Special Report: How COVID-19 is changing business sales tax obligations and enhancing risk [Part 8]
Food Delivery Services Have Become a Primary Vehicle for Restaurants to Make Money
COVID-19 is changing the way we do business, the way we buy, the way we sell — and how all of this affects businesses of all sizes and industries as well as their customers.
Greetings from my home office in NYC. It’s my Week 8 covering COVID-19 changing the way you and I literally live our lives. I’m sincerely hopeful you and your families are safe and well. I have written extensively about the increasing importance food delivery services are playing in helping to feed our families, and even delivering our prescription drugs. Most restaurants and bars around the country remain closed for inside dining even as stay-at-home orders are ended or allowed to expire. In this week’s installment of my special reports, I take a look at recent developments in this highly competitive rapidly growing industry. You can see more COVID-19 related blogs here.
Stay-at-home owners and shutdowns throughout the country have eliminated or significantly reduced sit-down dining for restaurants and bars. As a result, food delivery services have become much more essential for restaurants and bars. Many are being charged delivery fees as high as 30% or more by these services. Now that many restaurants rely on third-party delivery for a majority of their income, the fees and commissions these companies charge are making it much more difficult for these restaurants to stay afloat.
The four leading food delivery services, GrubHub, DoorDash, Uber Eats and Postmates, are facing closer scrutiny resulting in lawsuits, legislation and municipal ordinances. And in many states these service and delivery fees are subject to sales tax.
Restaurants, Customers, Legislatures and Courts Are Fighting Back
These food delivery services are facing aggressive actions by the businesses they serve, customers and governments across the U.S.
New York City recently passed a bill that would place a temporary maximum of 15% on delivery-service fees and a limit of 5% on marketing contributions and other fees. Similar mandates have been made in Seattle, Washington, D.C. and Chicago recently announced new rules for services to provide greater pricing transparency. San Francisco implemented a 15% cap on delivery services in March.
A couple of weeks ago, Jersey City placed a 10% cap on delivery fees. Uber responded by imposing a $3 surcharge on all orders to the city. Mayor Steve Fulop responded angrily, but there is not much he can do beyond what has already been done.
Last week, a class-action lawsuit was filed against GrubHub led by a restaurant in Colorado. The lawsuit alleges GrubHub created a listing for the restaurant on its website even though the restaurant hadn’t signed up for the service. The listing indicated the restaurant was closed even though it was open.
A lawsuit was filed in mid-April in New York by several customers alleging that GrubHub, DoorDash, Uber Eats and Postmates have “monopoly power” that they wield against restaurants and consumers. Their fees range from 13.5% to 40% of purchases, the lawsuit says, adding that the companies “prevent competition and limit consumer choice.” The plaintiffs are seeking class-action status.
Los Angeles restaurant owners, who have been vocal about high service fees charged by food delivery apps as well. Restaurants pay as much as 30%. A new city ordinance would limit the maximum to 15% of the purchase price per order during the pandemic.
Sales Tax Compliance Implications
Many states and municipalities place the responsibility for sales tax compliance directly at the feet of the food delivery services. Many restaurants, especially the “chains,” Wendy’s for example, have taken on the sales tax obligation. Either way, sales tax compliance responsibility further impacts the even more tight margins these businesses are operating under.
The Big Four Food-Delivery Services May Soon be Three
News of an offer by Uber to acquire GrubHub renewed concerns that a combined company could hold an even tighter grip on the food delivery service industry. As of last October, GrubHub held 30% of the U.S. meal delivery market, while Uber held 20%, according to analytics firm Second Measure.
The Services Are Striking Back
The big four food delivery services could also choose to cut back on their services if they decide the fee caps make the work less worthwhile. After San Francisco applied a fee cap of 15% for delivery, Uber Eats is reported to have told customers in an email it was ending service to the Treasure Island neighborhood of the city, an area with relatively few food options to begin with. As more and more municipalities impose delivery fee caps and these companies face more lawsuits, similar actions curtailing service delivery in areas where fees are capped may increase.
As delivery increasingly has become lifelines for restaurants and bars, the stakes for this battle between food delivery services and those they serve are higher than before. Without readily available and reasonably priced delivery services, eateries will face even more challenges to their very existence … and customers, many of whom are facing their own very difficult financial circumstances, will need to pay more to feed their families.
Further, the sales tax compliance obligations weigh heavily on the food delivery services and restaurants, placing even more stress on very tight margins.