Taxing To-Go Food - Compliance Q&A

Sales tax compliance is tricky no matter what the product, but it can be downright nutty when food is involved. Questions arise. For example:

When is to go food subject to California sales tax?

Food sales tax laws are confounding in just about every state, including California. For example, “food products” are generally non-taxable but effervescent water, which seems like a food product, is taxable. Sales tax applies to soft drinks and 100% fruit drinks that are carbonated while sports drinks and 100% juice drinks that are not carbonated are exempt. And so on.

Nowhere is confusion more evident than with “food ordered to go.” To properly apply sales tax — or not — vendors need to take into consideration the following:

• The temperature of the product
  • Is it heated?
• How the product is packaged
  • Is it part of a combination?
• Is seating provided?
• What percentage of sales are taxable?

Hot or cold

Sales of hot prepared food are subject to California sales tax, no matter where the food is consumed. Meet a friend for lunch at the Thai place next to your office and you’ll pay sales tax on the bill. Sales tax also applies when you pop out and get Phad Thai to go or buy hot food from a grocery store deli.

Intention is everything. What makes a food “hot” is that “it was intended to be sold as a hot food.” So tax is due even if the hot food has cooled by the time of sale.

Exception: hot cross buns or other baked goods and cups of hot coffee and tea are exempt from sales tax when sold “individually and to go.”

Cold food sold to go is generally exempt, so long as the vendor does not provide a place for the food to be consumed on premises.

The combo

Mixing and matching food messes with taxability when the end result is sold for a single price.

A combination that includes a hot prepared food or a hot beverage is taxable. Examples include hot fried chicken served with cold slaw and a bun (a childhood favorite) and a donut and hot coffee (an adult staple).

Less cut and dry is the taxability of a combo meal that includes cold food and a carbonated drink. Cold food sold to go is generally exempt, so sales tax does not apply to a combination that includes a cold sandwich, chips, and iced tea.

But carbonated beverages are generally taxable. So for a combination that includes a cold sandwich, chips and a Coke, vendors must apply tax to “the portion of the selling price that represents the carbonated beverage.”

Sit on it

Is there seating in the house? Food that is “sold in a form for consumption at tables, chairs or counters or from trays, glasses, dishes or other tableware” provided by the seller is subject to tax. This generally includes food sold at food courts, where there is seating for multiple eateries. It also includes cold food, which is generally exempt when sold by a vendor that doesn’t provide seating. And it includes colds food sold at drive-ins that provide parking, the presumed seating.

Remember that hot food is generally taxable regardless of seating.

Do the math

Food taxability is usually tempered with the term “generally.” This is deliberate and it’s due to the fact that there is an exception for almost every food tax rule. Consider the 80/80 rule.

A grocery store or similar establishment may elect to apply sales tax to charges of to-go sales of cold food if both of the following are true:

• More than 80% of the store’s sales are from the sale of food products
• More than 80% of the store’s sales are taxable dine-in or hot food sales

The 80/80 rule varies slightly for the dining and beverage industry:

• More than 80% of gross receipts must come from the sale of food products (alcohol sales are not included)
• More than 80% of the retail food product sales are taxable because one of the following is true:
  • Food is prepared, furnished or served for consumption at the place of business
  • Food is a meal or hot prepared food
  • Food is sold by a drive-in

Under California law (Regulation 1603), “When a seller meets both criteria of the 80/80 rule, tax applies to sales of cold food products (including sales for a separate price of hot bakery goods and hot beverages such as coffee) in a form suitable for consumption on the sellers premises even though such food products are sold on a take-out or to go order.  Sales of cold food products which are suitable for consumption on the seller's premises are subject to the tax no matter how great the quantity purchased."

Beginning April 1, 1996, a seller meeting both criteria of the 80-80 rule “may elect to separately account for the sale of "take-out" or "to go" orders of cold food products which are in a form suitable for consumption on the seller's premises. The gross receipts from the sale of those food products shall be exempt from the tax provided the seller keeps a separate accounting of these transactions in his or her records.”

Still have questions? Check out the California Department of Tax and Fee Adminstration's publications on the Dining and Beverage Industry and Grocery Stores, and explore automating tax compliance at Avalara.