Navigating The ‘Hot Mess’ Of Online Food Delivery Sales Tax

In commerce, when it comes to taxes, new business models beget new (tax) problems.

Against that backdrop, tax collection in the nascent restaurant delivery space remains fragmented at best — and confusing at worst.

And although we live in a three-dimensional world, tax policy has so many variables that it can seem like seven dimensions.

Consider comments by Grubhub CEO Matt Maloney, who said in November that rivals should be charging more sales taxes on delivery fees. But in many cases, these firms may not be collecting sales taxes at all. Or maybe they are, but at the wrong rates.

The sector is projected to receive more than $10 billion in delivery fees by 2023, which represents a huge leap over the $4.4 billion received in 2017.

Perhaps nowhere has the state of food delivery taxation been more succinctly rendered than in this way: Stephen Kranz, a tax lawyer with McDermott Will & Emery, has said collection policies represent a “hot mess.”

The fragmentation is apparent in the fact that food delivery services are taxed according to decades-old policies that have not kept pace with the digital age.

Online delivery services might levy taxes on food charges, or on the combined total of the amount charged for the food, fees and delivery charges — resulting in significantly different taxes collected.

In some cases, the taxes are collected by the marketplace, and in other cases, such as noted by The Wall Street Journal, the taxes are remitted to the restaurants themselves, which in turn remit the taxes to the states.

In an interview with Karen Webster, Scott Peterson, vice president of U.S. Tax Policy at Avalara, took note of the challenges confronting even the most diligent food delivery firm that wants to make sure the proper tax amounts are being collected.

As Peterson told Webster, state and local governments are all over the board when it comes to what constitutes the proper amount to be taxed — and there’s even a lack of uniformity about which points of the food ordering and delivery process need to be taxed.

The lack of consistency comes even as multiple models of ordering and delivery — not just in food, but in commerce in general — have evolved in recent years, spotlighted by delivery platforms.

Over the Counter — and Into Murky Tax Waters

There’s the standard model illuminated by the local pizza shop: Pick up the phone, place the order and charge the amount to a credit card. The tip may or may not be included, noted Peterson.

“The pizza company is treating that transaction like an over-the-counter sale,” he said.

And herein lies a wrinkle: Taxes vary based on the methods consumers use to get what they’ve bought — in other words, how they take possession. The consumer who walks into the pizzeria is charged sales tax at the counter. And for a long time, sales tax was applied based on the store’s location, even in cases where the pizza was delivered to another address.

Taking a page from other retail verticals, consider the case where someone walks into a dress store, orders a dress and has it shipped to a relative in another state. The applicable tax policy is not determined at the “over-the-counter” location, but rather by the sales tax rules governing the place where the dress is ultimately delivered.

The decades-old era of turning a blind eye to tax policy may be over in the wake of Wayfair, said Peterson. Wayfair, of course, is shorthand for the Supreme Court decision that, in part, lets states collect more tax revenue from online firms that sell goods.

For the online food upstarts, he said: “You’ve got this dichotomy between how tax applies based on how you take delivery, matched with this brand-new business model, which is ‘deliver.’”

And even the “deliver” model has its wrinkles. If the customer arranges for the delivery — sending a car to a store and an agent to pick up the goods — the taxes are tied to the “over the counter” principle. If the store arranges for the delivery, sales tax rules are entirely different, Peterson said. In those permutations, taxes are determined based on where the store is physically located. Some transactions are taxed at origin, others at destination.

Want another wrinkle? If a seller uses a “common carrier” to deliver its product, then FedEx, UPS and other carriers do not generate a physical presence for the seller, which adds even more new complexity to taxation.

Now comes Wayfair and legislation governing marketplace facilitators, which Peterson contended was “designed to attach [charge fees on] one business model — the Amazon model.” The legislation is less than three years old, but it has already been through five iterations, reflecting the dynamic evolution of marketplaces.

Nowadays, a customer orders food through Grubhub in Florida — and Grubhub, it should be noted, may not have a physical presence in Florida. No longer does sales tax depend on where the company is domiciled. There are lots of ways that an online marketplace or aggregator can be classified as being physically present, noted Peterson.

The obligation, he said, “could be because of where you are domiciled. It could be because you have stores in a state. It could be because you have employees or agents in a state.”

Grubhub may be domiciled in a state, but it has presence (through its delivery people) in several other states.

The Hot Mess

“If I am an online food delivery company,” said Peterson, “I have to know where food is taxable — and when it comes to restaurant meals, they’re taxable almost everywhere, and are almost always taxed at a higher rate than normal. I also have to know whether the state taxes delivery services. There are a number of states that don’t.”

But then again, there are many states that would say the delivery fee is part of the sales price of the food, and is indeed taxable.

There might even be two separate transactions. The consumer pays for the meal through the online app, and pays separately for the delivery of that food. The taxability then changes yet again because the online platform is, effectively, a freight company.

Thus, the hot mess.

The complicated set of rules and regulations is unlikely to be untangled easily, or anytime soon. Automating tax compliance (such as through Avalara) can help the marketplaces collect tax with greater efficiency. That’s especially important where it’s unlikely that a federal framework governing tax policy will evolve to create a uniform policy.

Call it the ultimate “lose-lose” proposition.

“Get it wrong and over-collect on taxes, and you risk getting sued by your customers,” Peterson told Webster. “Get it wrong by under-collecting taxes, and you’ll get audited.”