I hardly ever eat doughnuts, but an overwhelming urge to indulge envelops me whenever I see one. The feeling usually passes before I succumb, but if someone were to place a box of fresh doughnuts within my reach, I’m pretty sure I’d have to eat one. Or two.
How long would a freshly baked doughnut remain unmolested in your presence? Answer carefully. Your response could impact the tax charged on the sale.
Food in Missouri
Some food sales are subject to a reduced rate of state tax in Missouri — 1.225% instead of 4.225%. As explained by the Missouri Department of Revenue, the lower rate applies to all food items that may be purchased with Food Stamps. These include fruits and vegetables, breads and cereals, dairy products, and fish, meats and poultry. It does not include “food that will be eaten in the store.”
In 1999, the Missouri General Assembly further clarified which foods do and do not qualify for the reduced rate. Other than for vending machine sales, the reduced rate does not apply to “food or drink sold by any establishment where the gross receipts derived from the sale of food prepared by such establishment for immediate consumption constitutes more than 80% of the total gross receipts of that establishment, regardless of whether such prepared food is consumed on the premises of that establishment, including, but not limited to, sales of food by any restaurant, fast food restaurant, delicatessen, eating house or café” (Missouri Revised Statutes Section 144.014.1).
Falling into the doughnut hole
Back in 2006, a doughnut franchise in Missouri requested a sales tax refund from the Missouri Department of Revenue, arguing that its doughnuts should be subject to the reduced state rate applicable to “food or food products for home consumption,” and not the full rate that had been collected.
Doughnuts do indeed qualify as “food” under the federal food stamp program. However, the Department of Revenue denied the refund on the grounds that “the company failed to show that not more than 80 percent of its gross receipts were derived from the sale of food prepared for immediate consumption.”
How do you determine if your doughnuts are being purchased for immediate consumption? You ask your customers, of course. So to prove its point, the company did just that.
Between September and November, 2012, the company conducted an online survey asking customers where and when they had eaten the doughnuts they purchased. It then concluded, “[I]f ‘immediate consumption’ meant consumed within one hour, then enough of its doughnuts were not consumed immediately to surpass the 80-percent threshold.” When the lower courts denied the refund request, the company appealed to the Missouri Supreme Court.
According to the unofficial case summary, the Supreme Court also rejected the “persuasiveness of that evidence:”
“[T]his Court does not believe the legislature intended that retailers interrogate their customers as to when they plan to eat food, which would be impractical and absurd. The terms of section 144.014.2 should be viewed in the light of reality and not be stripped of common sense or construed to establish arbitrary loopholes.”
The Court notes that the legislative clarifications added in 1999 were added “to ensure that food sold by restaurants no longer is taxable at … [the] lower rate.” It noted that “food that is akin to food primarily sold by restaurants is intended to count toward the 80-percent threshold.” The doughnut retailer could not dispute that its doughnuts are prepared for immediate consumption and are often immediately consumed. The refund was denied.
Location, location, location
Although the state of Missouri applies the full state sales tax rate to doughnuts sold by a doughnut shop that is akin to a restaurant or fast food establishment, it applies the reduced rate to doughnuts sold by the bakery department of a grocery store. Ponder that one — over coffee and a doughnut.
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