Special Report: How COVID-19 is changing business sales tax obligations and enhancing risk [Part 4]

How COVID-19 is changing the way we feed ourselves and our families.

Business the way we know it is changing. E-commerce has exploded, so online businesses face more complex sales tax obligations and enhanced risk.

Like you I continue to closely watch this pandemic unfold as a person first and a tax professional second. This is unprecedented in my lifetime and like you, my focus is primarily on my personal health and wellbeing as well as that of the people I care most about. Like many of you, I am leaving my apartment in Manhattan only for necessities; and I am always am mindful of physical distancing. We know that behavioral changes brought on by COVID-19 will have lasting financial and social impact on all of us. I’m dedicated to helping all of you see more clearly what’s coming in relation to tax relief, risks and opportunities as we navigate through and beyond COVID-19 to a way of life I believe will be different than it is today in many respects.

This is the fourth blog in this ongoing series and and there will be many more as changing circumstances and laws require. You can follow this series and more information on sales and use tax on our blog.

We are all witnessing a massive personal and business transformation at the moment, one not seen since the industrial revolution, with employees changing where and how they work and live. Abrupt closures of places we have relied upon every day — retail outlets, restaurants, bars, places of worship, schools, gyms and more have rocked all of us as.

Restaurants, Bars and Food Delivery Services

Restaurants and their employees are feeling the catastrophic effect of the COVID-19 pandemic across the country. Since March 1, the industry has lost more than 3 million jobs and $25 billion in sales, and roughly 50% of restaurant operators anticipate having to lay off more people in April.

We are all witnessing a massive personal and business transformation at the moment, one not seen since the industrial revolution, with employees changing where and how they work and live. Abrupt closures of places we have relied upon every day — retail outlets, restaurants, bars, places of worship, schools, gyms and more have rocked all of us as.

The passage of the CARES Act was a necessary first step towards helping the industry and their employees through this crisis, but we know more must be done, and the President and Congress are making plans to add as much as $250B in the Payroll Protection Program (PPP).

The pandemic is forcing more people to rely on food delivery apps such as DoorDash, Postmates and UberEats as they stay home; and more and more restaurants and bars close dine-in options. Although keeping up with the surge of orders is putting a strain on both restaurants and delivery apps leading to long delays in many cases, many have responded by eliminating fees and hiring more workers.

FoodBoss is an aggregator who collects data on popular food delivery services, which includes available restaurants, best deals, delivery times, menus and real-time surge pricing. The app covers more than 50 cities. FoodBoss is seeing an increase in contactless delivery options because of the coronavirus. Consumers want deliveries to be left at their doors without having contact with the drivers.

After initially raising their delivery fees as demand skyrocketed, many food delivery services have stepped up and either reduced or completely eliminated delivery fees.

For now, food delivery apps are focusing on meeting the growing demand of consumers stuck in their homes and tired of eating the same thing or struggling to buy food and other necessities because of bare shelves in grocery stores.

Consumers are not the only ones benefiting from the lack of fees. For example, Grubhub is not collecting commission fees from restaurants temporarily, which it states provides restaurants a relief of over $100 million.

Sales Tax Implications for Food Delivery Services and the Restaurants They Serve

As I have written in earlier blogs, food delivery services such as UberEats, Postmates, DoorDash, etc., face increasing scrutiny on their sales tax compliance policies. In addition, the restaurants and bars using these services face sales tax compliance issues as well as they use these services and go to a pick-up and/or delivery business model.

In some states, fast food restaurants are falling into the category of marketplace facilitators. As I mentioned previously, responsibility for sales tax collection and remittance for marketplace facilitators and marketplace sellers remains a matter of contention in the courts of some states, even as more states pass laws specifically making the facilitators responsible for sales and use tax collection, remittance and compliance (Tennessee is the most recent state to have passed such a law). Marketplace facilitators are usually places like Etsy, Amazon, or eBay that let individuals sell goods through their marketplace. Different states have different rules for Walmart.com or other marketplaces, and the bigger companies are fighting back in court.

One Example: Wendy’s

Wendy’s has been surprised to find itself in the middle of this. People can order their Wendy’s sandwiches online and have them delivered by DoorDash or a similar service. Wendy’s feels DoorDash should be responsible for the sales tax. After all, they’re a marketplace facilitator. Sometimes the delivery charge is higher than the price of the food.

And the food might not even be taxable. For example, in Ohio, that Wendy’s sandwich is not subject to sales tax. A carbonated beverage is, though and so is a toy in a kids’ meal. DoorDash is not up to complicated decisions about sales tax for specific menu items.

Sometimes deliveries cross state lines, too, making things even more complicated. Though the online sale may be said to take place out of state in any case, since the transaction is not local for most consumers. Unless the fact that a local franchise collects the money makes it an in-state transaction… or Wendy’s website is itself a market facilitator.

Should DOORDASH Be Involved?

DoorDash doesn’t collect sales taxes at all in some states. In those cases, the fast-food restaurant may be on the hook for sales taxes on the food. But who is responsible for collecting sales tax on the delivery fee? DoorDash and other similar companies say that they are marketplaces matching up buyers and sellers. Since they don’t actually sell anything, their thinking goes, they can’t be expected to collect or pay sales tax.

Wendy’s has a national online ordering system, plus an app. Consumers using different food delivery systems can expect to pay different prices. Depending on where you live, you may have no choice. If you have a choice of services, one of the factors in pricing differences is that some food delivery services pay sales tax and some do not.

Restaurant Delivery Services and Restaurants They Service Are Running into Post-Wayfair Sales Tax Confusion

As most states and municipalities have ordered the closing of restaurants and bars for in-house dining, we are seeing the following:

  • Restaurants are shifting to deliveries and curbside pickups as a way to stay in business.
  • GrubHub, Postmates and Uber Eats are temporarily suspending commission fees to help smaller restaurants as they work to stay afloat via delivery.
  • They’re also rolling out no-contact delivery options so customers and drivers don’t have to interact with each other.

The nationwide trend to enforce sales tax over online purchases is creating compliance nightmares for so many businesses.

Food delivery services face increasing scrutiny on their sales tax compliance policies. In addition, the restaurants and bars using these services face sales tax compliance issues as well as they use these services and go to a pick-up business model.

New state tax rules post-Wayfair continue to create unanticipated and complex issues and consequences for online sellers.

More on the case of Wendy’s, the large food chain headquartered in Ohio. They face sales tax obligations as both a marketplace facilitator and seller through other online platforms on which their food is sold.

Wendy’s expects third-party delivery services to follow the burgeoning and complex “marketplace facilitator” laws that impose sales tax obligations on online platforms used as a go-between. Many states have passed laws designating online platforms that facilitate third-party sales, such as Amazon, Walmart and eBay, as marketplace facilitators.

But none of the delivery services deemed marketplace facilitators quite know how to do it yet. The state rules are often written in ways that include platforms like Postmates, UberEats and DoorDash, which facilitate the purchase and delivery of food with a few thumb taps on mobile apps.

That brings a morass of complicated tax questions because state taxing rules for food were designed for brick-and-mortar restaurants. Wendy’s is dealing with the problem twice — contracting with third-party marketplace facilitators and separately acting as its own facilitator for deliveries from its website.

A Wendy’s spokesperson said, “It’s a wildfire, I think restaurants and food delivery businesses were not meant to get caught up in marketplace facilitation, but here we are.”

In my next Special Report on the impact of COVID-19 on the restaurant sector and the implications for food-delivery services and the restaurants and other businesses they serve, I will drill into the wide range of sakes tax rules and compliance requirements in many of the states around the country and how to best deal with the compliance requirements to stay compliant and minimize risk.

NOTE: CCH Incorporated is not engaged in rendering legal, accounting, tax or other professional services. If legal, accounting, tax or other expert assistance is required, the services of a competent professional should be obtained.[/vc_column_text]

In the last few weeks, the landscape of business has changed in fundamental ways in the U.S. and globally, the breadth and depth of which we can’t yet fully comprehend. These changes have challenged companies to rewrite their forecasts, cut their budgets, and their mode of operation — essentially overnight. Many businesses are closed completely or are operating exclusively on an online ordering/curbside-pickup model. Retailers such as Macy’s and Kohl’s have moved exclusively to online ordering/shipping way of doing business. Restaurants and bars are operating on an order pick-up or delivery model in an attempt to stay in business for as long as they can during the pandemic.

As of this writing, three-quarters of all Americans are on stay-at-home orders. This has made these new business models increasingly more important as these businesses struggle for their very survival. Unfortunately, this is will get worse before it gets better.

Restaurants and Drug Stores

The CARES Act signed by the President on March 27, 2020, offers help for small businesses and individuals, but many are concerned that the relief is insufficient.

Restaurants, bars and a nationwide drugstore chain are turning to food delivery services such as Uber Eats, GrubHub and Postmates to get online orders to their customers. Walgreens just announced it is expanding its on-demand delivery to over 7,000 stores across the U.S. through its partnership with Postmates. Customers can now order over-the-counter medications, household essentials and convenience products through Postmates’ app, or by visiting Walgreens’ website. Postmates offers “contactless” delivery options in most states.

As states and municipalities increasingly order the closing of restaurants and bars, and most brick and mortar retail businesses, we are seeing the following:

  • Restaurants and other businesses are shifting to deliveries and curbside pickups as a way to stay in business.
  • GrubHub, Postmates and Uber Eats are temporarily suspending commission fees to help smaller restaurants as they work to stay afloat via delivery.
  • They’re also rolling out no-contact delivery options so customers and drivers don’t have to interact with each other.

Retail gets a huge hit!

  • Most retail stores have turned exclusively to an online ordering-mail delivery busy model.
  • Faced with depleted cash reserves and extended store closures amid the COVID-19 outbreak, retailers turned to mass furloughs this week.
  • Department stores including JCPenney, Kohl’s, Macy’s, Neiman Marcus, and Nordstrom have ordered employees to take mandatory leaves of absence. Among those retailers, up to 314,000 workers are being furloughed.
  • Other apparel retailers have done the same: L Brands is furloughing most store staff at Victoria’s Secret and Bath & Body Works. The same goes for 90% of Ascena Retail’s 43,000 employees, nearly 80,000 of Gap’s store employees, and most workers at Urban Outfitters brands … and this isn’t even the entire list.
  • Visits to U.S. stores fell nearly 98% last week compared to the same period last year, after American retailers closed their doors, according to location-data provider Prodco Analytics.
  • Total store closures have surpassed 200,000 as of March 30, according to GlobalData Retail.
  • Grand total: Around 600,000 workers at major U.S. retail chains have been furloughed so far. More are expected to roll in as rents go unpaid today, April 1, 2020.

What does this all mean?

  • Online sellers are showing enormous increases in sales to consumers and businesses.
  • Huge marketplace facilitators and third-party sellers on these marketplaces are being overwhelmed.
  • Despite a slowdown in luxury clothing sales, online sales of leisurewear, household goods, drugs, food and drink have soared all across the country placing online businesses into the Wayfair “economic nexus” net. Online businesses and their owners will need to carefully examine their nexus “profile” to determine whether they are now obligated to register in a particular state and compute, collect, remit sales tax on the sales of their goods, and file sales tax returns.

Stay tuned for my next report in this series where I will focus on the revenue challenges faced by states and municipalities in light of COVID-19 and what that is likely to mean for online sellers, food delivery services and others.

This special report is part of an ongoing series from Wolters Kluwer focusing on tax and business developments, legislation and government relief efforts and other COVID-19-related activities. If you have questions, concerns or need additional insight on your situation, you can reach out to author and sales and use tax expert, Mark Friedlich at mark.friedlich@wolterskluwer.com.

NOTE: CCH Incorporated is not engaged in rendering legal, accounting, tax or other professional services. If legal, accounting, tax or other expert assistance is required, the services of a competent professional should be obtained.

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AUTHOR

Mark Friedlich

All stories by: Mark Friedlich