Delivery or Pick-Up? … and Other Simple Questions That Can Cook Your Client’s Sales Tax Complianceby
Autumn has arrived and the days are drawing shorter. For accountants and tax professionals, it’s time to update forms and software, attend annual updates, and take all the personal time off you can before busy season. It’s also the time of year for fall youth sports, an occasional tailgate experience, and maybe even backyard viewing parties for the big games.
Where is this article going? Pizza delivery, of course!
In most states, a pizza delivered to your home or get-together is probably subject to sales tax, but what about those delivery charges? Delivery charges and other “add-on” charges may or may not be subject to sales tax, based on state rules and the nature of the underlying transaction.
An ongoing lawsuit in South Florida between a pizza buyer and Pizza Hut illustrates the connection between a double-pepperoni and your client’s sales tax compliance effort.
A Florida consumer alleges she was erroneously charged sales tax on delivery services by the pizza chain. The underlying state rule is similar to a handful of other states: If a retail customer can arrange their own delivery (think: pick up the pizza themselves), the delivery fees charged for an actual delivery aren’t subject to sales tax. The tax on the delivery fee likely only amounts to pennies or dimes on a single pizza bill, but considering the number of pizzas delivered in Florida every month or year, perhaps it is not surprising a class-action lawsuit is underway.
What has pizza delivery got to do with your clients? Pizza delivery charges are only one example of a larger issue for your retailing clients: whether the charges they make in the process of completing a sale are subject to sales tax.
Besides delivery, such charges as crating, handling, assembly, installation, setup, mandatory training, implementation services, mounting kits, test equipment, or even maintenance contracts can all find their way on an invoice that already includes taxable goods or services. For the sake of word count, call these “add-on” charges.
One challenge for your clients who charge for add-ons is to identify the sales tax treatment for those charges. Unfortunately, there is a little art and a little science involved, but there are three principles to keep in mind:
1. First, determine whether there are rules or publications in your state that contemplate the transaction your client engages in. For example, the Florida case above will likely be decided by Florida rules on “delivery of sold taxable items,” and interpretation of those rules will be key because they serve as, at least, a framework.
The Florida regulations may not describe delivery of pizzas specifically, but the delivery of sold taxable items, such as pizza, is addressed generally by rules and publications in the Sunshine State. If you are fortunate to find applicable rules, use them!
2. However, be wary to not address the taxability of add-ons in isolation of the total transaction. The Florida rules and regulations in the example above concern “delivery of sold taxable items,” not stand-alone delivery services. Put another way, once a charge for an add-on is made on an invoice in which the other items or services are taxable, those charges may be treated very differently for sales tax purposes than if the add-ons were sold alone.
Simply looking at rules for delivery, handling, installation, and service agreements, for example, is likely not enough to get the right answer for your client, when those items are add-ons to a larger sale of taxable goods or services.
3. Finally, rules vary, but in the absence of specific rules around a given transaction, states generally view add-ons from the point of view of the customer. For example, is the customer required to pay for the add-ons? Do customers ever purchase the underlying taxable item or service without buying the add-ons? Are add-on fees separately contracted and negotiated?
If add-ons are mandatory, or if customers never buy your client’s goods or services without buying the add-ons, or if the add-ons are not separately contracted for, many states will extend the taxability of the items or services to the add-ons. In the pizza example above, Florida seems to exempt add-on delivery charges, as long as they aren’t mandatory. Can hungry Floridians pick up their pie or not? … that is the question.
The takeaway for your clients? The inclusion of add-on charges on an invoice with taxable goods or services may transform the taxability of those add-ons. Look at the relationship between add-ons and the stuff they are sold with when it’s time to solve your own pizza delivery moment.
Shane is a Senior Manager in the State and Local Tax Department at Clark Nuber, P.S. in Bellevue Washington. Shane focuses on state and local indirect tax obligations for companies of all sizes operating across the United States and...