WASHINGTON – The Streamlined Sales Tax Governing Board, a group that helps states bring simplicity and uniformity to state and local sales tax systems, has reached agreement on a definition of prepared food, which is expected to help retailers determine which products are taxable.

The agreement defines “prepared food” as including:

(1) Food sold in a heated state or heated by the seller;
(2) Food items that the seller has made by combining two or more ingredients; and
(3) Food sold with eating utensils provided by the seller, including plates, knives, forks, spoons, glasses, cups, napkins or straws.

However, during negotiations, “sold with eating utensils” (category 3) is subject to interpretation depending on state law, as states that exempt most food sales but tax sales of prepared food apply this criterion differently.

The interpretation provides that if prepared food in categories 1 and 2 comprises more than 75 percent of a retailer’s total food sales (including food ingredients, prepared food, candy, dietary supplements and soft drinks), utensils are classified as “provided” if they simply are made available to the customer. If a retailer has napkins, straws, cups, spoons or other utensils on a counter for the convenience of customers, most (but not all) food items sold by the retailer will be taxable. Bulk food (containing four or more servings) and foods sold in packaging that includes a utensil placed there by the manufacturer (not the retailer) are not taxable under the prepared food definition. 

If prepared food in categories 1 and 2 of the definition is 75 percent or less of a retailer’s total sales, a utensil is “provided” only if the retailer’s practice for the item is to give or hand the utensil to the customer. The only exception is that plates, bowls, glasses or cups necessary for the customer to receive the prepared food item need only be “made available” to the customer. For example, plates at a self-service salad bar or bowls at a self-service ice cream machine would make those items taxable.

The interpretation also provides guidance as to how retailers can determine their prepared food percentage:

• The prepared food sales percentage will be calculated by the retailer for each tax year or business fiscal year, based on the retailer’s data from the prior tax year or business fiscal year, as soon as possible after accounting records are available, but not later than 90 days after the beginning of the tax or business fiscal year. 
• A single prepared food sales percentage will be determined annually for all of a retailer’s establishments in a state. 
• A new business will make a good faith estimate of their prepared food sales percentage for their first year. A new business should adjust its good faith estimate prospectively after the first three months of operation if actual prepared food sales percentages materially affect the 75 percent threshold test.

States will have until August 1 to promulgate a rule or regulation to implement the aforementioned interpretation. States that need to change their statutes have until January 1, 2008, to make those changes. Those states are Kentucky, Minnesota and North Dakota. Until then, these three states will continue to interpret the statutes as they currently do: 

• Kentucky considers all food sold by restaurants as taxable if the restaurant makes utensils available to customers. 
• In Minnesota, all food sold at an establishment with an eating area is considered prepared food (and therefore taxable) unless the retailer maintains adequate records for the sale of food items that are generally not sold with utensils. Food at an establishment without an eating area is not considered prepared food simply because the retailer makes utensils available. If, however, the food is “traditionally” sold with eating utensils, it is prepared food and, therefore, taxable.
• In North Dakota, food is taxable if the retailer physically gives a utensil to the customer.