Third-party delivery apps can boost sales — and sales tax complexity
Third-party delivery apps had a pretty good following before the COVID-19 pandemic heightened their appeal. Now, even with in-house dining once again on the table, use of DoorDash, Grubhub, Uber Eats and similar platforms continues to grow.
Partnering with a third-party delivery app offers some obvious benefits to merchants. It can help you broaden your customer base. It also enables you to tap into a network of drivers, which, given the staffing challenges many restaurants now face, is no small thing.
Of course, there are also some downsides to using third-party delivery apps. For example, restaurant commission fees tend to be high and are likely to get higher. While some retailers may swallow a portion of the fee to remain competitive, that’s not an option for every business. Dark kitchens, those with no in-house dining option, may be best positioned to minimize the fees that customers pay. Restaurants offering both in-house and takeaway options, which tend to have razor-thin margins, may suffer the most.
According to McKinsey & Company, many restaurants using third-party delivery apps saw delivery revenue grow in 2020, but “their overall profits generally declined.” Although COVID-19 restrictions on on-premises dining likely contributed to that dip, “the gap between delivery-fueled revenue spikes and profit declines was already an underlying issue.”
Then there’s tax compliance. Ensuring the proper amount of tax is collected and remitted is a delicate dance, and it’s easy to trip when third-party delivery apps cut in — even when they’re invited to tap the shoulder.
Who collects the tax?
For the most part, states developed marketplace facilitator laws to collect tax from Amazon, eBay, and other marketplaces devoted to tangible personal property, not DoorDash or Drizly.
The meteoric growth of the third-party delivery market is compelling states to specify how their marketplace facilitator laws apply to those sales — the Texas Comptroller explained how tax applies to mobile delivery app fees in a recent letter ruling — but policies tend to differ from state to state. Scott Peterson, vice president of Government Relations at Avalara, explains: “Some states require the restaurant to collect and remit the tax. Some require the marketplace to collect and remit tax. And some may let the two entities work it out.”
Little wonder retailers and third-party delivery providers aren’t always clear on who’s responsible for the tax. This can lead a seller and delivery app to both collect tax on the same transaction (if they don’t realize the other is taxing the transaction), or to neither party collecting the tax due (if each thinks the other party did). It’s a little like the old “Who’s on First?” routine by Abbott and Costello, but less funny, and with more of a tax mess. (Though come to think of it, the comedy pair had some tax troubles too.)
Peterson isn’t surprised businesses are having trouble with this issue now because it’s been an issue from the outset. For the most part, he says, “the issue isn’t the law so much as the confusion around it” — though the taxability of transportation charges and service charges can add to the complexity.
Surprising or not, about a half dozen states can sue a retailer for overcollecting or undercollecting sales tax. Either the state attorney general will take the retailer to court, or the department of revenue will lead the charge. “There’s a tremendous amount of risk in not doing this correctly.”
Figuring out who owes the tax is step 1
Of course, understanding who needs to collect and remit all applicable taxes is just half the battle. Sales systems need to be set up to ensure tax is properly applied to each transaction. This can be particularly challenging for retailers that make both direct and third-party delivery sales, because tax may need to be applied to direct sales but withheld from sales ordered through a delivery app.
Automating tax collection can help. For example, if Grubhub is collecting the tax on the orders it processes, point-of-sale (POS) systems — the link between the merchant and the app — can be programmed to ensure orders coming through Grubhub enter a nontaxable stream.
With the cloud-based restaurant software provider Toast, for example, if a third-party delivery app or online ordering provider informs Toast that it plans to remit sales tax on behalf of a restaurant, Toast software will show the tax numbers in its reports. “Toast aims to provide insight into the total of sales taxes that have been paid by the Marketplace Facilitator and may still need to be paid by the restaurant.” Additional details can be found on Toast’s website under Understanding Marketplace Facilitator Laws and How They Affect Your Restaurant.
As of this writing, “only Uber Eats, DoorDash, and Grubhub” inform Toast of any sales tax amounts they plan to remit to restaurants (that then remit them to the proper tax authorities). It’s a start. Yet the inherently complex nature of sales tax can create additional challenges for retailers and delivery apps.
For example, as noted by Toast, “Uber Eats only pays state-administered taxes for their restaurants” in a “small number of states.” Applicable local taxes need to be handled by the retailer. Toast recommends restaurants work with an accountant or tax expert to ensure they’re collecting the tax required under marketplace facilitator laws.
Set it and forget it
Once systems are properly set up and it’s clear that tax is being properly accounted for, businesses can pretty much forget it.
DAVO by Avalara uses sales data from your POS system to identify the sales tax you collect daily. It then transfers the collected sales tax from your bank account to DAVO’s tax holding account at the end of each day. This ensures sales tax is always set aside, so you won’t be short when sales tax is due. Finally, DAVO files and pays the tax for you.
While some businesses may hesitate to have sales tax transferred from their accounts daily, those who’ve tried it tend to love it. “For a small business like ours, it is more manageable to have the taxes taken out daily in smaller amounts versus paying large amounts monthly or quarterly,” says Gladys Harrison of Big Mama’s Kitchen and Catering. “It feels good to know the taxes are paid on time every time. No one wants to pay their bills late or be stressed out by them.”
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