How you take your coffee may affect its taxability – Wacky Tax Wednesday

When researching my favorite beverage for National and International Coffee Days (Sept. 29 and Oct. 1), I discovered that coffee hyped up goats in ninth century Ethiopia and was dubbed a “bitter invention of Satan” by 17th century Christian Italians. This was unexpected. Still, the history of coffee surprises me less than the taxability of coffee drinks in several states.

It sometimes seems there are as many ways to tax coffee as there are varieties of coffee drinks — and anyone who’s been to a Starbucks knows that’s a lot. Taxability can be affected by the temperature of the coffee, and whether it’s consumed on premises or sold to go. It can depend on the percentage of taxable food sales made by the seller, and if the coffee’s sold separately or as part of a combination. In fact, even the sweetness of coffee can affect taxability. And if you're in the business of selling coffee, you need to get sales tax right.

Curious? Grab a cup of the tasty brew and read on.

Sit as you sip. Louisiana state sales tax often applies to hot coffee, but sales of “coffee and its substitutes” are exempt when (1) not prepared by the seller and (2) not sold by candy and nut counters, drive-ins, private clubs, snack bars, or establishments that furnish facilities for the on-premises consumption of the food. 

This exemption isn’t available to sellers that provide facilities for on-premises consumption, and it doesn’t apply to most local sales taxes.

Drink it cold. Sales of brewed and hot coffee are taxable in Pennsylvania when sold from a vending machine or at a delicatessen, grocery store, convenience store, farmers market, bakery, doughnut shop, pastry shop, or similar establishment. In fact, sales of all hot beverages are taxable in these venues, as are sales of nonalcoholic beverages. However, cold coffee that’s bottled and flavored is exempt when sold at any of the above.

Hang on to your lids for these next two.

When hot is cold. California sales tax generally applies to sales of hot prepared food, while sales of cold prepared food are generally exempt. Hot coffee is considered a hot prepared food, yet it’s exempt when sold separately unless taxable under the 80-80 rule (see below) or under California Department of Tax and Fee Administration (CDTFA) Regulation 1574. When hot coffee is sold combined with a cold prepared food for one price, the whole sale becomes taxable — even though both are exempt when sold individually.

When for here is to go. That’s not all. The taxability of coffee in California is sometimes affected by the 80-80 rule, for which there are two criteria:

  • More than 80 percent of the seller’s gross receipts are from the sale of food products
  • More than 80 percent of the seller’s retail sales of food products are taxable as provided in CDTFA Regulation 1603

According to the CDTFA, “When a seller meets both criteria of the 80-80 rule …, tax applies to sales of cold food products (including sales of … hot beverages such as coffee) in a form suitable for consumption on the seller’s premises even though such food products are sold … ‘take-out’ or ‘to go.’” Tax applies to the transaction no matter the quantity of the sale (e.g., 40 half-pints of milk, or 40 cups of coffee). However, tax generally doesn’t apply to “sales of food products which are furnished in a form not suitable for consumption on the seller’s premises.” And a seller meeting both criteria of the 80-80 rule may elect to separately account for sales of to go orders that could be consumed on premises. In that case, these sales may be exempt "provided the seller keeps a separate accounting of these transactions."

Sellers that don’t meet the criteria of the 80-80 rule should not charge tax on “sales of cold food products (including sales of … hot beverages such as coffee) when sold … ‘take-out’ or ‘to go.’”

If you’re confused, you’re not alone: The confusing nature of California’s policy has triggered lawsuits.

Try it black. Presweetened coffee and tea drinks are sometimes subject to a special tax in addition to sales tax. For example, presweetened coffee drinks distributed in the City of Brotherly Love are subject to the Philadelphia Beverage Tax (PBT) — unless they contain more than 50 percent milk (or milk substitute) by volume. Certain presweetened coffee drinks are also subject to special “soda taxes” in Boulder, Colorado, the state of Vermont, and several cities in California. Seattle, birthplace of the Frappuccino, started taxing many presweetened beverages in 2018 (Seattle Municipal Code, Chapter 5.53). Portland, Oregon, has tried to do the same.

The bitter dregs. Whether you sell one cup of coffee in a day or 100, you need to know if those sales are subject to tax, and if so, at what rate.

Coffeehouses have been places to exchange ideas as much as consume coffee since their first known appearance in the Ottoman Empire approximately 400 years ago. That tradition suffered during the worst of the COVID-19 pandemic, but it’s coming back. So, celebrate the 2021 Coffee Days by supporting your favorite coffee shot and swapping tales of wacky sales tax laws. You’ll find more in the Avalara blog.

This post was updated on September 29, 2021. It originally published September 27, 2017.

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