How delivering groceries can destroy deductions – Wacky Tax Wednesday
- Sep 30, 2020 | Gail Cole
I like going to the grocery store and never considered having my groceries delivered before COVID-19 hit. Now, I may join the growing number of Americans who regularly take advantage of this service. It’s convenient and safe. It can also complicate sales tax compliance in certain states.
New Mexico has a particularly perplexing policy. It allows retail food stores (aka, grocery stores) to claim a gross receipts tax* deduction for receipts from the sale of food for home consumption. However, the deduction may not apply to sales of qualifying groceries that are delivered: It depends on who makes the delivery (the grocery store or a third party) and when payment is made.
The best way to explain the tax policies is to describe different scenarios. Here goes.
Scenario 1: A consumer orders and pays for groceries online from a grocery store. The groceries are delivered to the consumer by a third-party delivery service.
Charges for qualifying food items are eligible for the gross receipts tax deduction (charges for nonqualifying items, such as aluminum foil or plastic wrap are not). Charges to deliver the groceries, whether delivery is arranged and paid by the grocery store or the consumer, are also taxable.
Scenario 2: A consumer orders groceries (by phone or online) from a grocery store but isn’t charged at checkout. The grocery store has an employee deliver the groceries to the consumer at the address specified. Once the consumer sees and approves the order, the employee accepts payment from the consumer.
Both the groceries and the delivery charge are subject to gross receipts tax because the transaction occurs at the consumer’s delivery address, not the grocery store. The grocery store can’t claim the gross receipts tax deduction for otherwise eligible food because the transaction doesn’t occur at the grocery store; the sale takes place where the employee accepts payment from the consumer.
Scenario 3: A consumer places an online order for groceries from a grocery store and pays for the groceries at checkout, along with a delivery fee. The grocery store then packs the groceries and delivers them to the consumer.
The grocery store may claim a deduction for qualifying foods because it’s the seller, and the transaction occurs at the grocery store (or online, the next best thing). However, there’s no deduction for the delivery charge — delivery charges are a taxable service in New Mexico.
Scenario 4: A consumer purchases groceries and delivery services from a delivery service provider.
The food delivery service generally wouldn’t qualify for the deduction for food (unless it’s also a grocery store), so the sale to the consumer is taxable.
However, the delivery service would be able to claim a deduction for the food and other items (e.g., cleaning supplies, toilet paper) it purchases for resale. The deduction must be validated with a resale certificate. See B-200.34 – Delivered Groceries (Under Publications, Bulletins, 200 Series-CRS Information) for more details.
To summarize, sales of grocery foods generally qualify for a gross receipts tax deduction in New Mexico. If they’re delivered to the consumer, they might not qualify for the deduction. Then again, they might.
Destination sourcing takes effect July 1, 2021
The taxability of delivered groceries in New Mexico is likely to get even more complicated next year.
The state currently uses origin sourcing to determine the rate of tax, meaning the rate is based on the location of the seller. Effective July 1, 2021, the sale will be sourced to the destination, the location where the consumer takes possession of the goods purchased. Sellers delivering to numerous locations may therefore have to collect and report numerous tax rates. See FYI-200 Your Business Location and the Appropriate Tax Rate (under Publications, FYIs, 200 Series-CRS Information) for more details.
If you’d rather get stuck in traffic while delivering groceries than grapple with complex tax issues, it may be time to automate sales tax compliance.
*New Mexico has a gross receipts tax rather than a sales tax. The gross receipts tax is a tax on the business, not the buyer or the transaction. Since businesses typically pass on that cost of doing business, gross receipts tax is generally paid by the consumer.