Are herbal aloe beverages marketed with health claims taxable in Connecticut, or exempt as food products?

Plain-English summary

A company sells herbal aloe products — in ready-to-drink, liquid-concentrate, and powder-to-mix forms — through independent distributors. The labels make health claims (soothing the stomach, supporting nutrient absorption and intestinal health), but each product also carries a "Nutrition Facts" box showing it's essentially a low-calorie beverage. The company asked whether these products are exempt as food products for human consumption.

DRS ruled they are exempt. Connecticut exempts food products for human consumption under Conn. Gen. Stat. § 12-412(13). That exemption excludes "tonics or preparations in liquid, powdered, granular, tablet and capsule form" that are sold as dietary supplements or adjuncts — so the question was whether these aloe products are "dietary supplements" pulled out of the food exemption.

They are not. Connecticut defines dietary supplements (exempt under a different provision, § 12-412(120)) as products that, among other things, are labeled as a dietary supplement and carry a "Supplement Facts" box. These aloe products are marketed as a beverage and bear a "Nutrition Facts" box instead — the label the FDA requires for foods. Because they're sold and labeled as a food/beverage rather than a supplement, they stay inside the food-products exemption. DRS added a second point: aloe raised for edible products can be a vegetable, and vegetable products are within the § 12-412(13) definition of food.

Notably, both food products and dietary supplements are exempt in Connecticut — so the practical tax result (no tax) is the same either way — but DRS grounded the exemption in the food-products category based on how the products are marketed and labeled.

What this means for you

Beverage and "functional food" makers

If your product is sold and labeled as a food or beverage — carrying a Nutrition Facts box — Connecticut is likely to treat it as an exempt food product even if you tout health benefits. The label format matters: a Nutrition Facts box points toward "food," while a Supplement Facts box (plus dietary-supplement labeling) points toward the separate dietary-supplement category.

Supplement companies

Health claims alone don't make a product a "dietary supplement" for Connecticut tax purposes; the statutory definition looks to labeling and marketing. Fortunately, both categories are exempt — but the classification can still matter for how you document and defend the treatment, and for products near the food/supplement line.

Accountants and tax professionals

The analysis turns on the interplay of Conn. Gen. Stat. § 12-412(13) (food products, and its exclusion for items "sold as dietary supplements or adjuncts") and § 12-412(120) (dietary supplements, defined by reference to a "Supplement Facts" box and 21 C.F.R. § 101.36), read with Conn. Agencies Regs. § 12-426-29 and Special Notice 2015(1). The controlling facts were the beverage marketing and the Nutrition Facts labeling; the "aloe as a vegetable" point is a secondary, reinforcing ground.

Common questions

Q: Are these aloe products taxable in Connecticut?
A: No. DRS held they are exempt as food products for human consumption under Conn. Gen. Stat. § 12-412(13).

Q: They make health claims — doesn't that make them taxable supplements?
A: No. Health claims alone don't make a product a "dietary supplement." Because these are marketed as a beverage and labeled with a Nutrition Facts box (not a Supplement Facts box), they're food products, not dietary supplements.

Q: Would it matter if they were dietary supplements instead?
A: For the tax bottom line, not here — dietary supplements are also exempt in Connecticut, under a different provision (§ 12-412(120)). DRS classified them as food products based on the marketing and labeling.

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 product labeled and marketed differently could be classified differently.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-412(13) (exemption for food products for human consumption; excludes items sold as dietary supplements or adjuncts)
• Conn. Gen. Stat. § 12-412(120) (exemption for dietary supplements; defined by "Supplement Facts" labeling and 21 C.F.R. § 101.36)
• 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")

Administrative guidance:

• Special Notice 2015(1), Sales and Use Tax Exemption for Nonprescription Drugs and Medicines

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2016-3

Original ruling text

Ruling 2016-3, Sales and Use Taxes, Food and Beverages, Nonprescription Drugs and Medicines

FACTS:

The Company sells several herbal aloe products through a network of independent distributors in forms that are: ready-to-drink; liquid concentrate; or a powder to be added to water or other beverages (the “Products”).  The Products’ labels state that they soothe the stomach and support nutrient absorption and intestinal health. The Products each bear the “Nutrition Facts” box on their labels, which state that each Product has fifteen calories or less, zero fat, carbohydrates and protein, and no more than one percent of each day’s daily values of sodium and potassium.

ISSUE:

Are sales of the Products exempt from sales and use taxes as sales of food products for human consumption under Conn. Gen. Stat. § 12-412(13)?

RULING:

The sales of the Products are exempt from sales and use taxes as sales of food products for human consumption under Conn. Gen. Stat. § 12-412(13).

DISCUSSION:

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

[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.

The definition of “food products for human consumption” is further elaborated upon by Conn. Agencies Regs. § 12-426-29 to mean all products normally consumed by human beings for nutritive value or taste satisfaction. The definition of “food products for human consumption” excludes, among other items, “tonics or preparations in liquid, powdered, granular, tablet and capsule form” that are “sold as dietary supplements or adjuncts.”

The issue presented is whether the Products, which are marketed as having certain health benefits, are thus excluded from the definition of “food products for human consumption.” Sales of dietary supplements are exempt under a different statutory provision. Conn. Gen. Stat. § 12-412(120).  For purposes of Conn. Gen. Stat. § 12-412(120), dietary supplements are defined as products, other than cigarettes or tobacco products, intended to supplement the diet of a human or animal that meet the following three requirements:

1. Contain one or more of the following dietary ingredients:

a.  A vitamin;

b.  A mineral;

c.  An herb or other botanical;

d. An amino acid;

e.  A dietary substance for use to supplement the diet by increasing the total dietary intake; or

f.  A concentrate, metabolite, constituent, extract, or combination of any ingredient described in above.

2.      Are intended for ingestion in tablet, capsule, powder, softgel, gelcap, or liquid form, or if not intended for ingestion in such a form, are not marketed as conventional food and are not marketed for use as a sole item of a meal or of the diet; and

3.      Are required to be labeled as a dietary supplement, identifiable by the “Supplement Facts” box found on the label and as required pursuant to Title 21 of the Code of Federal Regulations § 101.36.

Special Notice 2015(1) , Sales and Use Tax Exemption for Nonprescription Drugs and Medicines .

Although the labels of the Products include certain health claims, the Products do not qualify as “dietary supplements” because they are marketed as a beverage and are not labeled with the “Supplement Facts” box.  Instead the Products all bear the “Nutrition Facts” box. The United States Food and Drug Administration (“FDA”) is responsible for assuring that foods sold in the United States are safe, wholesome and properly labeled, pursuant to federal laws that require most foods to bear a “Nutrition Facts” box. [1]

The Products are made from aloe that has been converted into a ready-to-drink beverage, or a liquid or powdered concentrate for use as a beverage when added to water or other liquid. The Company markets the Products for use as a beverage, which is consistent with the labels using a “Nutrition Facts” box. These facts indicate that the Products are properly considered food products for human consumption and not dietary supplements.

In addition, vegetable products are included in the definition of food products for human consumption that qualify for exemption under Conn. Gen. Stat. § 12-412(13).  Aloe, when the plant is raised for edible products, can be considered a vegetable. [2]

For these reasons, the Products are considered food products for human consumption, and are not considered dietary supplements for purposes of the exclusion from food products set forth in Conn. Gen. Stat. § 12-412(13).  Therefore, sales of the Products are exempt from sales and use taxes as sales of food products for human consumption.

LEGAL DIVISION
September 15, 2016

[1] U.S. Food and Drug Administration, Guidance for Industry: A Food Labeling Guide , www.fda.gov/Food/

GuidanceRegulation/GuidanceDocumentsRegulatoryInformation/LabelingNutrition/ucm2006828.htm (last visited September 9, 2016).

[2] “Vegetable.” Def. 1.a. Webster's II: New College Dictionary . Boston: Houghton Mifflin, 1995. Print.