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Arkansas Takes Aim at Soft Drinks and Candy with Changes to State Sales Tax Law

by Tyler R. Knapp - January 4, 2018

While the average American consumed slightly more than 5 gallons of soda in 2015, America's love affair with soft drinks may be on the outs.1  Soft drinks and sugary snacks face increased scrutiny by health-conscious citizens and state and local governments seeking to curb consumption of products that have been shown to increase obesity and related diseases, such as diabetes.

No, Arkansas hasn't joined the ranks of American cities that have imposed large sales taxes targeting soft drinks, but recent amendments to state sales and use tax law could change consumption habits in the state.

Act 141, which was made law by the Arkansas Legislature at the 91st General Assembly in 2017, amends the definition of food and food ingredients to exclude soft drinks and candy.  As a result of these exclusions, beginning January 1, 2018, soft drinks and candy are subject to the full sales tax rate (6.5%) rather than the reduced 1.5% sales tax rate for unprepared food.

Image of soft drink bottle on display in a grocery store

What products are impacted by Act 141?

The state defines "candy" as a preparation of sugar, honey, or other natural or artificial sweeteners with chocolate, fruits, nuts or other ingredients that do not contain flour or require refrigeration.  "Soft drinks" are defined as non-alcoholic beverages containing natural or artificial sweeteners, but that do not contain milk, soy milk or milk substitutes.  Beverages that contain 50% vegetable or fruit juice also remain exempt from the full sales tax rate.2 

The table below shows some examples of the applicable tax rate for different products. (Notice how some candies, such as Twix, still have a tax rate of 1.5 percent. It's because of the flour in it.)

Tax Rate Examples of Taxable Products
6.5%
  • Sodas like Coca-Cola or Pepsi
  • Bottled or canned water containing sweeteners
  • Sports drinks like Gatorade or Powerade
  • Energy drinks like Red Bull and Monster
  • Pedialyte
  • Candy bars not containing flour
  • Chocolate-coated potato chips
  • Peanut brittle
  • Snickers bar
1.5%
  • Apple cider
  • Bottled or canned water without sweeteners
  • Sparkling non-alcoholic cider or grape juice with more than 50% fruit juice
  • Ensure and Slim-Fast
  • Twix Bars
  • Kit Kat Bars
  • Barbecue Potato Chips
  • Ice Pops/Popsicles

In addition to changing how soft drinks and candy are taxed, Act 141 also imposes the 6.5% sales and use tax on digital products, including music, videos, books and digital codes (codes allowing users to obtain a digital product).

What are the expected impacts of Act 141?

If you insist on getting your soda fix, you could see a moderate increase in your monthly grocery bill. Before the change, purchase of a $5 12-pack of soda would incur about 8 cents of sales tax.  After the change, the same $5 of soda would incur 33 cents of sales tax--a 25-cent tax increase overall.

Store owners probably don't need to worry about losing revenue.  In other regions of the U.S., higher sales taxes on soft drinks have led to increases in sales of substitute products, like bottled water, that are not subject to the higher tax.3

The Department of Finance and Administration's Legislative Impact Statement estimates that state revenue from the 6.5% sales tax on candy and soft drinks will be $6.8 million in 2018 and $13.8 million in 2019.4  Revenue from the 6.5% sales tax on digital products will be an estimated $1.2 million in 2018 and $2.4 million in 2019.  These revenue increases will allow the state government to offset the cost of the military retirement income tax exemption and revenue transfers to Medicaid.

 

Do you have questions about this content? 

Please contact Tyler Knapp at 501-671-2241 or tknapp@uada.edu

 

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