• Author
  • Recommend
  • Tags
  • Connect
  • Download


To tax or not to tax: when is a cookie a ‘cookie?’

How could a carrot get you a free theater performance? We report on the consequences of consumption tax determination.

When it comes to consumption taxes such as value added tax (VAT) and goods and services tax (GST), the difference between an essential everyday item and one deemed a luxury reflects a society’s values as well as the quirkiness of human logic.

Tax administrations must deal with such philosophical questions on a regular basis, determining tax status and tax rates for products that don’t fit neatly into one clear category. While tax bureaucrats try their best, their conclusions can lead to inconsistency and debate.

"We are looking at whether the guidelines still reflect the very rapidly moving nature of salads."

Australian tax official

The more distinctions, the harder it is for taxpayers and tax administrations to get it right. Reviewing the correct application of distinctions can be costly and result in disputes that can drag on for years. Errors can lead to consumers being overcharged or tax revenues being under-collected. Different tax treatments between similar products can distort competition (for example, if one snack is taxed at 15% while a similar product is taxed at zero, the maker of the taxed product has to charge more and risk losing customers or cut its margin and risk not making a profit). 

When is a cake not a cake?

Perhaps the greatest inconsistency is in the area of food — that most basic of human needs. But “basic” depends on where you are, what you’re eating and how you’re eating it. 

First there’s the “where” to consider. Cooking oil, for example, has long been a target of taxation. It was taxed by the pharaohs of ancient Egypt, and it’s still taxed today — depending on where you live. In July 2017, Malawi eliminated its 16.5% tax on edible oils while in 2015 Greece significantly raised its VAT rate (now 24%) on all cooking oils except for olive oil, a staple of Greek cuisine, which stayed at 13%.¹

Then there’s the question of “what” you’re eating. Defining a taxable food can be tricky. In the UK, cakes are exempt from VAT as are plain biscuits (cookies), but add a layer of chocolate to those biscuits and they’re subject to VAT. In 1991, a UK court considered the case of Jaffa Cake, a popular treat with a chocolate coating over a layer of sponge and jam.² The business successfully argued that the sponge layer made it more like a cake, and that the product became hard like a cake when it was stale rather than soft like a biscuit. 

If a cake is not always a cake, neither is a candy bar always a candy bar. In the US states of Illinois and Washington, chocolate bars are exempt if they contain flour.³ 

Finally, there’s the “how” to contemplate; the place you consume your food can also affect its taxability. For example, in Switzerland, the VAT rate for food served in a restaurant is 7.7%, versus 2.5% if sold over the counter for takeaway.⁴ 

Even the way the food is prepared can make a difference. In New York, a loaf of bread sliced in a bakery is exempt, but a sliced bagel is taxable. Buy it whole and it’s exempt.5 

Changes in food trends can lead to new challenges. Take Australia’s 2017 review of the taxation of fresh foods under the country’s GST. During parliamentary testimony, an Australian tax official explained that “We are looking at whether the guidelines still reflect the very rapidly moving nature of salads … because the market has shifted quite a lot.”6

He noted that “some people may define a salad as a bowl of lettuce; some may define it as a barbecue chicken shredded up with three grains of rice on it. I am not trying to be facetious, either; there are a range of products that are very, very different that are marketed as salads.” Officials subsequently decided to drop the review and retain the current tax status quo for salads.

Tax the embellishments

Jurisdictions may wrangle with how to tax basics like food, but they are more consistent with the idea of taxing luxuries and “sin,” though the definition of both is in the eye of the beholder. 

Consider this editorial in an 1893 London political journal:7 “New fashions in dress — and more especially when those are adopted from the Continent — should be heavily taxed … Tax false hair, paint, powder, and all other such fictitious embellishments.”

We may have moved away from such fashions, but the idea of taxing embellishments is still alive and well today, though sometimes without much consistency. Consider tattoos. In the US, some states exempt tattoos from sales tax as permanent makeup while others tax them as a beauty service. In Denmark, tattooing is generally subject to VAT, but may be exempt if enough freehand artistry and creativity is involved.

Sometimes items taxed as a luxury may not seem fair to consumers. According to India’s new GST system, which came into effect in July 2017, movie tickets are subject to the same top rate as casinos and top hotels (28%). This makes going to beloved Bollywood movies less affordable for the middle classes than it might otherwise be. 

But taxpayers can get creative. When the Spanish VAT on theater admissions was raised to 21% in 2012, one Spanish theater owner found an original solution to maintain live theater ticket sales. Since vegetables are subject to a much lower rate, the theater began selling carrots instead of tickets; with a carrot purchase came free admission to a performance. The move led Spanish media to dub it the “Carrot Rebellion.”9

A sweet tooth rebellion could be next. While many jurisdictions have long taxed “sin” items such as alcohol, tobacco and gambling, the modern definition of sin increasingly includes items such as junk food, sugary drinks and candy. Many governments are introducing sugar taxes on top of VAT/GST to try to address rising obesity rates by encouraging healthier lifestyles. But here too the lines are blurred. Some jurisdictions have chosen to levy taxes on sugary drinks but not certain fruit juice blends, candy or cakes. 

The answer to why sugary drinks — but not certain treats — are bad for one’s health and therefore subject to higher taxes is among the philosophical riddles that tax administrations and consumers will be contemplating in the years to come.


1 “Massive VAT hike sends prices soaring for Greeks and tourists as banks finally reopen after three-week closure,” Daily Mail, July 20, 2015; 2 “Cake or biscuit? Why Jaffa Cakes excite philosophers,” BBC, February 20, 2017; 3 Illinois Department of Revenue; “Some candy bars aren’t ‘candy,’” Seattle Times, May 31, 2010; 4 “Zum Mitnehmen oder zum Hieressen?,” Tages-Anzeiger, August 28, 2014; 5 “Cutting that bagel will cost you: Weird state tax laws,” USA Today, March 31, 2013; 6 Parliament of Australia; 7 Truth, Volume 33, 1893; 8 Danish Customs and Tax Administration; 9 “Spanish Ire, Symbolized by a Carrot,” New York Times, September 26, 2012

How we can help: Indirect Tax Services

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

Font size

Tax topics >

No filter criteria selected.

Industries >

No filter criteria selected.

Countries >

No filter criteria selected.

 < Close


 < Close


 < Close

Tax topics

 < Close


 < Close


 < Close

0 articles have been saved