Checkout at one register and a sale is exempt; use another and it’s taxable – Wacky Tax Wednesday

It’s been months since our last Wacky Tax Wednesday post. With businesses, communities, and individuals nationwide reeling from the impact of the coronavirus pandemic, focusing on wacky elements of sales tax laws felt out of touch. As we look toward recovery, it seems time to bring a little wackiness back. We hope it gives you something to smile about.

The first time I encountered a grocery store with a dine-in section, back in the late 1980s, I couldn’t imagine ever eating at such a place. Why eat at a grocery store when you could go to a real restaurant, or cook at home?

That was then. Before the lockdown, I regularly stopped by my favorite grocery store for lunch when out and about with the family: We'd grab our food to go if time was short or pause and enjoy it there. The ambience is surprisingly pleasant, and we'd be able to get our weekly shopping done, too. It’s a win-win.

I usually check out at a register located in the restaurant area, and I’ve never been turned away when I have a prepared salad in one hand and a dozen eggs in the other. Where I tend to shop, at least, it seems anything goes as far as checkout is concerned.

That’s not necessarily the case in Massachusetts, where what’s allowed through the checkout line can impact the taxability of all sales made at that register. 

Since meals sold by a restaurant (or restaurant area of a grocery store) are generally subject to Massachusetts sales tax, a supermarket sought advice from the Massachusetts Department of Revenue. How, it wondered, should grocery items be taxed when rogue shoppers/diners bring them through the restaurant-area cash registers?

In responding, the Massachusetts Department of Revenue considered:

• How the supermarket tracks sales of meals and supermarket products
• Whether the supermarket allows grocery items and meals to be purchased at the same registers

Generally, it noted in the letter ruling, “all items offered for sale in such restaurant parts are subject to tax,” and “all sales made at a restaurant or restaurant part are sales of meals subject to tax.” However, an exception can be made if sales of meals and supermarket products are separately tracked at all cash registers. 

In the case at hand, the supermarket promised to separately track sales of meals and supermarket products at all cash registers in its establishments. It would achieve this by:

• Affixing all products sold in the restaurant area with taxable universal product codes, or UPCs (grocery products are already labeled with UPCs)
• Ensuring meals are offered for sale only in the restaurant part, and all other items (e.g., supermarket products) are offered for sale only in supermarket areas
• Ensuring products sold in the restaurant area are taxed no matter which cash register is used
• Maintaining books and records identifying and describing all items sold, along with their UPCs and UPC tax designations
• Providing the total tax amounts collected and remitted

While encouraging shoppers to purchase restaurant meals in the restaurant area, and to purchase other products outside of the restaurant area, these measures would allow the store to properly tax items that end up at the “wrong” register.

Based on this analysis, and assuming the supermarket follows through on its plan to “implement various controls to separately track the sales of meals and supermarket products at all cash registers in its supermarket establishments,” the department concluded that “otherwise tax-exempt supermarket products are not subject to tax when purchased at a cash register in one of the supermarket’s restaurant areas.”

Note that this letter ruling applies to a certain set of circumstances explained by one taxpayer. Different circumstances could lead to a different ruling.

In fact, Footnote 2 of the ruling explains how a stand-alone restaurant maintained by a supermarket would generally “be required to charge tax on otherwise tax-exempt supermarket products unless [the] supermarket developed controls, equivalent to those considered in this ruling, to ensure tax was imposed only on taxable items.”

Additional details are available in Letter Ruling 20-1: Sales at Cash Registers Located in the Restaurant Areas of a Supermarket.

Similar sales tax issues may also arise at bakeries, which can operate without restaurant sales, as a restaurant, or with a restaurant part.

In Massachusetts, a bakery without restaurant sales generally should not charge tax on any sales of baked goods for off-premises consumption, regardless of the number of baked goods sold.

However, a bakery operating as a restaurant is considered a restaurant for sales tax purposes. As such, all sales of goods for consumption on premises are taxable, as are all sales of baked goods for consumption off premises — except sales of units of six or more.

A bakery with a restaurant part should keep restaurant sales separate from bakery sales. If all sales are made from the same counter, the business would be considered a restaurant and would have to tax “its sales of beverages and baked goods in units of five or fewer … even when the sale is made without a beverage.”

Yet if the bakery separates bakery sales from restaurant sales (i.e., keeps a separate register), sales of baked goods from the bakery section would be exempt regardless of the number sold, while sales from the restaurant part would be taxable — except baked goods in units of six or more. 

For more details, see 830 CMR 64H.6.5: Sales Tax on Meals. To improve compliance and stop worrying about sales tax, look into automating sales tax collection and remittance.

The dine-in section of my favorite grocery store is still closed because of COVID-19, but it's moving toward reopening. I'm looking forward to that day, even if I have to pay tax on everything I purchase.