Article by Lance E. Rothenberg, Esq., LL.M (Taxation), Tenenbaum Law P.C.
In a recent column, we examined some of the ins and outs of the proper use of sales tax exemption certificates within the restaurant industry.[1] Just after we went to press, New York passed a new law expanding the use of resale exemption certificates affecting the restaurant, catering, and hospitality industries in the Empire State.
Under New York’s recently passed 2019 Executive Budget, sales of restaurant-type foods, including heated foods and heated beverages, can now be made tax free, provided the sale is for resale – meaning the purchaser intends to resell the prepared food to its customers.[2] Let’s briefly unpack this to better explain the change.
1. The Old Law
The sale of restaurant-type foods, including restaurant meals, are generally taxable.[3] The food vendor (i.e., the restaurant) must charge and collect tax from the purchaser at the time of the purchase. In most industries, though, a sale for resale (otherwise called a wholesale sale) is exempt from taxation. That’s because the sales tax is imposed on the end-customer, not a wholesale transaction. In a wholesale transaction, a purchaser who buys an item in order to resell it can present a resale exemption certificate to the vendor rather than pay sales tax.
But, under the old law, this was not the case with sales for resale of restaurant-type food. Sales of restaurant-type foods were always taxable, even when it was sold for resale.[4] A restaurant or other prepared food vendor was required to charge sales tax no matter what. All was not lost, though, as the resale purchaser was entitled to jump through a few hoops to get the tax back by applying for a credit or refund after the fact.[5] But, the tax was due at the time of purchase. The new law changes this.
2. The New Law
Starting June 1, 2018, sales of taxable food and beverages by restaurants, caterers, and similar establishments can now be made for resale. The Department of Taxation and Finance has just issued guidance summarizing the changes.[6] New York restaurants and caterers that sell prepared foods for resale are now relieved of charging and colleting sales tax provided they receive a properly completed resale certificate from the purchaser.
New York Form ST-120, Resale Certificate, has also been updated as of June 2018 to reflect this change. Resale purchasers may now check off new Box C (Part 1) indicating the resale of “restaurant-type food.”
3. Examples of Food and Beverages That Can Be Sold for Resale Under the New Law
Under the new law, examples of restaurant-type foods and beverages that can now be sold for resale include the following:
- Cooked meat or vegetable dishes
- Cooked pasta dishes
- Cooked rotisserie chicken
- Deli or sandwich platters (such as cold cuts, subs, or burgers)
- Hot coffee
- Meals purchased from restaurants to be resold
- Premade sandwiches
- Soups
- Subcontracted catering services
- Vegetable platters[7]
4. Proper Record Keeping is Now More Important Than Ever
The new law will benefit restaurants, other vendors of restaurant-type food, and resale purchasers of restaurant-type foods by streamlining this particular aspect of sales tax compliance. However, proper recordkeeping will now be more important than ever. Sales tax resale certificates enable a purchaser to make tax-free purchases that would otherwise be subject to tax. A properly completed resale certificate can qualify as an “audit-proof” defense that a given transaction was exempt from taxation. But the key will be to collect and maintain properly completed exemption certificates on these new resale transactions in order to substantiate why tax was not collected.
It’s very common for a sales tax auditor to review and challenge incomplete or incorrect exemption certificates. That means when you are audited, an auditor could determine that additional tax is due simply because your records are faulty. Further, resale certificates must be kept on file for at least three years. For more information on proper recordkeeping practices, see our prior column.[8]
If you are reviewing your company’s sales tax practices, are considering whether you may have exposure for sales tax liabilities, wish to learn more about this new law and how it affects your business, or if you are facing a tax audit or dispute, you can email me at lrothenberg@litaxattorney.com.
Disclaimer: The information contained in this article does not constitute tax advice and is for informational purposes only.
Lance E. Rothenberg is a tax attorney and is Of Counsel with Tenenbaum Law, P.C., which is based in Melville, N.Y. Lance focuses on state and federal tax controversies and disputes, and he has experience assisting a wide range of businesses and business owners facing federal, state, local, and multistate tax issues, including sales-and-use taxes, corporate income taxes, personal income taxes, and excise taxes. You can reach him at lrothenberg@litaxattorney.com and at (631) 465-5000.
- [1] Making Sense of Sales Tax Exemption Certificates, Total Food Service (03/27/2018).
- [2] New York 2019 Executive Budget, Part J (03/30/2018).
- [3] Generally speaking, “restaurant-type” food means food or drink sold in a form that is ready to be eaten.
- [4] Former Tax Law 1105(d).
- [5] See generally, TB-ST-810 (06/13/2014) (addressing sales tax credits).
- [6] TSB-M-18(1)S (05/25/2018).
- [7] Id.
- [8] Want to Avoid a Messy Sales Tax Audit? Good Recordkeeping is the Key, Total Food Service (02/02/2018).
