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Who is in charge?

Figuring out state sales tax when using a marketing and delivery service

NIBBLES - Restaurant & Hospitality Newsletter
January 22, 2019
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Who is in charge?

Figuring out state sales tax when using a marketing and delivery service


By Bob Gilbert, CPA

Restaurant marketing & delivery services is one of the fastest-growing industries in the world right now. Many restaurants are at a point where they have no option but to incorporate this method of service into their business in order to maintain their status with the competition.

A common byproduct of the creation and expansion of a new industry is the immense confusion as to how existing regulation, tax and other, applies. This article specifically discusses the sales tax intricacies of utilizing an online marketing and delivery service.

The most complex piece in putting this puzzle together is that each arrangement can be different. Here are a few variables that are common within the industry that may trigger what is and isn’t subject to state sales tax:

  • Online provider solely provides internet advertising and fulfilment services
  • Online provider also provides delivery services and charges the restaurant
  • Online provider charges mandatory gratuity
  • Online provider charges the customer marked-up prices
  • Restaurant charges delivery fee
  • Restaurant charges service charge or automatic gratuity

Furthermore, the biggest variable of all is that EACH STATE IS DIFFERENT!

In order to reach the proper conclusion, we should first identify the products and services being sold in order to determine if they’re generally subject to sales tax. Once that is complete, we can then dictate who the seller of each taxable product and service is.


Typically offered Goods and Services

Below is a list of goods and services that are typically offered by restaurants with online delivery platforms. Within each item is a consideration as to whether or not that good or service is subject to sales tax.

  1. The online provider is selling Internet and advertising fulfilment services. Sales tax is normally charged on the sale of personal property, and specified services. In many cases, services such as advertising and online facilitation would not be considered enumerated services that are subject to sales tax.
  2. Either the online provider or the restaurant is providing delivery services. Many states dictate that if the charge is for the delivery of a taxable product or service, then the delivery charge will also be taxable. However, if the delivery service is being charged by a company other than the seller of taxable product, then the delivery service is generally not subject to sales tax.
  3. Either the online provider or the restaurant is charging a gratuity or service charge for the sale of prepared food. From an income tax standpoint, this one has its own issues that are outside the scope of this article but from a sales tax perspective, gratuities are often tax-exempt if the entire gratuity goes to the employees of the restaurant. A common pitfall here is when a restaurant charges its employees 2-3% of the tips they received via credit card, to compensate for credit card processing charges burdened by the restaurant. If this type of withholding were in place, the gratuity would often be taxable, in full.
  4. Either the online provider or the restaurant is selling prepared food and beverage. This is generally taxable.


Who should charge tax?


Now that we know what generally is and isn’t taxable, we need to determine who the seller is that needs to charge tax. In most cases, where the restaurant has its own deliverers and is responsible for the delivery of food and beverage, the restaurant is the seller and should charge tax on the food and beverage, delivery fees, and any mandatory gratuities that aren’t paid in full to the employees. In cases where the online provider is providing the delivery service, it becomes less clear as to who the seller is.

The New Jersey Division of Taxation recently responded to a similar inquiry by stating, ’A company that takes online orders for restaurant meals, delivers those meals, and accepts the payment for those meals is considered the retailer of those meals for sales tax purposes.’ What that means is that the online provider is actually the seller to the customer, and is required to collect and remit sales tax on the restaurant’s sale. The restaurant is actually a wholesaler in that instance, and would not have to charge New Jersey sales tax if a resale certificate was obtained from the online provider. This aspect would have to be reviewed on a state-by-state basis with regard to each arrangement. The definition of “catering services” in any state can determine who is actually transacting in the sale with the customer.


Takeaways


Using an online marketing and delivery service provider is becoming unavoidable. Here are some tips to keep in mind to stay out of trouble:

  • Develop an understanding of what is, in fact, being provided to both the restaurant and the customer.
  • Do not rely on a contract with the online provider to determine taxability. State law will ultimately determine who needs to pay tax, not a contract.
  • Each state is different and requires its own analysis.
  • Reach out for help from experienced professionals who understand tax regulation.


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