Sales Tax Slice: Have Your Cake, And Eat It, Tax Exempt?

With grocery stores striving to meet the needs of increasingly busy families, the availability of prepared meals offered at grocery stores is on the rise. The broad spectrum of food preparedness levels is geared toward consumer convenience, but presents a tax-headache for businesses seeking to comply with differing state-drawn lines between nontaxable grocery items and taxable prepared foods.

Bakery products have a history of creating sales tax controversies, which includes the bagel situation in New York where taxability turns on whether bagels are sliced for customers, and the Krispy Kreme Doughnut Corp. case in Missouri where the court determined the meaning of “food prepared… for immediate consumption on or off the premises.”

Streamlined states have adopted uniform rules defining prepared food, in part, as food sold with eating utensils, but may tax bakery items differently than prepared food if sold without eating utensils. But other factors are considered by many non-streamlined states, such as New York, Missouri, and Florida, which rely on whether the food is purchased ready to be eaten, or the intent to consume on the premises, in determining tax treatment.

Recently, the Florida Department of Revenue issued Technical Assistance Advisement 12A-021 to clarify the state's tax treatment of a grocery store’s sales of certain salad bar items, deli salads, and bakery products. The department concluded that:

  •  tax applies to salad bar items sold at stores that have tables and chairs because the items are prepared goods sold for immediate consumption, but the items are exempt at stores that do not have tables and chairs when packaged without eating utensils.
    •  tax applies to the deli salads because they are not prepared off the premises and sold in the original sealed container, and the exception for prepared food sliced into smaller portions does not apply because repackaging does not involve slicing.
      •   bakery products are exempt because they are packaged in a manner consistent with an intention to consume the products off the seller’s premises.

         The department explained Florida’s rebuttable presumption that the sale of bakery products by establishments with eating facilities are taxable when items are sold in quantities of five or fewer, or not packaged in a manner consistent with an intention to consume off the seller’s premises.

        Bakery products sold in packaging that is glued, stapled, wrapped, or sealed are examples of packaging consistent with an intention to consume off the premises, the department continued, explaining that bakery products sold by establishments without eating facilities are exempt.

        The grocery store that sought the advisement bakes and packages 95 percent of its bakery items on-site, and stated that it is the customary practice for bakery items to be consumed off premises.

        Despite the numerous rules and exceptions for applying tax to these items sold at grocery stores, one positive “take-away” is that the grocery store’s customers can purchase a freshly baked cake and take it to a seating area to enjoy, exempt from sales tax, at least until or unless the practice becomes customary in the establishment.

        For additional information on the taxability of prepared foods, see Bloomberg BNA's Sales and Use Tax Navigator, Section 5.6.

         By Christine Boeckel

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