Restaurant Container Exemptions (or the Sales Tax Guy talks McRibs)

It's time to talk about containers again, for several reasons.  First, this article gave me an excuse to take the above picture.  Second, I therefore had a reason to visit McDonald's for a McRib.  Third, how often do you get to write off a McRib as a business expense?

Most importantly, in my previous articles about containers, I didn't really talk about restaurants.  But lately, I've started using McDonald's in the container section of my Taxing Policy webinars, so I thought it was time for a picture to illustrate the PowerPoint presentation.  And, well, I haven't written an article in a while.

Most states have container exemptions.  These allow the vendor to be able to purchase containers tax free if the containers will be sold, with the product, to the customer. Basically it's an extension of the resale exemption.  The seller is essentially buying the containers for resale.  Even though they're not billing the customer separately, they are billing them for the containers as part of the cost of the actual merchandise sold.  In other words, Target didn't have to pay tax on the bag.  Just like the socks inside the bag, they bought the bag for "resale."

So let's take the top picture apart and talk about each item.

1.  The bag for the delicious fries, cup (and lid) for my iced tea, the box for the holiday pie, and the clam-shell for the wondrous McRib are all clearly containers.  McDonald's doesn't expect them back from you.  You bought them with the food.  Therefore, they are containers that generally qualify for the exemption.

2.  What about the napkins and straw?  In most states, disposable items like these that are available for the customer to take, are also exempt.  They obviously aren't containers, but they are clearly part of the selling price of the food and, once you've taken a straw, the restaurant would really prefer you not put it back.  This kind of "free for the taking" rule is only for restaurants.

3.  What about the brown tray?  Did you buy it with the food?  Can you take it with you?  No.  They didn't sell you the tray with the food.  That tray was purchased by McDonald's to use over and over again (after they've cleaned it, of course).  Unlike the above items, it was not sold to you with your food.  It is a "returnable container."  Therefore the restaurant paid sales tax for the tray.

4.  Finally, what about the "place mat" on the tray?  That's a stumper and I can see it going both ways.  It is certainly something that has value to the customer providing a clean place for your fries to spill out of the bag.  But it's also usually a marketing piece for the restaurant.  I personally would take the position that it meets the test for a disposable item and therefore is not taxable.  But the auditor might argue that one.

So there you go.  Containers for restaurants. Remember, every state is different.  Some states have broader rules, some are stricter.  Do your research and don't take my word for it.  See the disclaimer.  And it's almost lunch time as I write this.  Hmmm.  Wonder if they still have McRibs at my McDonald's?

Merry Christmas and/or Seasons Greetings.  May all your holidays be glad and let there be McRibs available at your McDonald's. 

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only.  Research these issues thoroughly before making decisions.  Remember: there are details that haven't been discussed, and every state is different.  Here's more information

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Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo. 

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Illustrations and Parables: A weird invoice where they paid extra California taxes for a shipment of non-taxable items to Idaho

The following is a true story.  I've randomly changed the names, states and products so that nobody, least of all me, will get in trouble.  But it had to be told.

I received a call from one of my previous class participants on Wednesday.  Doris had emailed me a question the day before, but it was so long and involved that I wanted to talk about it on the phone.  I had a long drive in Chicago morning traffic, so she called me back at the perfect time. 

Doris had sold some boxes to Sam in Idaho.  The boxes were containers for Sam's product so they were bought for resale and Doris had Sam's resale certificate.  Doris had billed Sam, with no sales tax on the invoice, since it wasn't taxable. 

But then Doris got a call from the Sam's distributor in California.  For some reason, they were going to pay the bill.  Here's the conversation:

Distributor: I have your invoice here for the boxes you sold to Sam.  Why didn't you charge sales tax?
 
Doris: It's not taxable.  They're boxes for his products so they qualify as exempt.

Distributor: No they're taxable.  You need to rebill us with California sales tax.

Doris:  You're wrong.  They're not taxable.  It's called the "container exemption."  I'd be happy to send you more information.

Distributor:  I need to have California tax on this invoice.

Doris:  But I can't bill you California tax anyway.  We aren't registered in California, don't do business in California and don't have nexus there.  I can't collect taxes for a state I'm not registered in.  Besides, the delivery occurred in Idaho, therefore it would be Idaho tax anyway.  But it's not taxable!

Distributor:  If you don't charge me California tax, we'll just add the tax to the payment.

Doris: If you do that, I'll just have to send you a refund check.  We can't accept that money.

Distributor:  We won't cash it.

At this point, Doris, realizing she was talking to a tree stump, gave up and sent me the email. 

After we went through the whole thing, Doris asked, "I'm right, aren't I?"  I said, "Absolutely!  The best chance you have is that the person who handles the refund check won't have heard from this idiot.  They'll deposit it and that'll be it.  Out of curiosity, what part of accounting was the person from?"

Doris replied, "She was the sales rep."

"Ah.  Now it makes sense."

If there's anyone who'll stick to their guns, on a topic they know nothing about, in the face of someone who clearly knows what they're talking about, it's a sales rep.  (I kid, I kid.  I spent years in sales)

I explained to Doris that she needed to keep very detailed notes on this situation because of two potential scenarios:  

1.  The California distributor gets audited by the state of California who discovers that taxes were paid to Doris.  The auditor will ask Doris what she did with the money, since she's not registered in California.  Doris will need to be able to document that she did refund the money.

or

2.  The California distributor hires a reverse sales tax auditor who comes across this weird invoice where they paid extra California taxes for a shipment of non-taxable items to Idaho. [Boy, as soon as I wrote that, I knew I had the title of this article.]

The auditor will immediately call Doris and demand a refund for the overpayment.  Again, Doris will need to be able to document the refund.

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Now the other thing that the sales rep didn't know about (and many of you probably don't know either) is that refusing to cash the check doesn't really solve the problem.  After about a year or so, depending on the state, it will become an unclaimed property issue.  Doris will have to send a letter to the company telling them they have an uncashed check.  If they still refuse to cash it, Doris will then turned the money over to the abandoned property department of the state.  Her job will then be finished.  The money has been paid, in this case, to the state.

Now, when that reverse sales tax auditor calls about the overpayment, Doris can just say, "Yeah, that company you're working for refused the payment.  We had to turn it over to the state treasurer.  Call them.  Not my problem anymore."

But, as I said, Doris needs to document the heck out of this.  Because she'll be lucky if this doesn't pop up again in the next three or four years.

And here's a message for sales people, or any non-accounting folks out there.  If the accounting people seem to know what they're talking about, there's a chance they do.  I'm just sayin'.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only.  Research these issues thoroughly before making decisions.  Remember: there are details we haven't discussed, and every state is different.  Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo. 

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Accounting and the Container Exemption

I got this tip recently in a seminar. I've never heard of it before, but I thought I'd pass it on because it makes sense

The logic behind containers being exempt is that the box, bag, carton, pallet and other packaging materials were bought for resale. They're essentially sold with the product to the customer - they're ingredients. But a sharp auditor might ask about the accounting for your packaging costs.

In order to be able to argue that the container is part of your product, you may want to account for it that way. In other words, the theory is that you should be including the cost of your packaging materials and containers in cost-of-sales or cost-of-goods-sold, where your other product costs are.

Now, if you're like most companies, those costs are probably being included in your sales and administrative expenses. And you might have some trouble convincing your CPAs of the sound, logical and insightful thinking behind this recommendation.

But it's worth considering to be able to reinforce why your packaging materials aren't taxable.

Note that you should check how the container exemption works in YOUR state. And DO talk this over with your accountants.

Sales Tax Guy
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Brothers and Sisters, let us now discuss...containers.

When you buy a can of beer, what are you really buying?

When you purchase the can of beer, you're also buying the can, aren't you? Isn't the can sold to you with the product? Therefore, the can is an ingredient in the product called, a can of beer. Therefore, logically, shouldn't the brewery be able to buy the can for resale, just like the ingredients for the beer?

Containers that are sold with the product to the customer are generally not taxable.

If you go to a restaurant and they sell you pop (or soda, whatever) in a cup, they are able to buy that cup for resale. Because it is sold to you with the delicious beverage. But if you get your drink in a glass or a china cup, the container wasn't sold to you with the beverage and the seller should have paid tax when they bought it.

Returnable containers, like a keg of beer or a tank of propane, are generally taxable because they are not sold to the customer with the product. They are bought by the seller, empty of course, and used over and over again. The seller pays tax on those containers because they use them to transport their product to their customers.

But a container that is sold with the product to the customer, is not taxable when purchased by the seller.

By the way, this isn't just a manufacturing exemption. It generally applies to anyone who sells products. The grocery store doesn't pay tax on the bags they put your food into when you make a milk run.

That's the general rule, backed up with logic. But there are significant variations from state to state, mostly with the definition of container and customer.

Just about every state will say that the can itself is exempt. The container that actually touches the product and/or is received by the final consumer of the product, is almost always exempt when bought by the seller of the product.

How about this shipping container?



Usually the box would be exempt, if sold to the customer with the product inside the box. When I got this box, (which I carefully saved unopened so that I could photograph it and use it in this blog) the vendor didn't expect me to return it to them. I got the contents, plus a nice empty box. But, say the seller purchased boxes to ship materials internally from one division to another? In that case, the container would be taxable. It wasn't bought to sell with product to the customer.

But some states, as mentioned above, would not exempt the box, only the container touching the product. If the company shipping this box was in one of those states, they would have had to pay tax since the box doesn't touch the product. What the box contained was software (that I paid tax on...don't worry). In some states, only the software box containing the CD would be exempt, just like the can, because only the software box touched the product.

Let's say that box containing the software was sent to a dealer, who would then put the software on the shelves in their store. In a few states, the box would be taxable because it didn't get shipped to the final consumer.

And then, there's the beloved peanuts.



Some states have a problem with peanuts, bubble wrap, excelsior, etc. because it's not touching the product. The box might be exempt, because it's really containing something. But the peanuts are not a container, therefore they don't qualify for the exemption. In fact, they are being contained.

Shipping labels are often differentiated from marketing labels, or inventory control labels which are usually taxable.

And finally, there's skids (or pallets - whatever).



Pallets are barely containers. You could say that they are the bottom part of a container made up of the stretch-wrap on 5 sides and the pallet on the bottom. Might be tough, though.

Often, the state's rules don't use the term container, they use a variation on wrapping supplies or shipping materials. That's a good thing because then you can pretty much fold everything I've talked about into that definition, as long as the wrapping materials are sold with the product to the customer. But that also leaves room for the auditor to wiggle as well. I can see an auditor trying to make the case that the peanuts really aren't wrapping the product. I'm just sayin'

When I'm researching a state, I'll look for mention of specific items, like dunnage (a really obscure term for peanuts) and pallets. If a state exempts those things, I figure we're home free.

Hopefully it's obvious that people who sell services usually don't sell product. Therefore, there's no container exemption for them. Your CPA doesn't get to buy the envelopes, in which he sends out reports, tax free. He really hasn't sold a product. The report is really just the work product of his services. Except that, in a few states, dry cleaners bags are exempt when bought by the dry cleaner. Go figure.

Summary:

1. If you sell stuff, and you buy containers, you should see if you qualify for the container exemption. A lot of new businesses don't realize that this stuff is exempt to some degree.

2. You need to get as much information on the laws in the state where you receive and use those containers. What do they consider a container? And does the container have to get sold to the final consumer?

I've got a few more issues to talk about, but you've gotten enough to chew on for now. Stay tuned.

Sales Tax Guy
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