Food tax compliance may be too much for sellers to swallow
Is there sales tax on food?
Food sales are big business in the U.S. Americans spend $1.4 trillion annually on groceries, prepared foods, snacks, and dining out. How people choose to allocate their food dollar spend is shifting. Dining out, purchasing pre-prepared meals and opting for meal delivery are becoming more commonplace than cooking at home. In fact, in 2015, U.S. consumers spent more money on restaurant meals than groceries for the first time in history.1 This trend has escaped the states’ notice, with more local lawmakers making a play to lower or eliminate sales tax on groceries and increase or extend it to prepared food and dine-out meals.
Whether or not sales tax is applied to food depends on several factors including the location of the buyer, the type of food purchase, whether it was prepared food, and how it was acquired.
- Location: Sales tax is governed at the state, county, and city levels. Depending on where the buyer is, they will be impacted by the sales tax rules for that specific location.
- Type: Food can go by many different names, groceries, candy, soda, dinner, etc. Sales tax rules can very dramatically for each.
- Preparation: Whether food is prepared or not may impact its taxability. A great example to consider is a toasted bagel versus one that has not been prepared. Additionally, a personal chef has its own taxability rules.
- Acquisition: Whether food was delivered or eating as a take-out or dine-in meal may impact its taxability. Hitting a vending machine for lunch today? There are rules for that too.
We'll examine each of these variables tand highlight some specific locations impacted by these rules below.
How does sales tax on food stack up for your business?
- Cooking at home: Most states exempt unprepared food items from sales tax. That’s most, not all; 15 states tax groceries at either the full sales tax rate or a reduced rate. These states are Alabama, Arkansas, Hawaii, Idaho, Illinois, Kansas, Mississippi, Missouri, Oklahoma, South Dakota, Tennessee, Utah, Virginia, West Virginia and parts of Alaska. Candy and soft drinks are often excluded from the list of tax-exempt foods. And, in fact, 18 states tax candy and 23 states tax soft drinks at a higher sales tax rate than groceries. Buying local? Some states, like Virginia, consider farmers and co-ops that sell at outdoor markets or through Community-Supported Agriculture (CSA) programs or websites to be engaged in “direct marketing.” Since they sell to consumers or end users, sales tax is collected on taxable goods and must be separated out from the item price.
- Dining out: Don’t feel like cooking? You’re not alone. Americans dine out 4.5 times per week on average.2 Dining out has its advantages (fewer dishes to wash), but cost isn’t one of them. Fifteen cities impose an additional tax on top of state sales tax for restaurant meals. These cities are Boston, Charlotte, Chicago, Denver, Indianapolis, Jacksonville, Kansas City, Miami, Milwaukee, Minneapolis, Omaha, Raleigh, Seattle, Virginia Beach and Washington DC. The add-on tax ranges from .05% in Milwaukee up to 5.50% in Virginia Beach. Certain towns in Montana and Oregon also tax restaurant meals, despite both being non-sales tax states.
- Take-out meals: Prepared food is one of the biggest growth areas in retail food service. Delivery services like DoorDash, Grubhub and Uber Eats have made it easier than ever for consumers to get hot meals on their tables with the push of a button. Hot meals and pre-made dishes account for 60% of deli sales in the U.S. and generate more than $20 billion annually for supermarkets.3 When customers order take out from a restaurant, pick up a pre-made deli dish or order a complete meal from supermarket catering, they get to skip the prep time, but not the sales tax. Prepared food is taxable in many states. This can include food that is heated before sale; food where two or more ingredients are mixed together; and food sold with eating utensils.
- Food delivery: Nowadays, consumers can get gourmet meals delivered right to their door through popular food retailers like Harry & David and Williams-Sonoma and culinary services like Blue Apron, Platejoy and Freshly. They shortcut having to shop or cook, but they can’t short change the state when it comes to sales tax. If the service includes fresh or frozen ingredients in their original form or package, these items are taxed according to state food (grocery) taxability rules. If any of the items have been re-packaged, combined, prepped or pre-cooked, then state sales and use tax rules for prepared items would apply.
- Personal chef: In some states, like Washington and California, personal chefs or professional cooks are considered independent contractors and services provided by the chefs are subject to retail sales tax. The tax rate is determined by where the customer receives the prepared food. In the case of a home-prepared meal, the sales tax rate is based on the jurisdiction in which the host resides. Buyers who want to save a few bucks can supply the ingredients — then sales tax is only owed on taxable items. But if the personal chef does the shopping, the food is considered part of the service and, therefore, taxable.
- Vending machines: In some states, the sales of food and beverages from vending machines are taxed in the same manner as the sales of those same items in food stores. Commonly taxed items are sandwiches, plated items, bottled water, and hot items like soup. There are some exceptions. For example, in New York, this rule does not apply to hot beverages or items under $1.50 such as candy, nuts or chips (these are exempt). In Alabama, some localities impose an additional local sales tax on food sold through vending machines (rates vary by jurisdiction). And in California, fresh fruit sold in vending machines is taxed at 33%, while the same fruit bought from grocers or other food sellers is tax-exempt.
Why food tax is so tricky for sellers
Even though consumers ultimately eat the cost of sales tax, it’s the grocery stores, restaurants and other food sellers that suffer the heartburn of having to make the right call when it comes to rates, rules and exemptions.
For example, in October, Alaska voters repealed a local Kenai Peninsula sales tax on non-prepared food items. Yet, after the law went into effect, customers were still paying sales tax on exempt items at some major food retailers. Delays in making the change resulted in these retailers having to issue refunds to customers. To further complicate matters, the exemption is seasonal and only in effect during winter months.
The Idaho Retailers Association expressed a similar concern over a plan to repeal sales tax on groceries, which would require new state tax rules to be written specifying which foods would be taxable and which food would be exempt. The organization urged the Idaho Tax Commission to consider using Streamlined Sales Tax definitions to make the process easier (many national retailers follow these guidelines) and requested 90-days’ notice to allow businesses ample time to comply with the new law.
Keeping up with food taxability rules in one state is difficult enough. For food companies that operate nationally or in multiples states, such as chain brands, franchises or ecommerce sellers, this is compounded given that there is little consistency in how states apply food taxability rules.
Too much on your plate to deal with sales tax?
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1. U.S. Commerce Dept 2. Zagat 3. Statista
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