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Originally published October 6, 2010 at 10:00 PM | Page modified October 7, 2010 at 10:18 AM

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The Truth Needle | The Seattle Times has launched a new feature to help voters discern fact from fiction between now and the November election. The Truth Needle will examine the claims of candidates and campaigns in the top races and decide whether they are true or false.

The Truth Needle | Mostly false: 'Grocery items' ad misleading

Mostly false: A TV ad supporting Initiative 1107 says new taxes are being levied on "grocery items," including foods made of meat, fruits and vegetables. It also says the taxes target products made by Washington companies, but not out-of-state competitors.

Watch the ad from Stop the Food and Beverage Tax Hikes

The claim:

A TV ad supporting Initiative 1107 says taxes are being levied on "grocery items," including foods made of meat, fruits and vegetables. It also says the taxes target products made by Washington companies, but not out-of-state competitors.

What we found:

Initiative 1107 would repeal taxes the Legislature approved this year on candy, gum, soda pop, bottled water and certain processed foods.

The ad features a man dressed like a grocer standing in a supermarket. "The new tax scheme the politicians in Olympia put on grocery items makes no sense," he says.

"They tax thousands of food and beverage products, not just candy and soda," he continues. "They put new taxes on bottled water and other common beverages. On foods made with meat, fruits and vegetables. Even on some organic-food products. ...

"Even worse, they put new taxes on food products made by Washington companies, like locally made chili and pancake mix, but not on similar products made by their competitors in other states or countries."

The ad is being run by Stop the Food and Beverage Tax Hikes, which is sponsoring I-1107. The initiative campaign is funded almost entirely by the American Beverage Association.

The ad leaves the impression that the new taxes cover a wide swath of food products you might buy at the grocery store.

Certainly shoppers are now paying taxes on a long list of candy, gum, bottled waters and carbonated drinks. The state's list of candy and gum that are taxed runs to the thousands of products alone.

But the taxes affect only a narrow range of products most people would consider food or groceries, so we label this ad mostly false.

The Legislature approved the taxes as part of a nearly $800 million tax increase to help plug a $2.8 billion hole in the state budget.

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The taxes include a temporary tax of 2 cents on each 12-ounce can or bottle of carbonated beverages, a temporary sales tax reinstated on bottled water, a new sales tax on candy and gum and an increase in the business-and-occupation tax on certain processed foods.

The vast majority of the money raised by these new taxes — about 96 percent — comes from the levies on soda, water, candy and gum. The ad accurately says taxes on those products have gone up.

The claim about new taxes on foods made with meat, fruits and vegetables, and the charge of taxing only in-state companies, concerns the business-and-occupation (B&O) portion of the tax increase.

This is a little complicated, so please bear with us.

In 1967, lawmakers approved a lower B&O tax rate for meatpackers, who market perishable meats. Somewhere along the line, other companies that use meat in their products — such as canned chili — sought to claim the same lower tax rate, and in 2005 the state Supreme Court ruled that they could, based on the language of the existing law.

The tax package approved by the Legislature this year clarified that the lower B&O tax rate doesn't apply to companies that use meat in their processed foods. Those companies now have to pay the same higher B&O tax rate as other food manufacturers. The state says that change will bring in an additional $18.8 million over five years.

The Legislature also clarified — just in case — that an existing lower B&O tax rate for providers of fresh fruits and vegetables doesn't apply to companies that make prepared foods containing those products, such as pancake mix with berries.

But prepared-food manufacturers have never tried to use that lower rate, said Mike Gowrylow, with the state Department of Revenue. Those companies are paying the same rate as they have paid all along, he said.

Now let's look at the claim that in-state companies are being taxed while out-of-state competitors aren't.

Under the Commerce Clause of the U.S. Constitution, the state can't impose B&O taxes on an out-of-state business, such as a maker of canned chili, that has no presence in Washington. So in-state processed food producers must pay the tax, while their out-of-state competitors don't.

But the same could be said for any Washington state company that pays the B&O tax. And, as Gowrylow points out, the out-of-state companies are subject to whatever taxes their own states assess.

Also, products from out-of-state businesses, like those from in-state businesses, are subject to wholesaling and retailing B&O taxes when they are sold in Washington, he said.

Finally, the ad also says that "under the politicians' absurd definition of candy" products like certain "organic nutrition bars" are taxed, while some candy bars are exempt.

The candy tax exempts products that include flour. This is not a definition devised by Washington state, but by the Streamlined Sales Tax Governing Board, an organization formed by states to, among other things, bring some uniformity to tax rules. The governing board includes elected leaders — politicians, if you will — from many states.

The board defines candy as: "Any preparation of sugar, honey or other natural or artificial sweeteners in combination with chocolate, fruits, nuts or other ingredients or flavorings in the forms of bars, drops, or pieces. The term candy does not include any preparation containing flour as an ingredient."

As a result, a Twix bar, which contains flour, isn't taxed while some types of nutrition bars that contain no flour may be taxed. Is that absurd? It's a head-scratcher, at the least.

This story includes material from The Seattle Times archives.

Reported and written by staff reporter Susan Gilmore.

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