The pandemic has changed the physical and economic environment in which restaurants operate. Although food delivery has long been popular for certain types of food, pandemic restrictions and consumer preferences hastened the expansion of food delivery for almost all food and meals. Food delivery can be done either through the restaurant itself or through unrelated third-party online food delivery services.
Restaurants without pre-pandemic infrastructure for deliveries are now increasingly relying on regional or national online or app-based food delivery services. Delivery, particularly through these online food delivery services, unearth new challenges for restaurants’ compliance with state sales tax laws.
A. Marketplace Collection Laws
Marketplace collection or “marketplace facilitator” laws require that certain marketplaces—such as online platforms connecting retailers with customers—collect and remit sales tax on behalf of the retailers or restaurants (marketplace sellers) making sales through the marketplace. These state laws shift the burden of collecting and remitting sales tax from the marketplace sellers (the restaurants) to the marketplace facilitator (the online food delivery services).
In 2018, the United States Supreme Court’s decision in South Dakota v. Wayfair ushered in states’ expanded ability to impose sales tax on businesses not physically located within the state. While this decision had little impact on the existing tax obligations of restaurants physically present in a state, it affected other retailers and online marketplaces that generally were not physically present in each state where their independent contractors performed deliveries. In addition to remote collection from non-physically present retailers, states looked to fill perceived sales tax collection gaps by enacting marketplace collection laws. Only a handful of states had enacted marketplace laws prior to the Wayfair decision including Minnesota, Pennsylvania and Washington.
Today, all but three states with a state sales tax have enacted such laws. Only Florida, Kansas, Missouri do not have marketplace collection laws. Some of these marketplace collection laws were hastily enacted and state revenue agencies may still be issuing guidance, determining audit enforcement practices, and resolving practical implementation issues as they arise.
State marketplace collection laws vary by state—each law having its own definitions of terms and parties to which it applies. Online food delivery service platforms often meet the typical definition of “marketplace facilitator,” because they advertise the sale of meals on an online forum and collect the payment from the customer to transmit to the restaurant. However, several states have made the policy decision to expressly exclude online food delivery services from the marketplace collection and remittance responsibility, including California, Maryland, Mississippi, New York, and Tennessee. Utah recently amended its marketplace collection law to exclude online food delivery services. Additionally, some states’ marketplace collection laws, like Georgia’s, apply to third party food delivery services but exclude app and web-based sales by a franchisor on behalf of franchisees.
ii. Opt-Out Provisions
Although state marketplace laws require the marketplace facilitators to collect and remit sales tax on behalf of all sellers using their marketplace, several states provide certain marketplace sellers opt-out opportunities. These type of opt-out provisions may be applicable for restaurants which are already registered for and collect and remit sales tax for their standard retail sales. However, qualification to opt-out and the necessary documentation to do so varies from state to state.
Typically, the marketplace facilitator and not the marketplace seller must affirmatively opt-out of its collection obligations—either through application to the state or by retaining the appropriate documentation from its marketplace sellers. Some states, such as Maine, Massachusetts, and Nebraska, may relieve a marketplace facilitator of sales tax responsibilities if the restaurant (the marketplace seller) provides the marketplace (an online food delivery service) proof of their in-state sales tax registration permit or license. Other states, such as Nevada, allow the online food delivery service and the restaurant to contractually determine who will remit the sales tax. Lastly, states such as Virginia and Wisconsin allow the online food delivery service to request a waiver from the marketplace requirement from the state taxing agency.
B. Marketplace Collections Law Compliance
If a restaurant makes sales through online food delivery services, it is critical to ensure that sales tax is being collected on all sales and that the restaurant is keeping adequate records of sales for which the online food delivery service is responsible for remitting sales tax. Moreover, inconsistencies between the taxing practices on the same food items sold through the online food delivery service versus the restaurant could increase the risk of audit assessments or even litigation.
i. Other Taxes and Fees
Most state marketplace laws expressly apply to state and local sales and use tax, but do not include, or clearly address, other state and local taxes and fees that are commonly imposed on the restaurant industry, such as local meals or food and beverage taxes, hospitality taxes, bag fees, etc. Restaurants would need to look to state statutes and local ordinances to determine whether online food delivery companies are considered a “marketplace facilitator” for purposes of these other taxes and fees. And, if not, restaurants should understand how to comply with their obligations to remit these other taxes and fees where the online food delivery companies are collecting and remitting sales tax as a marketplace facilitator on the restaurant’s behalf.
ii. Applicable Tax Rates
For states with different local sales tax rates, the rules regarding how to determine the applicable sales tax rate for deliveries vary. Sales tax rates are typically based on either the location of the business (“origin sourcing”) or the destination of the delivery (“destination sourcing”). Some states, such as New Mexico and Virginia, utilize origin sourcing, which requires the sales tax rate be based on the location where the food is prepared—in other words, the location of the restaurant. Other states, such as Georgia and New York, utilize destination sourcing which determines the sales tax rate based on the delivery address, or the location of the customer. If a restaurant in a destination sourcing state makes sales through an online food delivery service, but retains the responsibility for remitting sales tax (if for example, the state’s marketplace law excludes marketplace collection and remittance obligations), the restaurant would need to ensure that it is receiving the customer location information from the online food delivery service to determine the appropriate tax rate. And if a restaurant near a state boundary is crossing state lines to make deliveries, it may have additional sales and use tax registration, collection and other tax obligations in the delivery destination state.
iii. Delivery Fees, Discounts, and Service Charges
Under most marketplace collection laws, the marketplace facilitator is the “seller” instead of the restaurant. But in some states, the restaurant may remain the seller even when selling through the marketplace. The distinction of which party is the “seller” can be particularly important when determining the appropriate taxable price of the food sold, and whether the taxable price includes other charges or discounts. Many states existing sales tax laws and guidance do not account for the new delivery model where the seller may be either the restaurant or the online food delivery company.
For example, additional charges (such as delivery fees or mandatory gratuity) are often included in the taxable sales price. But, where the seller of the food and the seller of the other service (delivery) is not the same party, the taxable price may vary. The taxability of delivery fees pose questions for all deliveries, regardless of whether they are charged through a third party or not. Some states tax delivery fees and others do not. Taxability may depend on whether delivery service is performed by the seller’s employee or an unrelated party.
Which party is the “seller” may also determine the tax base when dealing with sales coupons or other promotions. For a retailer’s discount or coupon, the tax base is generally the discounted price. But for a coupon or discount where the seller is reimbursed by a third party, the tax base is generally the pre-discounted price. Thus, where a third-party food delivery service is not considered the seller, and offers marketplace customers a coupon but remits the pre-discount price of the food to the restaurant, the sales tax collected from the customer may be based on the pre-discount price of food.
iv. Other Compliance Considerations
Marketplace collection laws may raise additional complications for common sales tax considerations. For example, restaurants selling through online food delivery services may still be required to report the gross receipts on their sales tax return, but each state may have a specific guidance for reporting these sales. In some states, the amounts reported on the sales tax return may require reconciliation for other tax purposes—such as local taxes or state excise taxes. Additionally, a restaurant may need to consider how to handle customers that are exempt from sales tax (such as nonprofits in some states) making purchases through the third-party food delivery services.
In general, states may only audit a restaurant for the sales on which it remits tax. However, restaurants should be able to segregate their own sales versus those sales through a marketplace. Additionally, where a marketplace collects and remits sales tax on behalf of restaurants, the restaurant has an obligation to provide the marketplace with adequate information to charge the appropriate tax on the restaurant’s food. On audit, the marketplace facilitator is generally liable for failure to collect or remit any sales tax, unless the marketplace facilitator can prove that its failure to properly collect the tax was due to the failure of the marketplace seller to provide information. The scope of this protection for marketplace facilitators varies by state, but if a marketplace facilitator can prove the failure to collect was due to the marketplace seller, liability for the sales tax would generally shift to the marketplace seller or restaurant.
vi. Non-Compliance Risks
Failure to properly comply with the laws, such as failing to retain adequate documentation or not providing appropriate information to online food delivery services acting as marketplace facilitators can result in additional tax liability, interest, and penalties. Even worse, failure to properly charge the appropriate tax may lead to defending litigation for the under (false claims act) or over collection (class actions) of sales tax.
Marketplace collections laws and the guidance around them to continue to evolve. It is essential that restaurants monitor these changes to ensure compliance with these laws.