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Target’s Coffee: For Here or To Go, Taxable or Exempt?

  • May 5, 2014 | Gail Cole

 Target: is hot coffee to go taxable or exempt?

Americans like their coffee to go. Consider our cars: cup holders in a German Audi, designed for the Autobahn, are small and more likely to tip your cup than hold it still. Cup holders in an American Ford?  Roomy and stable enough for a giant cup of Joe (with cream and sugar).

What most of us don’t consider as we’re driving off with our cups are the tax consequences of taking that coffee to go. And there are consequences. Just ask Target, which has been forced to defend its practice of charging sales tax on hot coffee sold to go.

Two California consumers contend that Target “represented that it properly was charging and in fact charged them sales tax reimbursement on sales of hot coffee sold ‘to go,’ when, according to plaintiffs, the tax code rendered such sales exempt from sales tax.”

Food for human consumption is exempt

The plaintiffs in the Target case pointed to Regulation 6359 of the California Sales and Use Tax Law, which exempts from sales tax “food products for human consumption,” including “coffee and coffee substitutes, tea, and cocoa and cocoa products.” They alleged that Target had charged them sales tax* on their “purchases of hot coffee to go, and ‘thus caused [plaintiffs] to suffer monetary loss.” They later added that Target “never inquired whether the named plaintiffs’ coffee purchases were to go, thereby depriving plaintiffs of the ‘opportunity to avoid being wrongfully charged the taxes at issue.’”

This begs the question, is hot coffee exempt from California sales tax when it is sold to go?

California tax law—exceedingly complex

The California Supreme Court opinion referred to California tax law as “exceedingly closely regulated, complex, and highly technical.” It later refined that statement: “The regulation defining the taxability of food products is of amazing complexity.”

For example, while it is true that Regulation 6359 exempts from sales and use tax food products for human consumption, “[t]here are many exceptions to the exemption appearing in section 6359.” These include, but are not limited to:

  • Food products “served as meals on or off the premises;”
  • “Items that are ‘furnished, prepared, or served for consumption at tables, chairs or counters or from trays, glasses, dishes or other tableware’ provided by the retailer.”

In other words, the taxability of food often depends on whether it is consumed on premises or off premises: for here or to go.

The opinion seems to have a little fun at the tax code’s expense. It reads:

“The regulation applies the tax to sales of hot prepared foods (a term subject to very extensive refinement and somewhat contradictory definition (see id., § 1603, subd. (e)), with provisions for items furnished by specified establishments “whether served on or off the premises.” (Id., § 1603, subd. (a)(2)(A).) There are special rules for sales of straws and toothpicks along with food (ibid.), and a definition of “hot prepared food products” that distinguishes between items sold separately and those sold under a single price along with cold foods (id., subd. (e)(1)), which appears to exempt hot coffee if sold separately but not if sold with a bakery item, unless taxable because, among other reasons, it was sold for consumption at tables, chairs, or counters provided by the retailer. (Id., § 1603, subds. (e), (f).)”

To go

The California State Board of Equalization (BOE) filed an amicus curiae brief with the court, explaining “that ‘to go’ sales are those for which the customer leaves the store’s premises entirely before consuming the item.” The amicus curiae continues:

 “Target would have to distinguish sales of coffee where the customer bought the coffee and immediately left the store from those where the customer bought the coffee but continued to shop in the same store or drank the coffee at tables and chairs in the coffee sales area. In addition, since the analysis must be made on a location-by-location basis, Target would need to conduct investigations in each of its California locations. … the amount of administrative expense incurred to obtain such figures and maintain proper records would likely be passed on to Target’s customers in the form of higher prices.”

Furthermore, the BOE reminds that in California, “it is presumed that all ‘gross receipts’ are subject to the sales tax unless the contrary is established by the retailer.’”

You decide

Ultimately, the Supreme Court decided that the case rested on whether or not Target should charge sales tax reimbursement on sales of hot coffee to go, and confirmed “that the Board is the entity responsible for determining in the first instance whether transactions, in their nearly infinite variety, are taxable and how much tax is due.”

Since it is the responsibility of the BOE to determine such taxability issues, the Supreme Court affirmed the lower court’s decision that “sustained defendant’s [Target’s] demurrer without leave to amend.”

Yet in reviewing the facts of the case, the Supreme Court did note that the BOE is not exactly impartial in that “is very likely to become enriched at the expense of the customer to whom the amount of the excessive tax actually belongs.” This is because retailers have no incentive to request a refund of overpaid sales tax from the BOE (and retailers, as the taxpayers, must be the one to request the refund). Once a refund is granted, the retailer is required by law to pass it on to customers.

Consider how many people purchase coffee to go at Target. Would it even be possible to find them all?

The moral

The moral of this story seems to be that sales tax law is amazingly complex. It’s easy to make mistakes, and mistakes can be costly. How much money did Target have to spend to defend its practice of charging sales tax reimbursement on sales of hot coffee to go? And in the end, we still don’t know if hot coffee to go is taxable or exempt.

* The Supreme Court opinion clarifies that in actuality, Target charges consumers “sales tax reimbursement.”

photo credit: Thomas Hawk via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.