Missouri Supreme Court Says Operator of Federal Reserve Cafeteria Must Collect Sales Tax

Most states apply some form of sales tax to the purchases of meals and drinks. But what if a business or public employer maintains an employee cafeteria? Does the cafeteria operator need to charge sales tax on the meals and drinks sold to the employees?

The Missouri Supreme Court recently confronted these questions in a case, Myron Green Corporation v. Director of Revenue, that also involved the interaction of federal and state law. The plaintiff in this case, Myron Green Corporation, is a private company that provides food services to clients in Kansas City and several other Midwestern cities. One of Myron Green’s customers was the Federal Reserve Bank of Kansas City.

FRB of Kansas City contracted for employee cafeteria.

The Bank contracted Myron Green to run its in-house cafeteria which is restricted to Bank employees due to security needs. But, if cleared to enter the Bank, visitors could also purchase food and drink at the cafeteria.

Under Myron Green’s contract, Bank employees could pay for their purchases using their identification badges. The Bank would then deduct the purchase amounts from the employee’s next paycheck. Employees and visitors could also pay for purchases in cash, although roughly 80 percent of all sales were paid for using payroll deduction.

Actually, the bank paid Myron Green a lump-sum every two weeks using its own credit card. The Bank then reimbursed itself from the amounts deducted from individual employees. The Bank further subsidized the overall cost of food such that the employees and other customers paid below-market prices at the cafeteria.

Under federal law, Federal Reserve banks are exempt from paying all state and local taxes (aside from property taxes). Myron Green believed this federal exemption meant it did not have to collect Missouri sales tax on any products sold in its cafeteria at the Kansas City bank.

Sales are to employees, not the bank itself, thus taxable.

The Missouri Department of Revenue determined that all the cafeteria’s cash and payroll-deduction sales were made to individual employees, not the bank itself, and the exemption only applied to the latter. After an administrative hearing commissioner upheld the Department’s determination, Myron Green sought judicial review directly with the Missouri Supreme Court.

Missouri Supreme Court Upholds Determination

In a unanimous decision published on January 15, 2019, the Court agreed with the Department of Revenue and the commissioner’s reading of the law.

First, the Court noted that Missouri law imposes a sales tax any place where “meals or drinks are regularly served to the public.” The Court said there was a difference between a company-owned cafeteria and one maintained by an outside contractor like Myron Green. In a 2003 decision, the Supreme Court said a Missouri company that operated its own employee cafeteria did not need to collect sales tax because the firm’s “main business was not operating company cafeterias.” In contrast, Myron Green’s main business was “operating on-site cafeterias for corporate clients.” And the fact that access to the Federal Reserve building itself was restricted did not matter, as Myron Green’s cafeteria sold food or drink to anyone who had cash, i.e. it “regularly served” the public.

Second, the Court also rejected Myron Green’s argument that the Federal Reserve’s institutional sales tax exemption extended to individual employees. The Bank did not purchase food or drink directly from Myron Green. Rather, Myron Green purchased its own food at wholesale and offered it for resale to individual employees. Even though most Bank employees paid for purchases using their employee IDs, this “merely provided an avenue through which bank employees could pay.”