One of the oft-cited criticisms of the NC Senate’s tax reform plan is that it would extend the state sales tax to groceries. Observers may be interested, however, in learning more about North Carolina’s history with taxing food purchases.
North Carolina first enacted a sales tax in 1933, it was promised to be “temporary.” The rate was 3%. Food for consumption was exempted.
In 1961, the food exemption was repealed, subjecting groceries to the 3% state sales tax.
In 1971, the state authorized an additional 1 cent local sales tax for counties, adding to the total sales tax paid by consumers, including groceries.
The state authorized an additional one-half cent local sales tax in both 1983 and 1985, bringing total local sales taxes to 2%, and combined state/local sales tax to be paid by consumers to 5%, including groceries.
In 1985, North Carolina passed a law exempting the purchase of food with food stamps from the sales tax, this exemption would also apply to the local sales tax on groceries.
In 1991, North Carolina increased the state sales tax rate from 3% to 4%.
In 1996, the state passed a law to reduce the state sales tax rate on food from the standard rate of 4% down to 3%, effective Jan. 1, 1997.
The following year, state lawmakers passed another law lowering the state sales tax on food to 2%.
In the next year (1999), legislators eliminated the remaining state sales tax on food.
In sum, North Carolina has applied a sales tax on food since 1961.
- From 1961 to 1971, the rate was 3%, and it crept up to 5% by 1985. Remained at 5% until 1991.
- The rate topped out at a combined state/local rate of 6% from 1991 to 1996.
- From 1996 to 1999, the state sales tax on food was phased out.
- From 1999, the state no longer applied the state sales tax rate on food; however the local rate of 2% remained.
- Food purchased with food stamps was liable for the sales tax up until 1985.
Currently, food consumers pay the local 2% sales tax on most groceries, and the full 6.75% combined state/local rate on certain items including candy, soda, “prepared foods”* and dietary supplements. Food purchased with food stamps is exempt from both the state and local sales tax. North Carolina has 1.7 million food stamp recipients.
*Prepared food is defined as follows: Food that meets at least one of the conditions of this subdivision. Prepared food does not include food the retailer sliced, repackaged, or pasteurized but did not heat, mix, or sell with eating utensils.
a. It is sold in a heated state or it is heated by the retailer.
b. It consists of two or more foods mixed or combined by the retailer for sale as a single item. This sub‑subdivision does not include foods containing raw eggs, fish, meat, or poultry that require cooking by the consumer as recommended by the Food and Drug Administration to prevent food borne illnesses.
c. It is sold with eating utensils provided by the retailer, such as plates, knives, forks, spoons, glasses, cups, napkins, and straws.