Dishing up tax on delivery fees – Wacky Tax Wednesday
As the United States works to contain the spread of COVID-19, businesses from New York to Seattle are encouraging or requiring employees to work from home. K–12 schools and universities are suspending on-campus learning. Americans are gradually coming to terms with the fact that life in the coming weeks or months will likely involve a lot more time at home.
That will be a hardship for many of us, for many reasons. But fortunately, at least some modern conveniences will make staying home a bit more comfortable. We can still shop online. We can stream entertainment. And we can have food, both groceries and restaurant meals, delivered to our doorstep.
The food delivery buffet
Unless you picked up your meals to go, our choices used to be limited to restaurants that provided delivery services. Where I grew up, that was pizza.
Today, there’s a veritable food-delivery buffet in many cities. DoorDash, Grubhub, Uber Eats, and similar service providers have transformed takeout. No wonder online food delivery is expected to become a $200 billion industry by 2025.
If you don’t know how it works, these businesses function as marketplaces, like Amazon or Etsy; their websites offer food for sale from a wide variety of restaurants. Instead of ordering a meal directly with a restaurant, customers order through DoorDash (or Grubhub, etc.), which collects the payment, passes the order to the restaurant, and arranges the delivery service (unless you opt to pick it up). Typically, they charge a service or delivery fee.
Taxing the meal (and the delivery)
Although restaurant meals are almost always subject to tax, delivery services and associated fees may or may not be.
Nebraska is a state where delivery charges for prepared food are sometimes taxable and sometimes exempt. The Nebraska Department of Revenue categorizes prepared food deliveries as follows:
- Restaurant – Free Delivery
- Restaurant – Delivery Fee Charged
- Third Party Food Delivery Service – Delivery Fee Charged
- MMP (Marketplace Provider) – Delivery Fee Charged
Restaurant – Free Delivery
This is the most straightforward old-school option, in which the restaurant arranges the food delivery — usually by an employee or third-party delivery service.
The restaurant can either eat the delivery fee or pass it on to the customer by including it in the cost of the food sold (raising the price of delivery meals). Either way, there’s no separate delivery fee. The restaurant charges the customer applicable taxes on the price of the meal.
Restaurant – Delivery Fee Charged
Here again there are two options:
- A restaurant employee delivers the food. The restaurant separately states the delivery charge on the customer’s receipt. Tax applies both to the food and the delivery fee.
- A restaurant hires a third party to deliver the food. The restaurant charges the customer for the food and separately states delivery charges. Tax applies to both charges.
In both cases, the restaurant is responsible for collecting tax on both the food and the delivery charges.
Third Party Food Delivery Service – Delivery Fee Charged
In this case, the customer arranges the delivery with a third-party food-delivery service provider. The only interaction the restaurant and deliverer have is the exchange of food.
The restaurant charges the customer for the food, plus tax.
The delivery service provider charges the customer for the delivery, but not tax. In Nebraska, sales tax doesn’t apply to delivery services that are independent from the sale of food and arranged by the customer.
MMP (Marketplace Provider) – Delivery Fee Charged
In this scenario, the customer purchases food and the delivery of the food from a food-delivery service like Grubhub or UberEats — not a restaurant.
As the retailer, the delivery provider charges the customer for the food, as well as any delivery charges, mandatory gratuities, or service fees passed on to the customer (whether separately stated or included). The entire charge is subject to sales tax, which the delivery provider collects and remits.
Although the experience for customers in Nebraska should be the same today as it was at this time last year, the back end of these transactions changed with the enactment of LB 284 (effective April 1, 2019). The law made marketplace providers responsible for collecting and remitting the tax due on marketplace transactions.
Prior to April 1, 2019, those sales were considered sales for resale: The restaurant sold the food to the delivery provider, which in turn sold it to the customer. As such, restaurants shouldn’t have charged the delivery provider tax on the food but should have collected a Nebraska Resale or Exempt Sales Certificate for Sales Tax Exemption (Form 13) from them.
With the enactment of the marketplace facilitator law, the exemption certificate is no longer necessary. The delivery provider is the retailer, not a reseller.
However, although the restaurant isn’t the retailer, it can be held liable for the tax if the deliverer doesn’t remit it to the Nebraska Department of Revenue. Nebraska holds the restaurant and the delivery provider jointly liable. For more details, check out the Nebraska Department of Revenue Prepared Food and Beverage Delivery Service Information Guide.
Sourcing the sale
Restaurant meals received by a customer at the location of a Nebraska retailer (i.e., dine-in or takeout) are subject to the rate in effect at the location of the retailer.
If the food is delivered to a customer by the restaurant or a third party, the sale should be sourced to the location where the customer receives the food. For many of us in the coming weeks and months, that will probably be home.
Determining what’s taxable or exempt, and who’s responsible for collecting any tax due, can be as challenging as preparing a 30-course meal for hundreds. So, it’s usually best to leave it to experts: chefs, or sales tax automation service providers like Avalara.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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