Reduced Food Tax Rate Off the Table for Missouri Food Establishments
Sales tax audit activity may be on the rise in Missouri for any establishment that prepares food, which includes restaurants, cafeterias, concession stands and golf courses. This will likely have a significant impact if the establishment previously benefited from the reduced food tax rate.
The reduced food rate
Typically, an establishment that prepares food buys all food items under a resale certificate. If the establishment does not resell the food items, e.g., items are given away as a free sample or an employee meal, the establishment is then required to self-accrue and remit tax on the cost of such food items. Historically, the establishment would pay the reduced food tax rate on such items.
Critical court ruling
Based on a new interpretation of a Missouri Supreme Court decision, Wehrenberg, Inc. v. Director of Revenue, 352 S.W.3d 366 (Mo. Banc 2011), the Missouri Department of Revenue has changed its application of the food tax rate statute as it applies to this industry. In Wehrenberg, the Court held that the reduced food rate only applies to food items purchased "for home consumption." As a result, the department has determined that establishments that prepare food are no longer eligible to self-accrue tax on food items using the reduced food rate. The department's current position is that since such items were not purchased "for home consumption" but rather for commercial consumption, they do not qualify for the reduced food rate.
What is the potential exposure or risk?
For a restaurant or other establishment that prepares food this means an establishment that:
• Has been self-accruing tax on such food items at the reduced food rate may be on the hook for 3 percent of the taxable receipts, i.e., the rate differential between the reduced food rate and the full sales/use tax rate.
For example: Restaurant X spent $200,000 on food items it prepared and gave away as free samples in 2014. Restaurant X self-accrued tax on the cost of these food items using the reduced food rate. Restaurant X will owe an additional $6,000 (3 percent of taxable receipts) in tax because it should have used the full sales/use tax rate.
• Has not been self-accruing tax on such food items may be responsible for the full sales/use tax rate (ranging from 7 percent to 10 percent) of the taxable receipts.
For example: Restaurant X spent $200,000 on food items it prepared and gave away as free samples in 2014. Restaurant X did not self-accrue tax on the cost of these food items using the reduced food rate. Restaurant X will owe $20,000 (10 percent of taxable receipts) in tax because it should have accrued tax on the cost of the food items using the full sales/use tax rate.
Due to this new interpretation and application of the reduced food tax rate, state audits on establishments that prepare food are likely to rise. The department can easily identify a potential offender by reviewing the department's records to find taxpayers in this industry that are remitting at the reduced food tax rate. These establishments need to be aware of this potential audit issue.
For more information on this topic or to discuss your situation, contact Amy Jackson, Manager, Tax Services, at 314.983.1336 or firstname.lastname@example.org.