Does a Connecticut store have to charge sales tax on bottled kombucha, or is it exempt as a food product?

Plain-English summary

A supermarket sells bottled kombucha — a naturally carbonated, fermented tea beverage often marketed as a "functional food." The store asked whether kombucha is exempt as a food product for human consumption, or taxable as a carbonated beverage.

DRS ruled kombucha is taxable. Connecticut exempts sales of food products for human consumption, but both the statute (Conn. Gen. Stat. § 12-412(13)) and the Department's regulation carve carbonated beverages out of that exemption. The regulation is explicit that "carbonated beverages, including carbonated water" are not exempt food products. Kombucha is carbonated, so it falls in the excluded category.

The store's likely argument — that kombucha's fizz is natural (a byproduct of fermentation) rather than artificially injected — didn't help. DRS pointed out that the carbonated-beverage exclusion does not distinguish between naturally occurring and artificially added carbonation. Once a beverage is carbonated, the source of the bubbles is irrelevant, and the sale is taxable.

What this means for you

Grocery and convenience retailers

Treat kombucha like soda for sales-tax purposes: it's a carbonated beverage, so it's taxable even though most other grocery foods are exempt. The same logic reaches any carbonated drink — flavored sparkling waters, kombucha, and similar "better-for-you" fizzy beverages are outside the food exemption. Make sure your point-of-sale system flags carbonated drinks as taxable regardless of how they're marketed.

Beverage makers and distributors

Marketing a product as a "functional food," "health drink," or "natural" does not change the tax analysis if the product is carbonated. If carbonation is part of your product — even naturally, through fermentation — expect Connecticut retailers to charge sales tax on it.

Accountants and tax professionals

The exemption in Conn. Gen. Stat. § 12-412(13) is defined against Conn. Agencies Regs. § 12-426-29, which lists carbonated beverages (including carbonated water) among products that are "not food products and are subject to tax." The ruling's holding — that the exclusion applies regardless of whether carbonation is natural or artificial — is the useful, transferable point.

Common questions

Q: Is kombucha taxable in Connecticut?
A: Yes. Kombucha is a carbonated beverage, which is specifically excluded from the food-products exemption, so its sale is subject to Connecticut sales and use tax.

Q: Kombucha is fermented, so its carbonation is natural — does that make it exempt?
A: No. DRS held that the carbonated-beverage exclusion does not distinguish between naturally occurring and artificial carbonation. Either way, a carbonated beverage is taxable.

Q: Aren't groceries exempt in Connecticut?
A: Food products for human consumption are generally exempt, but the statute and regulation specifically pull carbonated beverages (and certain other items) back out of the exemption. Kombucha is in that carved-out group.

Q: Does this ruling apply to my product?
A: Not automatically. A Connecticut Ruling binds DRS only for the taxpayer and facts it addressed. A non-carbonated beverage, or a different product, could be treated differently.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-412(13) (exemption for food products for human consumption; defines "food products" and excludes soft drinks/sodas)
• Conn. Gen. Stat. §§ 12-407 and 12-408 (imposition of sales and use taxes on retail sales)

Regulations:

• Conn. Agencies Regs. § 12-426-29 (defines "food products for human consumption"; carbonated beverages, including carbonated water, are not exempt food products)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2015-4

Original ruling text

Ruling 2015-4, Sales and Use Taxes, Food Products, Kombucha

FACTS:

A supermarket sells bottles of kombucha beverages to its customers.  Kombucha is a naturally carbonated tea beverage that is marketed as a “functional food.” [1]   It is a sweetened tea beverage that requires fermentation, which creates a natural effervescence (carbonation) and a trace amount of alcohol.

ISSUE:

Is the sale of kombucha exempt because it is a food product for human consumption described in Conn. Gen. Stat. § 12-412(13), or is it a carbonated beverage excluded from the exemption?

RULING:

Sales of kombucha are subject to sales and use taxes because kombucha is a carbonated beverage that is excluded from the exemption for food products for human consumption set forth in Conn. Gen. Stat. § 12-412(13).

DISCUSSION:

Retail sales of tangible personal property in the State of Connecticut are subject to sales and use taxes, unless specifically exempt. Conn. Gen. Stat. §§ 12-407 and 12-408.  Sales of food products for human consumption are exempt from sales and use taxes under Conn. Gen. Stat. § 12-412(13), which defines “food products” to include:

[Cereals] and cereal products, milk and milk products, oleomargarine, meat and meat products, fish and fish products, eggs and egg products, vegetables and vegetable products, fruit and fruit products, spices and salt, sugar and sugar products other than candy and confectionery; coffee and coffee substitutes, tea, cocoa and cocoa products other than candy and confectionery. “Food products” do not include spirituous, malt or vinous liquors, soft drinks, sodas or beverages such as are ordinarily dispensed at bars and soda fountains, or in connection therewith, medicines except by prescription, tonics and preparations in liquid, powdered, granular, tablet, capsule, lozenge and pill form sold as dietary supplements or adjuncts .

The definition of “food products for human consumption” is further defined in Conn. Agencies Regs. § 12-426-29 to mean:

[All] products normally consumed by human beings for nutritive value or taste satisfaction, except that the following types of products are not food products and are subject to tax:

(3) carbonated beverages, including carbonated water.

Kombucha is a carbonated beverage, and carbonated beverages are specifically excluded from the exemption set forth in Conn. Gen. Stat. § 12-412(13).  The exclusion from the exemption for carbonated beverages does not distinguish between beverages in which carbonation is naturally occurring and beverages in which carbonation is artificial.  As a result, kombucha is not exempt as a food product for human consumption, and, therefore, sales of kombucha are subject to sales and use taxes.

OFFICE OF COUNSEL

September 16, 2015

[1] “Functional foods” -  are “designed to have physiological benefits and/or reduce the risk of chronic disease beyond basic nutritional functions, and may be similar in appearance to conventional food and consumed as part of a regular diet.”  United States Dept. of Agriculture, Agricultural Research Service, Functional Foods Research in ARS , www.ars.usda.gov/SP2UserFiles/Place/00000000/NPS/FinalFunctionalFoodsPDFReadVersion6-25-10.pdf (last visited 8/12/15)