When One State’s Tax-Exempt Necessity Is Another’s High-Tax Discretionary Purchase

Sales taxes empower governments to maintain critical public services, but they can also make medical essentials too expensive for those who need them. Campaigns against taxing obligatory items are spreading across the United States, forcing states to rethink their revenue generation decisions.

Many governments historically lower or remove taxes on items they wish to make easier to purchase. Louisiana exempts most food purchased outside restaurants, for example, while Missouri exempts clay pigeons and targets used in skeet shooting. Neither state exempts diapers, however, which advocates say illustrates a glaring blind spot.

Diaper expenses quickly add up for families with infants or incontinent adults, and sales taxes only increase the burden. Some families pay more in taxes on diapers in a year than a month’s supply actually costs, Phillip Vander Klay, director of policy and government relations for the National Diaper Bank Network, noted in a recent discussion with PYMNTS.

“Depending on the state and local taxes, a sales tax can add between 2.5 percent to over 10 percent to the cost of diapers,” Vander Klay said. “The extra dollars could make a big difference in what families are able to afford and whether they try to stretch the diaper their child is wearing right now out longer, which puts [the child] at risk for infections.”

The cost of not buying enough diapers is steep, he added. Wearing soiled diapers for too long can cause health issues, and children are turned away from day cares if families cannot supply enough diapers, which means a lack of diapers can force parents to miss work. Incontinent adults frequently become homebound and isolated, avoiding socializing or even visiting doctors if they do not have enough clean diapers, Adam Greenberg, president of incontinence products retailer NorthShore Care Supply, said in a separate PYMNTS interview.

“If [incontinence] is a full-time, chronic condition, [diaper] expenses are hundreds of dollars a month in many cases,” he said. “Millions of people who need [such products] are [living] without any incontinence supplies at all.”

Diaper retailers used to help customers avoid tax costs by providing their products online to out-of-state consumers, but the practice only helped those with cash flow and internet access, and the 2018 Wayfair ruling has since stopped such reprieves. Laws enabling remote sales taxes mean retailers must now navigate each state’s policies, so they are no longer able to dodge compliance expenses and shield their consumers by lacking physical presences in states that tax these items.

This policy change has refocused legislative action advocates and retailers to address the impact of sales taxes on individuals struggling to afford necessities. Greenberg and Vander Klay recently gave PYMNTS the scoop on what this shifting landscape means for consumers and retailers.

Sales taxes’ price tags

Tax law changes can hit retailers hard if states do not carefully announce and implement them. NorthShore had enjoyed low tax obligations in Illinois, where diapers were considered medical devices and subject to reduced rates, but the company was caught off guard when the state’s Department of Revenue (DOR) changed its interpretation of the tax code to no longer include diapers.

“We didn’t find out about [the interpretation change] until we were under audit,” Greenberg recounted. “NorthShore had to pay back taxes for the full audit period as if all sales [we made] had been under that higher tax rate — even though we had no opportunity to go back to those consumers after the fact to recover that [tax cost].”

The 2018 Wayfair ruling added to the small business’s concerns, forcing it to comply with other states’ policies. Vander Klay noted that some states exempt diapers for adults and children but not infants, and others exempt all or none of these products. Greenberg added that certain jurisdictions require retailers to remit sales taxes even for very low levels of in-state economic activity — as few as 10 in-state orders could obligate companies to register, collect and remit state and local taxes. Other policies require retailers to register for corporate income and franchise taxes, adding further complexity.

NorthShore’s sales tax compliance costs wipe out approximately 1 percent of its sales revenue, Greenberg said. Consumers are not always aware of these regulations, and some have reached out to allege overbilling and question the higher prices.

Managing compliance

NorthShore has long turned to an outside tax software provider to help its accounting team with compliance. The company sought solutions that easily integrate with its internal enterprise resource planning (ERP) systems, its website, and the marketplaces through which it sells. Some state laws place tax collection and remittance responsibility on such platforms, rather than on third-party merchants, but NorthShore believes double-checking the marketplaces’ tax assessment work is worthwhile. Any errors could lead to the platform or seller being audited and charged for unpaid taxes, after all.

“Marketplaces use their own tax software, [but] we feel more comfortable — especially since there [are] new and evolving tax laws — to have our software double-checking.” Greenberg said. “If we find shortfall, we pay it to the state directly, and we work with the marketplace to try to correct any coding inaccuracies.”

Several states currently have no sales taxes, nine specifically exempt adult and infant diapers, two exempt only adult diapers and one state taxes all diapers at the lowest rate in its tax code, Vander Klay said. The latter state — Virginia — changed laws so that consumers no longer paid a 5.3 percent to 7 percent combined state and local sales tax on diapers but instead now only pay 2.5 percent. Legislators tend to be receptive to consumers’ diaper-affording struggles, but some are concerned about the revenue impacts of exemption and often choose to provide general financial support to those in greatest financial need instead. Some states provide low-income families diaper vouchers, directly distribute diapers to these households or provide financial support for such purchasing via work support programs.

Efforts to change legislation are ongoing, with many retailers and advocates hoping to see tax policy updates in states’ New Year’s resolutions.