TWIST - This Week in State Tax

New York: Party Platters are Taxable Prepared Food

The New York Division of Tax Appeals recently addressed whether a deli operator was liable for sales taxes on sales of party platters. The party platters at issue came in varying sizes and consisted of a choice of three meats and three cheeses. The meats and cheeses were served on a deli tray with rolls, mayonnaise, mustard, oil, lettuce, tomatoes, onions, and banana peppers. The meats and cheeses were pre-sliced and were arranged in a circle in the middle of the tray. The outer ring consisted of individual containers that included the various condiments and sliced sandwich toppings. Rolls accompanied the platter and were contained in a separate bag. Under New York law, sales tax is imposed on prepared food sold by restaurants. There is an exception when the food is intended to be consumed off premises and is sold in an unheated state in the same form and condition, quantities, and packaging that is used when selling the food at the store. In other words, the deli had to establish that it sold these items in the same condition, quantities and packaging that was used when a food store sold the same item.  The taxpayer argued that the products were sold in the same form and condition, quantities, and packaging as was commonly used by retail food stores. The ALJ, however, determined that this was simply not accurate. The deli separated the condiments into individual packaging, while retail stores would sell condiments in jars or bottles. The platters included pre-sliced lettuce, tomatoes, and onions whereas retail stores would sell them unsliced. In the ALJ’s view, it was this preparation work done by the taxpayer in creating the platters that differentiated the deli trays from the same items sold in a retail store. As such, the platters were taxable as prepared food. Please contact Judy Cheng with questions on Matter of the Petition of Todd. A. Neupert.

Pennsylvania: Philadelphia Issues Guidance on Voluntary Disclosure Program

On December 5, 2023, the City of Philadelphia Department of Revenue issued guidance on the city’s voluntary disclosure program. The program allows businesses and individuals with unmet tax obligations to come forward voluntarily and become compliant. The program covers businesses not registered with the City of Philadelphia for a Commercial Activity License or a business tax account. Taxpayers are eligible for the program if they have not yet been contacted by the Department of Revenue, fully disclose their liabilities for at least the past six years, and pay the full amount of tax and interest owed within 60 days of the date the City issues a bill. The type of taxes that may be disclosed under the program for businesses include, but are not limited to, the Business Income & Receipts Tax, Net Profits Tax, and Use and Occupancy Tax.  In addition to the city not assessing any taxes owed for any period prior to the six-year disclosure period, the City will waive all penalties for eligible taxpayers. Please stay tuned to TWIST for future updates on state and city VDA programs.

Washington State: Department Addresses Taxability of Termination Fees; Licenses to Use Real Property

The Washington State Department of Revenue recently issued guidance on their website on the taxability of termination or cancellation fees that consumers are required to pay when they decide to end a contract or agreement prior to the agreed upon date. In the guidance, the Department confirms that the amount that a vendor bills a customer for the early termination of a contract is generally taxable under the same tax classification used for reporting the payments made under the contract. As to whether sales tax applies to termination fees, the Department states that when the contract is considered a retail sale, sales tax will apply. However, when the contract is not a retail sale, sales tax would not apply. The guidance includes three examples of certain types of contracts, such as a cell phone service plan that is cancelled prior to the end of the service agreement.

The Department also issued guidance clarifying the taxability of a rental of real property versus a license to use real property. A lease or rental of real property is not subject to business and occupation (B&O) tax or retail sales tax, but a license to use real property is subject B&O tax and may be subject to retail sales tax. A rental or lease of real property is present provided the following elements are met: (1) there must be a landlord/tenant relationship; (2) the lessee must have exclusive use of the rented space; (3) the rental period must be one complete month or 30 days, or longer; (4) the lessee must have the exclusive right of continuous possession; and (5) the lessee must have dominion and control over the rented space. The guidance explains that a license to use real property is distinguishable in that the licensee does not have exclusive dominion or control over the property. Generally, the owner, not the licensee, controls items such as lighting, heating, cleaning, repairing, and opening and closing the premises.

Generally, gross receipts from a license to use real property are subject to B&O tax under the service and other activities classification; however, in some scenarios, gross receipts would be subject to retail sales tax and B&O tax under the retailing classification. Examples of such scenarios include sales of lodging/accommodations, meeting facilities provided by a lodging business, storage garages, and automobile parking (except designated spots leased for 30 days or more). Please stay tuned to TWIST for more Washington updates!