Take-Out May Help You Save Money

“Take-out or eat in?” “Sliced or not?” At a café, we usually answer these questions with an eye to convenience: Do I want to go home and eat on my couch in front of my TV or should I just eat here since I’m already here anyway? And should I have them slice the bagel for me, or do I want to make this a quick stop and can deal with the slicing myself? In some states, your decision will also determine the tax rate and, ultimately, how much you actually spend.

I first found out about the ‘take-out’ tax exemption a few months ago, while ordering some frozen yogurt at a Pinkberry in California. The cashier asked if we would be eating in or out, and when my friend and I hesitated for a moment, he explained that if we ate in, the standard food tax (of at least 7.25%, but higher depending on the county) would apply while if we ate out – including at the benches just a few steps out the door – our yogurts would be tax-free. It wasn’t unbearably hot, so we decided to eat out.

In California, while groceries are tax-free, food served at restaurants, bars, and other places with seating in the premises or close by (e.g., food court seating) is taxable. However, if you order food from these places to go, they may or may not be taxed. Generally, if (1) a business makes at least 80% of its sales through food and (2) it is a drive-in restaurant or at least 80% of its sales are consumed in its premises and/or are hot food items, the business can choose whether to tax certain take-out items or not. Specifically, cold food products (e.g., ice cream and cold sandwiches), hot bakery goods (e.g., fresh from the oven bread), and hot beverages (e.g., hot coffee, tea, and cappuccino) ordered to go may be exempt from sales tax if the business so chooses. Keep in mind, though, that this decision is per establishment, so that, even if one of the stores in a chain makes these sales tax-free, you cannot assume all their other stores do the same.

Starbucks Receipt

As you can see in my receipt for a recent purchase at Starbucks in NY, the 8.875% sales tax was applied to my iced mocha (3.65 x .08875 = 0.32), but not to my marble loaf, since the marble loaf is cold and was not prepared on the premises for my consumption.

Californian food establishments that do not satisfy the two requirements above, such as most ice-cream stores and coffee shops, should always waive sales taxes on these items if ordered for take-out: hot beverages, non-carbonated cold beverages (e.g., juice and iced tea), cold food products, and hot bakery items. Note that soda and alcoholic beverages are always taxable in California, even if ordered to go.

If this break-down seems confusing or arbitrary, consider New York’s tax-exempt food categories, which are different if sold at a “food store” or at a restaurant, deli or similar establishment. Just as in California, hot food items, food sold for consumption in the premises, and carbonated drinks sold at food stores are taxable in New York State. But all sandwiches (hot and cold), candy and confectionery, and “prepared” items are also subject to sales tax, whether ordered to-go or not. “What is a ‘prepared item’,” you ask? Anything that has been handled by the seller or at the establishment so that it is ready to eat as is, such as food on a plate, ice-cream, or self-serve food from a deli. This key description, in fact, earned the Brugger’s Bagels chain an audit last year: while regular bagels are tax-free, sliced bagels are taxable in New York, since slicing makes them ready to eat (I assume none of the tax collectors tear their bagels for eating).

At restaurants, diners, food carts, and similar establishments in New York, the only food items that are tax-exempt when ordered to-go are food and drinks that are unheated and sold in “the same way (in the same form, condition, quantities, and packaging)” as in a supermarket or grocery store. That is, coffee is not tax exempt since it is not cold, iced coffee is not exempt since it does not come the same way as it would at a grocery store (unless you are buying one of those bottled or canned Starbucks drinks), and bagels are only exempt if you’re buying them packaged as they would be in a store.

To sum up, in California, if you want to avoid taxes on bakery items, non-alcoholic and non-carbonated drinks, or cold food products, always choose take-out. If this is a store that mostly serves take-out or cold items, your purchase will be tax-free. If it isn’t, it’ll vary by store but there’s still a chance you won’t have to pay taxes on it anyway. In New York, on the other hand, getting your take-out food purchase to be tax-free may be harder, but, generally, avoid soda and sandwiches, and slice bagels yourself.

Further reading if you’re still very confused or really interested:

California

Publication 22: Dining and Beverage Industry

Regulation 1603: Taxable Sales of Food Products

New York

Tax Bulletin ST-283: Food and Food Products Sold by Food Stores and Similar Establishments

Tax Bulletin ST-806: Sales by Restaurants, Taverns, and Similar Establishments

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