protein bars contain ingredients that result in them being classified as candy, which makes them taxable.
New Jersey is one state where certain sweetened bars are taxable as candy if they "contain a preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts, or other ingredients or flavorings in the form of bars, drops, or pieces."
How can you determine whether you need to charge tax?
Whether you are an e-commerce seller or have a local business, here's how to determine whether you must charge tax on a vitamin or dietary supplement you sell.
- Determine whether you have economic or physical nexus in a state: Economic nexus is based on transaction volume or revenue, while physical nexus is based on physical presence. If you do not have nexus, you don't have to charge sales tax. If you do, move on to the next step.
- Find out how the item you are selling is classified in the states where you have nexus: If it has a nutritional label, it’s probably a food. If it has a Supplement Facts box, it’s likely a supplement. If it has a Drug Facts box, it’s likely a drug. If the state doesn't have a separate supplements category and your product doesn't meet the state’s definition of a food or drug, the state likely treats the product as general personal property.
- Determine how that class of items is taxed. Foods are almost never taxable. Supplements may be taxable. Medications may be taxable, but those that require a prescription are less likely to be taxable. Items that are classified as general personal property are usually taxable. Candy is often taxable.
The table below shows where vitamins and supplements are taxed differently in locations throughout the U.S. Remember, you must first determine how a state classifies the item and then find out whether that type of item is taxable or not. And you must do this in every state where you have economic or physical nexus.
Make sure to comply with your sales tax obligations
With so many steps involved in determining whether your vitamins and dietary supplements are taxable, it's no wonder so many sellers consider compliance with sales tax rules to be a huge headache. The good news is, there are solutions.
Numeral makes sales tax compliance effortless by automating the process of determining whether items are taxable and calculating the correct sales tax for every transaction based on the buyer's location and the products being purchased. Numeral also tracks nexus for you, registers you with jurisdictions where you must file, and even submits your tax forms.
