Nobody likes a double-dipper. They’re grimy and uncouth and are often boorish conversationalists. This applies equally to dinner companions and taxing authorities. Accusations of “double taxation” are the bread and butter of taxpayers seeking to underscore the absurdity of an audit result, and these appeals to justice are frequently made in support of claims to a state’s sale-for-resale exemption.
Perhaps the quintessential example involves sales of condiment packets to restaurants. Since their cost is accounted for in pricing menu items, so the argument goes, to tax their sale to restaurants as a retail sale would result in double-taxation: once when the condiments are purchased by the restaurant, and a second time when a diner purchases a menu item. According to restaurants, restaurant suppliers, and other proponents of this argument, such sales of condiment packets should be treated as exempt sales for resale.
As expected, the states are divided on this issue, and in a letter released this month, the Colorado Department of Revenue drew its line in the chimichurri. According to the department, single-serving condiment packets, such as jelly packages, butter pads, and half & half creamers, that a restaurant does not incorporate into prepared meals are not resold to customers. Therefore, these condiments are taxable when purchased by the restaurant. In support of this position, the department observes that the restaurant does not transfer these condiments to the customer with the meal purchased, but instead makes them available separately, such as at a condiment counter.
The Alabama Court of Civil Appeals rejected a similar argument in a 2011 case. The Department of Revenue in that case conceded the issue with respect to condiment purchases, but went for the throat when it came to the restaurant’s purchase of peanuts that it made available liberally throughout its premises. Before prevailing on the viscerally appealing double taxation argument, the restaurant produced evidence that it priced 9 cents into every entrée served to offset the cost of peanut consumption.
Other states have resolved the condiment controversy through statutes and regulations. For instance, under Haw. Regs. § 18-237-4-01.01(f)(2), Hawaii restaurants’ purchases of prepackaged, single-serving shoyu, Huli-huli sauce, and other condiments are taxed as retail sales unless resold for a separate charge. Under Ariz. Rev. Stat. Ann. § 42-5061(A)(5), Arizona takes a different approach, treating all sales of condiments to restaurants as exempt sales for resale.
Ultimately, the choice of which condiments to use and in what quantities is a deeply personal one. Should restaurants that defer to customers on this by making condiments available on a self-serve basis be required to pay more tax? On the other hand, if states concede the resale point for condiments, as Alabama did, what about other items available to customers free-for-the-taking? For instance, restroom items such as hand soaps and paper towels? How about table center pieces? Restaurants can be expected to stretch this argument as far as they can. And who can blame them? After all, isn’t there a double-dipper in all of us?
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Are French fries best with ketchup, vinegar, or aioli?
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