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11 Strangest Ways States Tax You (And Don’t)

David Muhlbaum, Senior Online Editor, Kiplinger.com

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Funny thing about our federal system of government: There's that complicated tax code that Uncle Sam keeps and the IRS enforces.

Then there's an even larger patchwork of taxation schemes crafted by 50 state legislatures, all coming up with new ways to extract coin from their citizenry (or create social policy through tax breaks). Some of these regimens are, well, quirky.

We've found 11 of the strangest ways states tax you and cut you breaks (plus a few creative tax dodges) from across the land.

SEE ALSO: Best States for Low Taxes: 50 States Ranked for Taxes, 2018

Texas: Taxing Deodorant, But Not Antiperspirant

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Sales taxes have long been the source of tax head-scratchers. States will often seek to effect a bit of social policy by making things that are luxury items or deemed "bad" taxable (furs, candy, soda) while exempting items seen as necessities, particularly if there's a health angle.

That leaves plenty of grey area: For example, in Texas, deodorant is subject to sales tax, but antiperspirant is exempt.

The distinction between the two products you use in your pits turns on this, according to Texas authorities: Antiperspirant has an FDA "Drug Facts" panel on it; deodorant doesn't.

Given the fierceness of the Lone Star sun, this seems like a wise accommodation. We didn't check every state, but notably, Minnesota, Illinois, New York, Pennsylvania and Rhode Island all consider antiperspirant taxable, drug facts label or not.

SEE ALSO: 10 Things You Must Know About Retiring to Florida

Illinois: How a Twix Isn't Actually Candy

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As with health-care items, the debate over how much (if any) tax should be applied to food can lead to oddities.

And again, there's an effort to do good" behind the laws: States often tax soda and candy at higher rates than other groceries. Definitional fights then spring up over ... chocolate covered fruit, for example.

The strangest outcome, though, may be in Illinois (and many other states), where a Snickers bar gets taxed at the state's 6.25% rate, but a Twix bar is taxed at only 1%. Why? A Twix contains flour, and according to the definition of candy from the Streamlined Sales and Use Tax Agreement, to which Illinois subscribes, that makes it not candy, but simply "food" and thus taxed at the same rate as a stalk of broccoli.

SEE ALSO: 14 Nice-Try Tax Breaks Rejected by the IRS

Alabama: Laid Off? The State's Got Your Back

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If you've been let go by a company and collect severance pay, Uncle Sam will take his usual bite of that. So will almost all states.

Alabama, though, will soften the blow of the axe by exempting the first $25,000 of severance pay from state, city, and county taxes. Among the limitations: You can't take advantage of the program if you were fired for cause, and it's your company that needs to take action to get the exemption approved by the state.

SEE ALSO: The Least Tax-Friendly States in the U.S.

Montana: Car Registration

Courtesy Doug DeMuro/Oversteer

You don't have to be a car nut to wonder why exotic cars often have Montana license plates. What's going on? Did Montana mint a bunch of new oil billionaires?

Actually, chances are good the owner of that Ferrari or Bugatti doesn't live in Montana. Heck, the car's tires may never have even touched Big Sky blacktop. What's happening here is an artful dodge meant to circumvent sales taxes and registration fees in high-tax states, such as New York and California, as well as the annual personal property taxes of some states, such as Virginia.

Imagine you're in the market for a $500,000 car. (Go on--it's a fantasy.) The sales tax alone on that car in New York would be about $41,000. Guess what Montana doesn't have? A sales tax.

There are other states that don't have a sales tax, but Montana doesn't have any sort of car inspection, either. That's given rise to a cottage industry of firms that will create a limited liability company that technically owns your car and registers it with the state of Montana.

Is this legal? Montana doesn't seem to mind the revenue, but there could be real implications for getting car insurance--plus, your home state may come looking for you. First-world problems, indeed.

SEE ALSO: How to Claim Florida as Your State of Residence to Save on Taxes

California: Taxing the Strong Stuff


When it comes to taxation, the rule is generally the stronger the booze, the higher the tax. California follows that curve, but at 100 proof, you'd better be ready to pay through the nose.

Distilled spirits are taxed at $3.30 a gallon if below 100 proof, or 50% alcohol. Go over that, as with some "barrel proof" whiskeys or Cruzan 151 rum, and the tax doubles to $6.60. Maryland also notes the 100 proof point, but it only adds 1.5 cents per proof, per gallon, to the relatively modest liquor tax of $1.50 per gallon, taking the levy on the Cruzan to $2.27 per gallon.

SEE ALSO: Claim These Tax Deductions Even If You Don't Itemize

Hawaii: Atoning for Exile

While most states have programs that provide some property breaks for the disabled, Hawaii's laws are notable for calling out a specific ailment: Hansen's Disease, better known as leprosy.

Why? For decades--in fact, until 1969--the state had a policy that banished thousands of sufferers to an isolated area on the island of Molokai; a handful still live there by choice, in what is now a national park. The disease is now curable.

Hawaii has sought to make amends for the policy, exempting the first $50,000 of real property's value from taxation for those with the disease, the same break as for residents who are blind, deaf or totally disabled. Compensation Hansen's patients receive for their ailment is also exempt from state income tax.

SEE ALSO: 18 Red Flags for IRS Auditors

West Virginia: Turning a Toll Road Into a Freeway (Almost)

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The West Virginia Turnpike has tolls. (They're low by East Coast standards: $12 for all 88 miles, if you pay cash.) But the Mountain State tries to ease even this modest bite--for its own residents, at least. If they sign up for an E-ZPass transponder, the toll rate drops by one-third. What's more (and this is where it becomes a tax issue), the state allows residents paying via E-ZPass to deduct the tolls they've paid for non-commercial travel.

The fine print: The tolls to be claimed must total at least $25 but no more than $1,200. But taxpayers can "look back" into previous tax years and claim any tolls paid in those years that exceeded the applicable limit.

SEE ALSO: 10 Cheapest Small Towns in America

New Jersey: $100K Mercedes = $400 More Tax


Want to own a plush or fuel-thirsty ride? That'll cost you extra in the Garden State.

New cars that cost $45,000 or more or have a combined EPA fuel-mileage average of 19 or below pay an additional 0.4% when registered, on top of New Jersey's 7% sales tax. The tax dates to 2006, but notably, the dollar value hasn't been adjusted since then, even as the average price of a new car has risen (it's almost $35,000 now).

SEE ALSO: 37 States That Don't Tax Social Security

New Mexico: Cutting Centenarians a Break


In the Land of Enchantment, making it to 100 years has a payoff beyond the chance that Al Roker will wish you a happy birthday on the "Today" show: You don't have to pay state income tax anymore.

If you've been physically present in the state for at least six months and a resident of the state on the last day of the year, and you're not someone's dependent, you're eligible. You'll still need to file, and there are some complications if you're married and your spouse doesn't qualify.

SEE ALSO: 15 Things Retirees Should Buy at Costco

South Carolina: A Break for (Educated) Matrimony


Eager to see married couples stay that way, South Carolina's legislators have encouraged those tying the knot to take a premarriage counseling course by offering a tax credit.

A couple who sits through (together, natch) a minimum of six hours with a licensed professional or active member of the clergy (or their designee, if "trained and skilled in premarital preparation") can take a $50 tax credit when filing jointly once married.

SEE ALSO: 10 Tax Breaks for the Middle Class

New Hampshire: Taxing the Dirt


All states tax property: New Hampshire taxes it if you move it around. Well, if you move an awful lot of it around.

The Granite State is, of course, a rocky place, with plenty of quarries and gravel pits. And so the state has an excavation tax at a rate of $.02 per cubic yard of earth excavated (if more than 1,000 cubic yards are moved). While this is primarily aimed at industrial extraction (most states levy severance taxes on coal, oil and other mineral wealth), New Hampshire specifically notes that the tax is due even if you're just giving away the dirt. So you can put up a "FREE FILL" sign and hope someone takes it, but you'll still owe the tax man.

SEE ALSO: The Most-Overlooked Tax Breaks and Deductions


Copyright 2019 The Kiplinger Washington Editors