Taxing Matters: Meals Tax versus Sales Tax - What You Need to Know

In a previous installment of Taxing Matters, we discussed how complicated it can be to apply tax rules to restaurant sales. This month, we'll provide some examples of these general sales and meals tax rules, and how takeout, catering and the physical location of a restaurant within grocery stores may further alter taxation.

As you probably already know, many states do not tax food sold for home consumption, but a large number do impose sales tax on prepared food, soft drinks, and candy. Restaurants often sell any combination of these items, and taxability of these can vary widely depending on ingredients, packaging, preparation, service, add-ons, seller type, and even gross receipts thresholds.

How do you know if a food is considered "prepared" and how does this affect its taxability? Small details about how food is sold or prepared change its level of taxability. Understanding these different aspects will ensure restaurants and grocery stores are compliant.

In a location that has more than one tax type, such as sales tax and meals tax, what may make an item subject to sales tax can be completely different than what would make the same item subject to meals tax. For this reason, one must make an independent analysis of each type of tax and how it applies to the same product sold.

The Taxability of Prepared Food

By way of example (and not for legal advice), let's look at prepared food in North Carolina. Two types of taxes may be applicable to restaurant sales there - state and local sales tax and also local meals tax.

Let's start with sales tax. North Carolina defines prepared food as, in part, 1) food sold in a heated state, or 2) food consisting of two or more foods mixed together by the retailer as a single item which does not require further cooking to prevent food borne illnesses, or 3) food sold with eating utensils provided by the seller (plates, forks, spoons, cups, napkins, straws, etc.).

You can see from the definition that anything sold hot is prepared food, and anything prepared by the retailer that does not require further cooking, such as salads, cold side dishes, etc. will also likely be prepared food. But what about a slice of pie sold, but not prepared by the restaurant, or a prepackaged bag of potato chips? Taxability will depend on whether the slice of pie or the bag of potato chips was provided to the customer with utensils, even if it's just a napkin.