wholesale or retail sales
Are disposable utensils sales tax exempt for fast food restaurants?
Sales tax is usually assessed at the retail level. Most states exempt wholesale transactions from sales tax. But distinguishing retail from wholesale can be problematic. An Alabama appeals court recently had to decide whether the sale of certain supplies to a chain restaurant constituted a final, retail sale or merely a wholesale transaction exempt from tax.
Kelly’s Food Concepts is a restaurant supplier based in Selma, Alabama. Its customers include popular national chains like KFC and Popeye’s. Kelly’s sells items including plastic utensils, napkins and straws to these restaurants.
In 2011, the Alabama Department of Revenue audited Kelly’s and determined the company failed to collect state and local sales taxes on the sale of these supplies. Kelly’s argued these were wholesale transactions exempt under state law. But in 2012, Bill Thompson, the department’s chief administrative law judge, said Kelly’s was incorrect. As he saw it, the restaurants did not “resell” the utensils or napkins to their customers, but rather provided them free with the purchase of food. Relying on a 1984 decision by New York’s highest appeals court, Thompson said only items necessary to package the food should be considered part of the sale. Furthermore, under a prior Alabama appeals court decision, additional items like utensils must be factored into the price of the food. Thompson said Kelly’s presented no such evidence that was the case here; therefore it was liable for uncollected retail sales taxes on its sales of utensils, napkins and straws.
An Alabama Circuit Court judge later reversed Thompson’s decision and held “the purpose of the sale of cutlery and tableware … to the restaurants was for the restaurants to include the items with food and drink the restaurants sold to their customers.” These were, in fact, wholesale transactions not subject to sales tax. The department of revenue appealed this decision.
On June 20 of this year, the Alabama Court of Civil Appeals upheldthe circuit judge’s decision. Presiding Judge William C. Thompson, writing for a unanimous court, said when a restaurant sells “prepared food” to the public, that includes any cutlery or tableware. They are “critical elements of the food and drink items sold by the fast-food restaurants to their customers, and, thus, [Kelly’s], as a wholesaler, is neither liable for nor required to collect sales tax from the fast-food restaurants.” The sales tax is properly collected by the restaurant when the customer buys a meal.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.