California Sales Tax and Grocery Stores

[Steve Pope]

Apparently the Board of Equalization has come down on
at least one grocery store chain (Whole Foods) for
not charging sales tax on food items (even if not heated)
which the customers then sit down and eat at one
of the tables adjacent to the parking lot.

My question is: has this issue arisen before with
grocery stores in California, and if so what was the
outcome? It's hardly a brand new situation.

Thanks

Steve

 

[Lanny K Williams CPA]

Apparently the Board of Equalization has come down on
at least one grocery store chain (Whole Foods) for
not charging sales tax on food items (even if not heated)
which the customers then sit down and eat at one
of the tables adjacent to the parking lot.

My question is: has this issue arisen before with
grocery stores in California, and if so what was the
outcome? It's hardly a brand new situation.

I haven't lived in California since I left school, 40+ years
ago. Yet, I remember that stores had to charge sales tax on
food items "consumed on the premises." I don't recall
anything ever being said about heating the food; all that
was required was that the food be eaten on the spot.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

 

[Stuart A. Bronstein]

Apparently the Board of Equalization has come down on
at least one grocery store chain (Whole Foods) for
not charging sales tax on food items (even if not heated)
which the customers then sit down and eat at one
of the tables adjacent to the parking lot.

My question is: has this issue arisen before with
grocery stores in California, and if so what was the
outcome? It's hardly a brand new situation.

The rules are complicated. Tax is due on foods sold for
immediate consumption, but there are many ins and outs in
the applicable statute - Rev. & Tax. Code section 6359.

The issue comes up from time to time, but depends on the
specific facts of the individual case.

Stu

 

[A.G. Kalman]

Apparently the Board of Equalization has come down on
at least one grocery store chain (Whole Foods) for
not charging sales tax on food items (even if not heated)
which the customers then sit down and eat at one
of the tables adjacent to the parking lot.

My question is: has this issue arisen before with
grocery stores in California, and if so what was the
outcome? It's hardly a brand new situation.

I have no history on this subject. However, as a patron of a
full service Whole Foods here in Glendale, I have wondered
how they were charging sales tax on the cold prepared food
sold at the deli counter. I have to assume that they fail
what the BOE refers to as the 80/80 rule as I doubt that

80% of the sales are taxable in any of the different

taxable categories. This means that the cold food sold at
the deli in a form that is packaged such that it could be
consumed as is would be taxable unless it was sold "to go."
As Whole Foods does provide tables and utensils for the
patrons to consume the product, one has to wonder how one
knows whether that small package of fresh fruit salad with
poppyseed dressing is being sold "to go" at 12:30PM or if it
is for consumption right there unless the patron tells you.

 

[Dick Adams]

Apparently the Board of Equalization has come down on
at least one grocery store chain (Whole Foods) for
not charging sales tax on food items (even if not heated)
which the customers then sit down and eat at one
of the tables adjacent to the parking lot.

My question is: has this issue arisen before with
grocery stores in California, and if so what was the
outcome? It's hardly a brand new situation.

Problem #1:
It is Sales Tax Auditors who give malacious bastards a
bad name.

Problem #2:
Since Kal-E-forn-Ya can't raise property taxes, they have
to get the money somewhere else.

 

[A.G. Kalman]

Apparently the Board of Equalization has come down on
at least one grocery store chain (Whole Foods) for
not charging sales tax on food items (even if not heated)
which the customers then sit down and eat at one
of the tables adjacent to the parking lot.

My question is: has this issue arisen before with
grocery stores in California, and if so what was the
outcome? It's hardly a brand new situation.

I have no history on this subject. However, as a patron of
a full service Whole Foods here in Glendale, I have wondered
how they were charging sales tax on the cold prepared food
sold at the deli counter. I have to assume that they fail
what the BOE refers to as the 80/80 rule as I doubt that

80% of the sales are taxable in any of the different

taxable categories. This means that the cold food sold at
the deli in a form that is packaged such that it could be
consumed as is would be taxable unless it was sold "to go."
As Whole Foods does provide tables and utensils for the
patrons to consume the product, one has to wonder how one
knows whether that small package of fresh fruit salad with
poppyseed dressing is being sold "to go" at 12:30PM or if it
is for consumption right there unless the patron tells you.

 

[Stuart A. Bronstein]

I haven't lived in California since I left school, 40+ years
ago. Yet, I remember that stores had to charge sales tax on
food items "consumed on the premises." I don't recall
anything ever being said about heating the food; all that
was required was that the food be eaten on the spot.

Heating food is one criterion to establish taxability of the
sale. But it is not the only one.

Stu

 

[Stuart A. Bronstein]

I have no history on this subject. However, as a patron of a
full service Whole Foods here in Glendale, I have wondered
how they were charging sales tax on the cold prepared food
sold at the deli counter. I have to assume that they fail
what the BOE refers to as the 80/80 rule as I doubt that
80% of the sales are taxable in any of the different
taxable categories. This means that the cold food sold at
the deli in a form that is packaged such that it could be
consumed as is would be taxable unless it was sold "to go."
As Whole Foods does provide tables and utensils for the
patrons to consume the product, one has to wonder how one
knows whether that small package of fresh fruit salad with
poppyseed dressing is being sold "to go" at 12:30PM or if it
is for consumption right there unless the patron tells you.

This same problem came up with drive-ins - it was difficult
to determine if people were buying to eat on or off
premises. So the legislature created a rule that said that
tax must be charged by such an establishment if they provide
a parking lot in which patrons "could" eat the food.

Does not seem to apply in this case, though, as just
providing tables is not encompassed by the statute. It may
be by regulations, but I haven't bothered to look that
closely.

Stu

 

[Stuart A. Bronstein]

Problem #1:
It is Sales Tax Auditors who give malacious bastards a
bad name.

I thought they made lawyers look good.

Problem #2:
Since Kal-E-forn-Ya can't raise property taxes, they have
to get the money somewhere else.

In fact, property taxes have gone way up in CA over the last
25 years. Whenever a property gets sold, it's tax goes up,
sometimes as much as ten times or even more.

Stu

Moderator:
You are correct. Sales tax auditors make criminal defense
attornies look like honorable people.

 

[Stuart A. Bronstein]

I have no history on this subject. However, as a patron of
a full service Whole Foods here in Glendale, I have wondered
how they were charging sales tax on the cold prepared food
sold at the deli counter. I have to assume that they fail
what the BOE refers to as the 80/80 rule as I doubt that
80% of the sales are taxable in any of the different
taxable categories. This means that the cold food sold at
the deli in a form that is packaged such that it could be
consumed as is would be taxable unless it was sold "to go."
As Whole Foods does provide tables and utensils for the
patrons to consume the product, one has to wonder how one
knows whether that small package of fresh fruit salad with
poppyseed dressing is being sold "to go" at 12:30PM or if it
is for consumption right there unless the patron tells you.

What I've seen in other situations, like Noah's Bagles, is
that they simply ask the patron if it's to take out or eat
there. Of course, those who have a brain say that it's to
take out, but then eat it there anyway.

A brief glimpse at the statute indicates that this is
appropriate except in the case of drive-ins. Providing a
parking lot specifically for consuming food makes all food
sold there taxable, though prividing tables and chairs
apparently does not.

Stu

 

[A.G. Kalman]

(e-mail address removed) (A.G. Kalman) wrote:

This same problem came up with drive-ins - it was difficult
to determine if people were buying to eat on or off
premises. So the legislature created a rule that said that
tax must be charged by such an establishment if they provide
a parking lot in which patrons "could" eat the food.

Does not seem to apply in this case, though, as just
providing tables is not encompassed by the statute. It may
be by regulations, but I haven't bothered to look that
closely.

Regulation 1603 (f):

FOOD FOR CONSUMPTION AT FACILITIES PROVIDED BY THE RETAILER.
Tax applies to sales of sandwiches, ice cream, and other
foods sold in a form for consumption at tables, chairs, or
counters or from trays, glasses, dishes, or other tableware
provided by the retailer or by a person with whom the
retailer contracts to furnish, prepare, or serve food
products to others.

Reg 1603(c) addresses cold food sold as take-out. This is
where it says that if you pass the 80/80 rule it is taxable
if the way it is packaged it is "suitable" for consumption
even if sold for take-out. As mentioned earlier, flunk the
test and take-out is not taxed.

So... even though I have not seen the BOE position on Whole
Foods, I'm guessing that we have a food market that fails
the 80/80 test, that does have tables and utensils on the
premises, sells food for consumption both on and off the
premises that is packaged suitable for consumption.

 

[Victor Roberts]

This same problem came up with drive-ins - it was difficult
to determine if people were buying to eat on or off
premises. So the legislature created a rule that said that
tax must be charged by such an establishment if they provide
a parking lot in which patrons "could" eat the food.

When purchasing fast food in some state other than
California (I think Ohio) the clerk asked me if the food was
to be eaten there or for "take out". If I said take out
there was no sales tax.

 

[Stuart A. Bronstein]

When purchasing fast food in some state other than
California (I think Ohio) the clerk asked me if the food was
to be eaten there or for "take out". If I said take out
there was no sales tax.

That happens in CA too, if you're not at a drive-in. You
say it's to take out, there's no tax, but you take a table
and eat it there anyway.

Stu

 

[Stuart A. Bronstein]

Reg 1603(c) addresses cold food sold as take-out. This is
where it says that if you pass the 80/80 rule it is taxable
if the way it is packaged it is "suitable" for consumption
even if sold for take-out. As mentioned earlier, flunk the
test and take-out is not taxed.

The 80/20 rule says that food must be sold in a form
suitable for consumption on the seller's premises, AND both
of the following must be true [see Rev. & Tax Code
§6359(d)(6):

1. that more than 80% of the seller's gross receipts are
from the sale of food products, AND

2. that over 80% of the seller's retail sales are subject to
tax because they are

- prepared and served meals
- served for consumption on the seller's premises or
- foods ordinarily sold for immediate consumption in parking
facilities provided specifically for that purpose.

So... even though I have not seen the BOE position on Whole
Foods, I'm guessing that we have a food market that fails
the 80/80 test, that does have tables and utensils on the
premises, sells food for consumption both on and off the
premises that is packaged suitable for consumption.

That may be the argument. I imagine it will be difficult to
prove that more than 80% of gross sales are served for
consumpion on the premises.

Stu

 

[A.G. Kalman]

The 80/20 rule says that food must be sold in a form
suitable for consumption on the seller's premises, AND both
of the following must be true [see Rev. & Tax Code
'6359(d)(6):

1. that more than 80% of the seller's gross receipts are
from the sale of food products, AND

2. that over 80% of the seller's retail sales are subject to
tax because they are

- prepared and served meals
- served for consumption on the seller's premises or
- foods ordinarily sold for immediate consumption in parking
facilities provided specifically for that purpose.

So... even though I have not seen the BOE position on Whole
Foods, I'm guessing that we have a food market that fails
the 80/80 test, that does have tables and utensils on the
premises, sells food for consumption both on and off the
premises that is packaged suitable for consumption.

That may be the argument. I imagine it will be difficult to
prove that more than 80% of gross sales are served for
consumpion on the premises.

You misinterpreted the code. The actual words are:
6) When the food products sold are furnished in a form suitable
for consumption on the seller's premises, and both of the following
apply:
(A) Over 80 percent of the seller's gross receipts are
from the sale of food products.
(B) Over 80 percent of the seller's retail sales of food
products

Note the word "suitable." The store does not have to
actually provide a place for consumption. That's why one
has to look to the regulations for an explanation.

What it means is this: If you pass the 80/80 test and sell
a half gallon of milk, it is not taxed. If you sell milk in
half-pint containers, then that milk is taxed because it is
suitable for consumption on the premises.

As previously noted, if you don't pass the test, you operate
under a slightly different set of rules.

I just returned from the Whole Foods store in Glendale,
where I purchased cold food items from the deli for
consumption tonight when I watch the Yankees beat the Angels
again. Each item purchased was packaged in a form suitable
for consumption on the premises. The check out clerk asked
me whether or not I was going to eat the items there or take
them home. I said "home" and there was no sales tax.

I don't write these laws.......

 

[Stuart A. Bronstein]

Stuart A. Bronstein wrote:

You misinterpreted the code.
[snip]

Note the word "suitable." The store does not have to
actually provide a place for consumption. That's why one
has to look to the regulations for an explanation.

I didn't deal with the point specifically because it's
irrelevant. In this case the retailer does provide
facilities for eating on the premises.

On the other hand, if no facilities are provided on the
seller's premises, I don't see how any form of food could be
"suitable" for consumption on the premises. Under your
interpretation any raw fruit or vegetable and anything that
doesn't have to be cooked for health purposes is "suitable"
for consumption on the premises, even though there are no
facilities.

What it means is this: If you pass the 80/80 test and sell
a half gallon of milk, it is not taxed. If you sell milk in
half-pint containers, then that milk is taxed because it is
suitable for consumption on the premises.

Right. If the test is satisfied. It seems to me that will
be the big burden in the case.

I just returned from the Whole Foods store in Glendale,
where I purchased cold food items from the deli for
consumption tonight when I watch the Yankees beat the Angels
again. Each item purchased was packaged in a form suitable
for consumption on the premises. The check out clerk asked
me whether or not I was going to eat the items there or take
them home. I said "home" and there was no sales tax.

So they're presuming that they don't satisfy the 80% test.

Stu

 

[A.G. Kalman]

Stuart A. Bronstein wrote:
You misinterpreted the code.

[snip]

Note the word "suitable." The store does not have to
actually provide a place for consumption. That's why one
has to look to the regulations for an explanation.

I didn't deal with the point specifically because it's
irrelevant. In this case the retailer does provide
facilities for eating on the premises.

On the other hand, if no facilities are provided on the
seller's premises, I don't see how any form of food could be
"suitable" for consumption on the premises. Under your
interpretation any raw fruit or vegetable and anything that
doesn't have to be cooked for health purposes is "suitable"
for consumption on the premises, even though there are no
facilities.

The issue is not raw fruit and vegetables. I am discussing
the sale of cold food sold as a take out order (reg.
1603(c)). If the retailer passes the 80/80 test then cold
food sold as take out is taxable if it is "suitable" for
consumption. See my example on the milk.

If the 80/80 test is failed, then cold food sold for take
out is not taxed. It is only taxed if it is to be consumed
on the premises.

Remember, the 80/80 test requires >80% sales of food AND

80% is taxable because the entity is either a restaurant,

hotel, boarding house, soda fountain or a similar
establishment; or is a drive-in; or it sells hot-prepared
food; or it sells the food for consumption on the premises.