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Tax & AccountingApril 16, 2019

Special Report: How COVID-19 is Changing Business Sales Tax Obligations and Enhancing Risk [Part 5]

COVID-19 is changing our social and purchasing behaviors

Greetings from my home office in New York. It’s my Week 5 with COVID-19 changing the way you and I literally live and breathe. I’m sincerely hopeful you and your families are safe and remaining well. In this week’s installment of this special report on how this crisis is impacting businesses and changing their tax landscape, I’ll dive in a little deeper on the sales tax collection and remittance challenges faced by food delivery services and the restaurants they serve. You can follow this series and more information on sales and use tax on our blog.

This is the fifth blog in this ongoing series and focuses on restaurants and the sales tax complexities they face as sales rapidly shift to delivery.

Deeper dive: Restaurants, bars and food delivery services

Food delivery services and the restaurants they serve are struggling with different and vague rules in many states and even municipalities on requirements for collection and remittance of sales taxes.

There’s nothing vague about service and delivery fees, according to Verenda Smith, deputy director of the Federation of Tax Administrators, a Washington nonprofit trade group for tax collectors. “Delivery and service fees have either been taxed or not been taxed, depending on what the state chose its policy to be,” she said.

Differing state rules

In Pennsylvania, the food delivery companies should be collecting sales tax on the entire purchase price, which includes the cost of food, delivery and service fees,” a spokesperson for the Pennsylvania Department of Revenue said.

New Jersey, however, does not require sales tax to be charged on third-party food delivery services, according to a spokesperson for the state’s Office of the Treasurer. The state’s sales tax is 6.625%.

The question of whether sales tax is being collected on service and delivery fees has also arisen in New York, where State Sen. Brad Hoylman called for a sales tax audit of the industry. Its sales grew 41% in 2019, according to Second Measure, a data analytics firm. Growth estimates for March 2020 compared to March 2019 have been estimated by some as being 150%.

California and Maryland excluded delivery services from their marketplace facilitator laws, according to the Multistate Tax Commission, which operates through committees of state officials to create model tax laws and regulations that states can choose to adopt or modify.

Pennsylvania did that with DoorDash in 2018, but then regulators changed their position last September.

DoorDash claims that since then “we have been working in good faith to better understand the implications of this change. We are grateful to have received additional clarity … and intend to fully comply with the guidance we have received from the commonwealth.”

The company is working on modifications to its software to give it the flexibility to remit any required taxes. Under its existing model, DoorDash collected taxes on the food and sent them to restaurants for payment to the state.

As I described in my previous Special Report, Wendy’s, located in Ohio expected third-party delivery services to follow the burgeoning and complex “marketplace facilitator” laws that impose sales tax obligations on online platforms used as a go-between. Many states have passed laws designating online platforms that facilitate third-party sales, such as Amazon, Walmart and eBay, as marketplace facilitators.

But none of the delivery services deemed marketplace facilitators quite know how to do it yet, according to Tia Stern, Wendy’s manager of sales and use tax.

The state rules are often written in ways that include platforms like Postmates, UberEats and DoorDash, which facilitate the purchase and delivery of food with a few thumb taps on mobile apps.

That brings a morass of complicated tax questions because state taxing rules for food were designed for brick-and-mortar restaurants. As I mentioned previously, Wendy’s is dealing with the problem twice—contracting with third-party marketplace facilitators and separately acting as its own facilitator for deliveries from its website. Stern said. “I think restaurants and food delivery businesses were not meant to get caught up in marketplace facilitation, but here we are.”

Who’s on the hook?

The issue implicates customer service, making sure that the sales tax is properly calculated for customers no matter which app they use. But there are also enforcement concerns, with possible liability to the company at fault for a miscalculation.

In the event that sales tax appears to be calculated incorrectly, Ohio will audit the facilitators, Sara Caldwell, legal counsel from Ohio Department of Taxation has said. But that view is controversial because sellers might find themselves with problems down the line as well.

Under Ohio’s law, like with many other states, sellers such as Wendy’s are required to provide “sufficient and accurate information” to an online marketplace to make sure taxes are properly collected and remitted.

But what constitutes as “sufficient information” is unclear. For example, Susan Haffield, a partner at PwC has said some software isn’t equipped to handle the implications of the sale of carbonated tea that could be classified either as tea or as a carbonated drink, each classified and taxed differently.

Most of Wendy’s roughly 6,7000 restaurants are franchiser-owned. This means the corporate office will play an active role to make sure purchases through its online platform apply the right sales tax as well as thousands of distinct local food and beverage taxes. For now, Wendy’s is assuming the role as the taxpayer for these purposes.

Additional state examples: Food delivery services as marketplace facilitators


In Iowa, beginning January 1, 2019, businesses that meet the definition of marketplace facilitator must collect and remit Iowa sales tax and applicable local option sales tax for sales made or facilitated on the business’s marketplace if the business receives $100,000 or more in gross revenue from those sales.

Iowa says that one type of business that may qualify as a marketplace facilitator is a food delivery service company. If a business allows customers to order food and handle the payment for the customer, the business likely qualifies as a marketplace facilitator. But, the service of delivering prepared food itself is not taxable. So, a separately stated delivery service fee is not subject to sales tax.


On the other hand, in Mississippi, food delivery services are required to collect Mississippi sales tax and any local city or county taxes on the entire charge for the food and delivery.


The state of Illinois wants to make sure it isn’t missing out on millions in tax revenue from food-delivery companies as the pandemic has further increased the need for state tax revenue.

For example, Grubhub was informed by the Department of Revenue that it is “initiating action” to look into the taxes companies collect on delivery fees that customers pay when they order food.

Clearly, Illinois is following other states in taking a closer look at the tax consequences of delivery charges, which are becoming a big part of the bill that consumers pay for food and the tax dollars at stake are increasingly significant at this crucial time to capture state tax revenue.

The Illinois Department of Revenue declines to say if it’s investigating food-delivery companies but says: “Sometimes, taxpayers, including those in industries that utilize deliveries, will mistakenly assume they are providing a non-taxable service when they are, in fact, conducting a taxable retail sale. If an error is found, the department works to educate and bring the taxpayer into compliance. If the department discovers widespread noncompliance, it will issue a compliance alert.”

“Every dollar counts. We support further scrutiny to determine whether any food-delivery service companies improperly avoided paying state sales taxes,” says Illinois Comptroller Susana Mendoza, who is responsible for paying Illinois’ bills.

One major problem with Illinois law is that if pickup is an option, there is no tax on the delivery charge. One industry insider estimated that more than 90 percent of restaurants now offer a takeout option.

If the state were to change the law to collect taxes on all restaurant delivery, it likely would mean tens of millions in annual tax revenue from an industry that’s growing 30 percent a year and is growing at a much higher rate over the last month.


This report provides several examples of the differences in state sales tax rules governing food delivery services. There are many more examples across the country of the challenges food delivery services and the restaurants they serve face in complying with sales tax collection and remittance rules. Clearly, there is a need for clarity in many states (and municipalities). Voluntary state conformity or Federal congressional action would be optimum but will not happen. I watch this very closely and will continue to report and comment on these issues going forward.

This special report is part of an ongoing series from Wolters Kluwer focusing on tax and business developments, legislation and government relief efforts and other COVID-19-related activities. If you have questions, concerns or need additional insight on your situation, you can reach out to author and sales and use tax expert, Mark Friedlich at [email protected].

Mark Friedlich
Author at Tax & Accounting
Mark Friedlich, a CPA & tax lawyer, is the principal international & corporate indirect taxation analyst for Wolters Kluwer Tax & Accounting. He is a member of the U.S. Senate Finance Committee’s Chief Tax Counsel’s Advisory Board, advisor to 14 state taxing authorities, and a member of the American Bar Association’s Tax Section and AICPA’s Tax Section leadership teams. Prior to joining Wolters Kluwer he was a Managing Tax Partner at PricewaterhouseCoopers.
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