Sales Tax Slice: Tax Planning for Turkey Day, Black (Thursday?) Friday, and Cyber Monday

With only days remaining to prepare for Thanksgiving, Black (Thursday?) Friday, and Cyber Monday, we should all take a few moments to mentally and physically prepare for the festivities, count our blessings, and be thankful for the sales and use tax guidance that has been so graciously provided by our state and local governments.  Without their forethought and attention to detail, we could spend all day trying to determine if, when, and how much tax applies to retail transactions.

 While battling fellow grocery store patrons for the last package of dinner rolls or standing in painfully long lines to purchase your favorite items for Thanksgiving dinner, consider the different approaches states are taking in applying tax to the items to help pass time. For example, does your state's sales tax apply to your turkey purchase if:

  1. You purchase an uncooked fresh or frozen bird from your grocery store, for home preparation.
    • Most states provide an exemption or apply a reduced rate to purchases of food and food products, which generally includes items such as raw turkeys not ready for immediate consumption.
  2. You purchase an uncooked turkey alternative, such as Tofurkey, from your grocery store, for home preparation.
    • Sales tax treatment is the same as that for traditional turkeys.
  3. You purchase a prepared bird from your grocery store.
    • Taxability often depends on the state's definition of prepared food, "immediate consumption," and whether the bird is sold with eating utensils.  
  4. You purchase a prepared bird from a restaurant or catering service, for home consumption.
    • Sales of prepared food by restaurants and catering services, including sales of roasted turkeys, are subject to tax in most states.
  5. You purchase a baby turkey (called a "poult") and raise it, and you process the bird yourself.
    • The purchase of the bird is usually taxable, but exemptions may be allowed for animals used in agriculture. 
  6. You purchase a poult and raise it, but you pay for processing services.
    • Taxability of processing services depends on whether the state imposes tax on services.  Most states impose tax only on enumerated services.
  7. You do any of the above and your plans are foiled, you recognize the inherent dangers of turkey preparation (regardless of whether or not the fire department is called), or you otherwise opt to gather at a restaurant to enjoy turkey.
    • Even if your turkey and kitchen are charred, you will generally have to pay tax on a turkey prepared and enjoyed at a restaurant.

 It's easy to get caught up in the excitement of holiday shopping with all of the great deals advertised, but businesses and consumers should be prepared to properly calculate sales tax on purchases when retailer or manufacturer discounts are applied, or a deal-of-the-day instrument (such as from Groupon or LivingSocial) is redeemed.  Nearly all of the states have set out pretty clear rules for retailer and manufacturer discount situations, but only about a dozen have issued guidance for deal-of-the-day instruments.

Why the lack of guidance? Controversy surrounds whether sales tax is to be applied to the full price of the item acquired in a transaction where a deal-of-the-day instrument is redeemed (e.g., tax would be imposed on $100 for an item even though the customer actually paid $50 as a result of the certificate), or the discounted price of the item (e.g., tax would be imposed on $50 even though the full value of the item was $100). Among the states that have provided specific guidance are California, Illinois, Kansas, Massachusetts, Missouri, New York, Nebraska, and Washington.

And, finally, a friendly tip for internet transactions on Cyber Monday and going forward through the holiday season: internet retailers may be required to collect and remit sales tax on sales sourced to a state if the retailer has nexus with that state.  If an internet retailer does not collect tax on a transaction, it does not follow that the transaction is tax free! If the purchaser is in a state where sales tax would be collected on the sale and the retailer is not obligated or fails to collect any tax, the purchaser is generally obligated to report and pay use tax to his or her state for the purchase. Thus, purchasers should maintain records for purchases and look for use tax reporting on state personal income tax returns.

By Christine Boeckel

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