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May 4 — Sales of doughnuts at Krispy Kreme Doughnut stores are subject to the 4 percent restaurant sales tax rate rather than the 1 percent grocery store rate, the Missouri Supreme Court ruled.
The May 3 ruling arose from a tax appeal filed by Krispy Kreme Doughnut Corp. over sales taxes it remitted based on the 4 percent restaurant rate between April 2003 and December 2005. In its appeal, Krispy Kreme sought a refund of $278,000, arguing that its sales should have been subject to the 1 percent grocery store rate.
Under Missouri law, the 4 percent sales tax is imposed on sales of food and drink in establishments where 80 percent or more of the gross receipts are derived from the sale of food made for immediate consumption, the court said. The lower, 1 percent rate is intended, for the most part, to cover sales of food in grocery stores.
On appeal, Krispy Kreme argued that its sales should be subject to the lower rate because less than 80 percent of the doughnuts sold from its stores were intended for immediate consumption. In particular, it argued that three categories of doughnuts shouldn't count toward the 80 percent threshold: doughnuts not purchased within an hour of being prepared and ready to eat, doughnuts sold by the dozen, and doughnuts that customers didn't eat at the store or in transit.
Krispy Kreme also argued that doughnuts could be distinguished from food served in restaurants because, “unlike a restaurant-prepared hamburger or steak, donuts may be consumed after some delay,” the court said.
But the court rejected the company’s interpretation of “intended for immediate consumption” after analyzing the evolution of Missouri’s statute governing the taxation of retail food sales. As originally enacted, the statute established a tax distinction between food purchased from grocery stores and food purchased from restaurants, the court said. But it did so by linking the statute to a federal definition of food that created several tax anomalies, such as different tax treatment of food bought at a restaurant for home consumption based on whether it was hot.
Because of that provision, the Legislature amended the statute two years later so as to distinguish the two categories of sales more effectively for tax purposes, the court said. It did so by eliminating the anomalies and focusing the statute on the essential question: whether the food sold by an establishment is regularly consumed immediately and is intended for immediate consumption.
“Simply put, a donut is a donut,” the court said in affirming the state Administrative Hearing Commission’s rejection of Krispy Kreme’s appeal. “Krispy Kreme does not prepare certain donuts suitable only for immediate consumption and separate, different donuts that are also suitable for non-immediate consumption. All donuts are prepared the same in this respect, and all donuts, in general, are regularly consumed immediately by its customers. A donut is no less a food prepared for immediate consumption simply because a customer chooses to eat it two hours after purchase rather than right away.”
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The ruling is at http://src.bna.com/eHf.
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