Restaurants and Third-Party Delivery: Just Add SALT (Complexity)
Restaurants weighing whether to engage third-party delivery providers have a host of issues to consider when vetting and comparing vendors. How do the providers’ fee rates and structures differ? Does their software integrate with the restaurant’s point-of-sale (POS) system? What are the capabilities and reach of the larger players’ mobile apps and website ordering systems? Are the providers’ hours and delivery areas in sync with the restaurant’s?
But a crucial area that restaurants need to evaluate is how third-party delivery providers and their agreements will affect restaurants’ compliance and audit risks related to state and local taxes—in particular with state and local sales taxes, local food and beverage taxes, or special taxing district taxes.
It is common for restaurants to make sales across multiple state and local jurisdictional lines, but many state and local taxing jurisdictions have not released guidance on mobile ordering and the treatment of third-party delivery transactions related to the restaurant industry specifically. This has resulted in a significant amount of uncertainty surrounding different tax laws and rules enacted across states and localities.
In the absence of such guidance, here are five considerations restaurants should make that could have a significant impact on their state and local taxes:
- The size, sophistication and number of third-party delivery services
- The capabilities of internal sales/POS/reporting systems
- Costs associated with updating tax-decision and rate software
- Compliance costs associated with filing additional or more complicated sales tax and related returns
- Potential costs resulting from enduring and defending additional audits
State and Local Tax: Questions to Ask
Sales tax issues associated with using third-party vendors are similar to other sales tax issues and transactions in the sense that the facts surrounding the transaction are critical in determining the proper treatment and working through the issues that may arise. These include:
- Which party is actually making the sale to the customer? Does the state consider the third-party vendor a marketplace facilitator?
- How will the food and beverage sales, services, and other charges be reported to the various taxing jurisdictions and by which party?
- Which items and services are subject to tax and at what rate?
The answer to these questions and more will depend on each transaction’s facts and will consider how the restaurant’s agreement with the third-party vendor is structured, how the customer places an order for delivery and what jurisdiction(s) is involved for all the parties.
What About the Locals?
The Iowa examples are from the perspective of one state’s sales tax only and does not include special or local food and beverage taxes that could be also be occurring in another jurisdiction. Consequently, if the food delivery transaction occurs in a state or local jurisdiction that is not the same taxing jurisdiction as the restaurant’s location, or the parties are not all located in the same taxing jurisdiction, the answers and issues will change and will likely be increasingly more complex to work through in order to comply with the many jurisdictions potentially involved.
Approximately 20 states and the District of Columbia authorize meals taxes, and of these, 17 exclusively authorize local option meals taxes, one (Vermont) imposes a state meals tax and provides for local option meals taxes, and two (Maine and New Hampshire) only collect meals taxes at the state level (The Tax Foundation Fiscal Fact No. 538 Jan. 2017 - Punching the Meal Ticket: Local Option Meals Taxes in the States
The Takeaway for Restaurants
As the fallout from the U.S. Supreme Court’s decision in South Dakota v. Wayfair
continues to ripple through the states, with the first wave of economic sales tax nexus laws now being closely followed by a second wave of marketplace facilitator laws, these new sales tax laws will present additional challenges to restaurants using third party delivery—and that’s only in attempting to comply at the state level. This is an ever-evolving area of the state and local tax law from the states’ perspective alone, and in those states that authorize local taxing jurisdictions, the treatment of third-party delivery can and will vary dramatically.
Restaurants should carefully consider which third-party delivery providers to use. Does a wider reach create a wider set of compliance issues? Limiting the number of third-party providers to one or very few will likely help lessen the impact of variability and potential exposure. Although Iowa and a handful of other taxing authorities have released information on the tax treatment of third-party delivery transactions for the tax(es) they are enforcing, many states and most localities have not.