Recipe for Sales Tax on Food in Minnesota - Too Complex!

 

Our tax laws are generally more complex than necessary. Most of this complexity is due to special rules where we try to give some types of taxpayer or activities special treatment. While there might be good reasons for the tax exception, there usually are simpler alternatives.

A recent news update from the Department of Minnesota included a Prepared Food Flow Chart. The first question is whether the seller heated the food or mixed or combined two or more food ingredients into a single item. That alone doesn't sound too complex but likely results in "yes" to most prepared food including cooking an egg in a pan that has butter in it. But there is more. Despite combining food, if the item is a bakery item but no utensils rae provided or needed (and if needed not made available), then the bakery item is not subject to sales tax. Also see the DOR's Fact Sheet 102D on prepared food.

I encourage you to look at the chart. Nice job by the DOR in trying to simplify the law created by the legislators.

What would be simpler? Tax all food purchased by a consumer. Provide relief to low income individuals through an income tax credit such as a larger EITC. If the federal government continues sending the advance child tax credit monthly, states should look into how they can provide funds to increase these amounts to advance the food sales tax credit.

Or, the entire sales tax system can be changed from being assessed at point of consumption to being computing using a formula approach of Income less Savings = Consumption. This could be a schedule attached to your state income tax return. Individuals below a specified income tax level would be exempt.  And there could be a graduated rate structure. And there would no longer be any sales tax compliance by sellers and businesses would no longer pay sales tax. There could still be sales tax applied to vehicles to help buyers who want to finance that (and the registration process can handle the sales tax collection). Also, if needed to help with revenue, perhaps businesses pay sales tax when they purchase vehicles. For more on this idea, see a 2017 paper on it I wrote with two of my econ fellow faculty. 

What do you think?

#Letsfixthis

Logical sales tax ruling on a web-based business

Since the start of e-commerce and web-based businesses, uncertainties have existed about how sales tax applies to their operations. Often, the state eventually issued guidance for many types of transactions, particularly those involving software. Where there was no specific guidance, you just need to read the statute, understand the technical and legal nature of the business operations and what it provides to customers, and derive an answer. Some companies have also sought rulings from state agencies.

I think a recent ruling from the New York Department of Taxation and Finance reaches a logical conclusion. TSB-A-14(27)S (8/20/14) involves a business (B) that operates a website where people can place an order with a restaurant and pay. B’s website lists about 5,000 restaurants in 27 cities. Website visitors search for a restaurant, see the menu, place an order and pay. B generates money by charging various services to the restaurants: one-time activation fee, menu update fee, and a marketing services fee. The latter fee is charged for every order. When a customer pays for their order, B charges the customer including sales tax and remits those funds to the restaurant less the marketing services fee. Restaurants are responsible for handling sales tax compliance, food returns and complaints. B provides customers with a receipt for their order.

NY imposes sales tax on food and drink sold in or by restaurants and similar establishments if consumption is on the premises or where the vendor serves food off the premises.

The Commissioner ruled that B was not liable for sales tax as it did not operate a restaurant or provide catering services. B’s business is “Internet advertising services and fulfillment services to the restaurants.” The ruling notes that if B does not remit the sales tax it collects to the restaurant, “the Commissioner reserves the right to collect those funds from [B] under the doctrine of money had and received.” Finally, B’s services are not subject to sales tax.

Seems logical. Too bad the law wasn't crystal clear enough to avoid the time for the taxpayer and state of issuing the Advisory Opinion.  It looks like there is no fee charged for obtaining one, but certainly, costs of the research and drafting by the taxpayer and their tax advisers and the state in issuing the ruling.  [Click here for the form to request an opinion and here for the instructions if you want to see what is involved in getting an opinion.]

Note - the result might not be the same for all states. B is only potentially liable for sales tax in a state if they have a physical presence there and if they are selling something subject to sales tax. Most states do not tax many services, but B needs to check. B also needs to see if its connection with a restaurant in a state causes B to be considered physically present in the state.  Fun stuff!

What do you think would make sales tax life easier for B?