Unexpected Tax Loopholes You Wish You Knew Sooner

From digital downloads to prepared foods, states define taxable differently; your location determines whether you pay a premium or get a tax break.

Key Takeaways

• In some states, candy with flour is exempt from sales tax. 
• Prepared foods, such as a cut bagel or scooped ice cream, will cost more in some states. 
• States with no income tax could mean higher-than-average sales or property taxes. 

Tax codes can get weird.

Depending on where you live, everyday choices — even how you order lunch — can change your tax bill. Some rules save you money; others add unexpected costs. Carving a pumpkin in New Jersey? That’ll cost you extra. 

Some of these quirks still exist. Others sound too strange to be true (but were). Either way, they show just how quickly the tax system can be.

10 unexpected tax loopholes you wish you knew sooner

Pennsylvania: no tax on clothing

In Pennsylvania, most clothing is tax exempt — with a few oddly specific exceptions. But, PA is unique in that it has a few oddly specific exceptions. Items that are taxable include: 

• Tuxedos and other evening wear
• Sporting goods, such as cleats 
• Clothing with real or synthetic fur when the fur is worth more than three times the value of the rest of the garment 

So, if you were hoping to save sales tax by buying a tux or fur coat in Pennsylvania, you’re probably out of luck.

Minnesota: no sales tax on baby diapers

In 1981, Minnesota became the first state to eliminate sales on baby diapers. Since then, 22 other states have followed suit. 

This exemption is only available for baby diapers though. In Minnesota, adult diapers are still taxable. Kids get a break. Adults — not so much.

New Jersey: no tax on edible pumpkins

Buying a pumpkin for baking? You won’t pay state sales tax in New Jersey. 

However, if the pumpkin is intended for decorative use, like a jack-o-lantern or gourd display, it’s taxable. 

New York: a sliced bagel comes at a premium

In New York City, an unsliced bagel with no toppings is tax free. Slice it, toast it, or add toppings and sales tax enters the chat. 

This bagel tax dates back to 1934, when it was introduced to help fund unemployment relief. It still applies today, taxing other prepared food like sandwiches.

Colorado: no sales tax on candy with flour

Colorado changes a ‘sin tax’ on sugary treats like candy, but this tax comes with a loophole.

If the candy contains flour, it’s exempt. That means a Snickers (no flour) is taxed, while a Twix (with flour) is tax-free. 

Texas: belt buckle tax

Shopping for a statement belt buckle to go with your cowboy boots? In Texas, you’ll pay extra. 

Texas is the only state with a belt buckle tax. Belt buckles are considered accessories, not necessities, and are subject to the state’s 6.25% sales tax — even during tax-free holidays.

Wisconsin: scooped ice cream is taxable

If you pick up ice cream at a grocery store in Wisconsin, it’s tax-free. 

Order a scoop or soft-serve from a shop, though, and it’s taxable because it’s classified as prepared food.

Other U.S. tax oddities 

It “pays” to live in Alaska 

The Alaska Permanent Fund Dividend (PFD) is an annual payment to eligible state residents.

Alaska sets aside a portion of its oil and gas revenue in the PFD fund. Each year part of the fund’s earnings is paid out to residents and is not subject to state income tax — federal income, however, still wants their share.

Digital download taxes

States define digital downloads differently. Because you can’t physically hold, touch, or possess them, these purchases often fall into a tax gray area. Renting a movie online, for example, isn’t always taxed the same way as renting one from the store.

In some states, you’ll pay sales tax on purchases like:

• Streaming services
• Digital rentals
• Ebooks

In others, these items are tax-free. Generally, states that belong to the Streamlined Sales and Use Tax Agreement (SSUTA) tax digital items, while states outside the agreement may not.

Nine states are income tax-free

In nine U.S. states, you don’t pay a state income tax. These include:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington 
• Wyoming

While paying no state income tax is a major perk, these states often have higher-than-average sales, property, or excise tax rates.  

Learn more about loopholes with TurboTax

Navigate loopholes — the surprising and the nuanced — with TurboTax. TurboTax Experts can help you understand how these quirks apply to your situation — and make sure you don’t miss a potential tax break.