Statement of Basis and Purpose - Colorado



COLORADO DEPARTMENT OF REVENUE

STATEMENT OF BASIS AND PURPOSE

Regulation 39-26-707.1

Articles and Containers for Food

1 CCR 201-4

Basis

This regulation is promulgated pursuant to §39-21-112 and §39-26-707(1)(c) and (d), C.R.S. (2010).

Purpose

The purpose of this proposed new regulation 39-26-707.1 is to implement HB10-1194, which suspends the sales and use tax exemptions for a food retailer’s purchase of articles and containers which are furnished to consumers. Prior to March 1, 2010, a retailer of food, meals or beverage could purchase exempt of sales and use tax articles and containers furnished to a consumer if certain conditions were satisfied (transfer of property, tax paid on retail transaction, etc.). This exemption addressed the issue of whether a restaurant or other food retailer could make a tax exempt purchase of disposable utensils, napkins, paper boxes and other similar items. These articles and containers are not part of the retail transaction for the purchase of a prepared meal. A retailer does not list on its invoice items such as utensils, straw, napkin, and toothpicks. These items are generally furnished separately from the sale of the meal. In many cases, the consumer does not to use condiments, utensils, or napkins furnished at the convenience counter. Although the consumer’s possessory rights to these items are generally greater than other conveniences furnished by the retailer to consumers, these items are considered more akin to the consumer’s use of the retailer’s tables and chairs furnished by the retailer for the convenience of the consumer. Finally, it is not sufficient that the cost of utensils and similar items are included in the price of the meal. All the retailer’s costs, including rent, insurance, capital equipment, must be recovered in the price of the meal, at least in the long term, but these items are not in any sense resold to the consumer. Therefore, the retailer cannot purchase these items as an exempt wholesale purchase.

House Bill 10-1194 suspends this exemption for purchases made on or after March 1, 2010, unless the article or container is essential. The purpose of this regulation is to classify some of the more common articles and containers as either essential or nonessential. As a starting point, this exemption must be strictly construed and only those articles and containers that clearly fall within the exemption can be allowed. In cases where there exist reasonable grounds for asserting that the article or container is not exempt, the item must be treated as taxable.

Moreover, the classifications proposed here favor a simplified approach over approaches that create greater ambiguity and uncertainty. For example, one approach that was initially proposed and then discarded was to classify the item based on whether the retailer offered eating facilities. As a corollary, most states use this approach when determining whether the sale of food is exempt food for home consumption or taxable food for immediate consumption. Applying the standard to articles and containers, the department considered whether an article is essential or not depending on whether the retailer offered eating facilities. For example, a retailer may offer eating facilities and serve prepared meals on a durable plate and bowl, but may also offer, for the convenience of the consumer and at the consumer’s option, disposable plates and bowls that the consumer could use to take the prepared meal to another location. In some sense the plate and bowl are not essential because the consumer has the means to obtain the meal using the retailer’s durable plate and bowl. However, a different approach might be appropriate if the retailer operates only a carry out facility or serves food using only disposable articles and containers. A number of commentators on the emergency regulations complained that such an approach is too confusing, particularly wholesalers of articles and containers who may be retailers and have tax collection responsibilities if their sales to retailers are retail sales.

The department also considered using food safety laws as an objective criteria for determining whether an article or container was essential. The advantage of such an approach is that these laws are found in every taxing jurisdiction, their requirements are generally well understood by food retailers, and they are a reasonable proxy for what is essential in a food sale transaction. The department ultimately declined to adopt this approach because these food safety laws can vary among jurisdictions and create complexity and confusion to an already difficult issue. Moreover, wholesalers of articles and containers, who are retailers charged with sales tax collection duties for nonessential items, are not as likely to be familiar with such laws.

The department ultimately adopted an approach that more generally considers whether the sale of food can be completed without the item – i.e., whether the item was essential in order to complete the sale of the food. Thus, a plate, bowl, and cup are generally considered essential to convey prepared food to the consumer. Disposable trays, on the other hand, are generally a convenience for the consumer.

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