US: Food service delivery becomes more taxing

The tax consequences of using an app to order a pepperoni pizza for delivery are getting more complex by the day. Not necessarily for the customer, but certainly for meal delivery service providers like DoorDash and Grubhub. These businesses were among the undisputed winners of the 2020 pandemic economy as millions of Americans sheltered at home, found it convenient to place take-out food orders on their mobile devices. But just as no good deed goes unpunished, it might also be fair to say that no novel business model goes untaxed.

The tax villain in this case is marketplace facilitator sales tax legislation that has recently been enacted in most states. A marketplace facilitator is essentially an online platform that brings buyers and sellers together for the purchase and sale of taxable goods or services. State revenue agencies have discovered that they can achieve significant efficiencies in revenue collection by placing the sales tax compliance obligations on the marketplace facilitator instead of on the true seller. As a result, meal delivery service platforms now face a litany of complex and confusing sales tax obligations that may require them to charge, collect, remit and report tax on customer food orders submitted over the platform.

That is not all. Perhaps predictably, a number of state and local governments just can’t seem to get enough of a good thing. Thus, in addition to sales tax obligations, a number of municipalities are now requiring meal delivery services to collect and remit city restaurant and meal taxes in addition to sales taxes. Moreover, several local jurisdictions have also decided to place caps on the commissions that meal delivery services charge restaurants.

Marketplace facilitator legislation is not unique to meal delivery services but extends to all online marketplaces where taxable items are sold. In fact, a few states specifically exclude meal delivery services from the state’s marketplace facilitator definition.

The point, though, is that marketplace facilitator laws have become the shiny new toy in a state’s sales tax collection arsenal. Although nuances from state to state may support arguments against marketplace facilitator characterization under a particular set of facts, platform sellers must become educated regarding their potential tax compliance requirements in order to minimize tax exposure in the future.