A Popcorn Puzzle – Wacky Tax Wednesday
- Sales and Use Tax
- Nov 26, 2014 | Gail Cole
I have pie on the mind these days. I love to prepare pie, serve pie, and eat pie, and Thanksgiving allows me to do all of the above. Just thinking about all that pie makes me immeasurably happy.
After pie, there is little I like more than a good movie, seen on the big screen. Watching a movie with friends and family after the Thanksgiving feast makes me pleased as punch pie. And try as I might, it is hard to think about the cinematic experience without thinking of popcorn.
In theaters in Washington, where I live, popcorn is generally subject to sales tax as a prepared food. In at least one chain of theatres in California, however, popcorn is tax exempt. Here’s the story.
Heated v “Cornditioned”
During an audit of a California movie theater chain, the Sales and Use Department of the California State Board of Equalization determined that sales tax should have been collected on a portion of the popcorn sales because it was a hot prepared food. Sales of hot prepared food are taxable under Revenue and Taxation Code section 6359, subdivision (d)(7). (California Code of Regulations, title 18, § 1603, subd. (e)(1).) As explained in the memorandum opinion, “The Department contended that in its process to produce and sell fresh popcorn, claimant intended to prepare, and actually prepared, all the popcorn for sale in a heated condition.”
The owner of the theater chain (the claimant) demurred, insisting that the cooking and storage process used to prepare the popcorn “does not create a hot prepared food product.” He said he had no intention of providing a hot food product. The popcorn was not heated but “cornditioned” (not a typo), and the intent of the cornditioner is “to dehumidify the popcorn, not to heat it.” That the packaging used to serve the popcorn “had little insulating value” is further proof of his intentions.
Intention is everything
The claimant pointed to California Code of Regulations, title 18, section (Regulation) 1603, subdivision (e)(1), which he said “requires intent to provide a hot food product for the sale of the product to be taxable.”
(e) Hot Prepared Food Products.
(1) General. Tax applies to all sales of hot prepared food products unless otherwise exempt. “Hot prepared food products” means those products, items, or components which have been prepared for sale in a heated condition and which are sold at any temperature which is higher than the air temperature of the room or place where they are sold. The mere heating of a food product constitutes preparation of a hot prepared food product, e.g., grilling a sandwich, dipping a sandwich bun in hot gravy, using infra-red lights, steam tables, etc. If the sale is intended to be of a hot food product, such sale is of a hot food product regardless of cooling which incidentally occurs. For example, the sale of a toasted sandwich intended to be in a heated condition when sold, such as a fried ham sandwich on toast, is a sale of a hot prepared food product even though it may have cooled due to delay. On the other hand, the sale of a toasted sandwich ...[that] is not intended to be in a heated condition when sold, such as a cold tuna sandwich on toast, is not a sale of a hot prepared food product.
The BOE agreed with the claimant for the following reasons:
- The cornditioner was open to the ambient air.
- The product packaging lacked insulation.
- The product itself was within the range of ambient air temperatures in the serving area.
There was no mention of the heating required to turn teeth-cracking dry kernels of corn into the puffy, yummy treat I so enjoy. The opinion reads, “The incidental warming of the surrounding ambient air in the effort to produce a dry product does not constitute “heating” within the meaning of the regulation.” Put another way, if the popcorn were a sandwich, it would be a cold tuna sandwich on toast and not a fried ham on toast.
Sounds a bit like something out of the movies.
Share your wacky tax tales in the comments below.