Are Food Delivery Fees Subject to Sales Tax?
Since the pandemic, food delivery has grown from the occasional pizza order to include just about any food you can imagine. Groceries, meal kits, and restaurant dining are almost all available for order to your home because of the convenience third-party food delivery provides. While this business model is a positive for you or your client’s bottom line, it can lead to problems in your sales tax reporting without awareness for the issues that affect taxability of food delivery charges.
Sales Tax on Food Delivery Fees Could Vary From State to State
Food delivery charges can range from taxable to nontaxable depending on how the state applies sales tax to the underlying food and delivery charges in general. For example:
- Michigan largely exempts delivery charges from sales tax if the seller separately states them on the bill of sale or invoice. See Michigan Revenue Administration Bulletin 2023-16.
- Florida exempts delivery charges under two conditions. First, the charge must be separately stated from the price of the delivered food, and second, the delivery charge must be avoidable at the discretion of the buyer. In other words, the delivery charge can’t be mandatory. See TAA 14A-025.
- South Dakota taxes delivery charges when the transferred property is also taxable. See South Dakota DOR Tax Fact: Delivery Charges (July 2023).
Restaurants and food businesses must understand how sales tax applies to these charges in the states where they have nexus. They must also monitor compliance with third-party delivery companies (e.g., Grubhub or UberEATS) to ensure they are collecting the right sales tax on these charges for their food sales.
Key Issues Affecting the Sales Tax on Food Delivery Charges
As you contemplate the need to collect sales tax on food delivery fees, consider the following issues that could affect whether the charge is taxable or not.
- The type of food being delivered (i.e., exempt groceries versus taxable meals).
- How you invoice the delivery charge on the sale receipt.
- Whether the delivery includes additional property, and if so, the weight or price of the food in proportion to those other items.
- The state’s sourcing methodology, which could lead to the application of different sales tax rates depending on where you deliver the food.
- Whether delivery happens through the restaurant or through a third-party delivery service.
- If the delivery charge is the actual cost or includes charges for additional amounts as a markup.
Protect Your Restaurant Against a Sales Tax Audit Over Delivery Fees
How, or if, you collect sales tax on food delivery charges can be a sticking point during an audit because there are so many potential factors that can impact the taxability. The result is often an under or over collection of sales tax that your business must address post-audit. Additionally, states are regularly shifting their rules on the taxability of delivery fees in general, which can make it hard for restaurant owners to track. For example, states like Michigan and Kansas recently reversed their stances by exempting delivery charges from sales tax as of 2023.
If you have concerns about your sales tax reporting for food delivery charges or recently received notice of audit or assessment, now is the time to act. A consultation with our sales tax professionals could be the first step in defending past returns or setting up future food delivery operations for sales tax compliance.