States don’t like to re-write their tax laws, so many state legislatures have become good at writing their tax laws to reference specific federal laws and regulations. It is not necessarily federal tax laws that are used when designing a state tax. Here is a recent example from the state of Texas.
Texas does not charge sales tax on over-the-counter (OTC) drugs and medicines, but it is unrealistic to think that every time a new OTC drug is released, the Texas Legislature would get together and add that item to the list of tax exempt sales. Yet the state government does need some way to identify what is and is not a qualified OTC drug. The solution for Texas was to write the law and reference the US Food and Drug Administration (FDA) rules to define what is an OTC drug. FDA rules require anything that organization classifies as a drug or medicine to be labeled with a drug facts panel. So if you buy an item required to have a drug facts panel in Texas, you do not pay sales tax on that purchase. Likewise if your OTC medicine does not have a drug facts panel, it is taxable.
It is pretty sunny in Texas and so I imagine Texans buy a lot of sunscreen, but is sunscreen an OTC medicine? The FDA says yes, but in 2007 the agency delayed requiring a drug facts panel on sunscreen. Sunscreen manufacturers were encouraged to add a drug fact panel, but they were not required to put a panel on sunscreen. The result was sunscreen, an OTC medicine, was taxable in Texas, because the FDA did not “require” a drug fact panel on sunscreen.
The good news for all you sun gods and goddesses is that on June 18, 2012, the FDA rule requiring a drug facts panel on sunscreen became effective. Immediately sunscreen also became a tax-exempt purchase in Texas. I hope you did not stock up on sun protection for the entire summer on June 17th.