A New York Sales Tax Lesson from H&H Bagels’ Cream Cheese-Filled Bagel
A couple months ago, the New York company, H&H Bagels, made national headlines with its announcement of a partnership with Philadelphia Cream Cheese to produce a cream cheese-filled bagel for April’s tax day. The move was an attempt at a novel workaround from New York’s sales tax, which the New York Department of Tax and Finance (NYDTF) imposes on prepared foods, including a sliced bagel with cream cheese spread. Despite the media narrative, some sales tax professionals had doubts about the tax application of cream cheese-filled bagels. The story leads us to an important lesson for business owners and their CPAs looking for extra clarity on the sales tax consequence of new products or services. We are talking about Advisory Opinions.
Are Cream-Cheese Filled Bagels Really Exempt from New York Sales Tax?
New York has two distinct categories for sales tax when it comes to food and beverage. Unprepared cold foods—like those you’d find at a grocery store—are generally exempt from sales tax because they are a basic necessity of life. However, New York sales tax usually applies to prepared foods served warm, such as food you purchase at a restaurant. The NYDTF has specific guidance on the taxability of food items through TB-ST-238 and TB-ST-835. Sliced bagels served with a cream cheese spread have traditionally been taxable as a type of sandwich.
Colorable arguments could exist on both sides in applying New York sales tax to a cream cheese-filled bagel. While H&H Bagels’ creation removed a step from the preparation process by not having employees slice the bagel and spread cream cheese on it, other factors could apply that would have still made the item taxable. For example, the following issues could easily alter the sales tax application of a cream cheese-filled bagel:
- Whether you served them warm using a heating lamp or another device.
- Whether you took other steps to “prepare” the bagel for eating (e.g., plating it).
- The fact that the food was sold in a form ready for consumption either on or off-premises.
The reality is that New York businesses frequently encounter scenarios where the available NYDTF regulations and guidance don’t answer pivotal sales tax questions on their products. This can leave businesses in a vulnerable position, unsure if they should collect tax or risk a surprise assessment from the NYDTF after a field audit. To reduce some of this risk, you might consider requesting an Advisory Opinion from the NYDTF.
How Businesses Can Use an Advisory Opinion to Get Clarity on their New York Sales & Use Tax Questions
An Advisory Opinion is a formal written document that the NYDTF’s Legal Division issues to taxpayers in response to unique questions about their sales & use tax obligations. The Opinion gives notice to taxpayers about potential corrections to their sales tax compliance under a particular set of facts but could also insulate them from future inconsistent rulings from the NYDTF or its auditors.
While an Advisory Opinion can provide additional sales tax clarity to your business, we must emphasize that it is not infallible. The NYDTF’s position in a prior Advisory Opinion could change with the onset of new laws or changes in policy through rulemaking. Furthermore, the New York Department of Tax Appeals and other state courts are not bound to the findings of an NYDTF Advisory Opinion and could rule differently during an appeal process. The decision to pursue an Advisory Opinion truly comes down to your unique facts, a weighing of the potential business risks, and other relevant considerations. Consulting with your sales tax professional is the first step in making an informed decision on requesting an Advisory Opinion from the NYDTF.
The Steps to Request a Private Letter Ruling from the NYDTF
You generally need to complete the following steps, found in the Instructions for Form AD-1.8, to process an Advisory Opinion request.
- Your sales tax question can’t be pending a determination or subsequent ruling from the NYDTF and can’t involve a question about nexus.
- Complete Form AD-1.8 which includes a statement of issues and facts.
- Make any requests for redaction of sensitive business information (e.g., trade secrets) prior to giving consent to publication of the Advisory Opinion
- Complete a Power of Attorney if your sales tax professional, CPA, or another party is submitting the request on your behalf.
Meet with Our Professionals Today and Address Your Toughest New York Sales Tax Issues
As products and services evolve, so do your company’s New York sales tax needs. The answers you need are not always straightforward when the NYDTF guidance falls behind or becomes inapplicable. An Advisory Opinion can be an effective workaround for getting the clarity you need to make sound tax decisions. If you have questions about your sales tax compliance or have fears of a future audit, a consultation with our team of professionals can be the first step in addressing your concerns. We regularly handle all types of sales and use tax issues for businesses, including nexus studies, audit defense, assessment appeals, and more.