The Department of Taxation and Finance has ruled that charges for food preparation services furnished to clients by a wholly owned subsidiary of a food preparation services company are not subject to sales tax, even where the parent corporation separately contracts with the client to furnish the food and related supplies. Advisory Opinion, TSB-A-14(34)S (N.Y.S. Dep’t of Taxation & Fin., Aug. 27, 2014). The Advisory Opinion addresses the scope of the sales tax rule with respect to exempt sales of food and beverages, where an affiliate of the vendor prepares and serves the food and beverages.
Facts. Parent corporation (“Parent”) provides various food preparation services for clients, which include the procurement and purchase of food and related supplies for those clients, typically nursing facilities and senior citizen independent housing communities (“Clients”). Parent is considering a new business structure in which the food preparation services at a particular Client location would be performed by employees jointly employed by the Client and by a Professional Employer Organization (“PEO”) formed by Parent. A PEO is defined under the New York State Labor Law as a business that enters into professional employer agreements with clients, under which it agrees to co-employ the client’s employees. N.Y. Lab. Law § 916(4). Under the contemplated structure, Parent would create a new limited liability company (“Subsidiary”), which it would register as a PEO with the New York State Labor Department. The Subsidiary would be qualified to do business in the State.
Parent would contract with the Client to provide administrative services, in particular to procure and purchase from distributors and other vendors food and related supplies for the Client, which it would in turn provide to the Client. The Client would be billed by Parent directly for those services. Subsidiary would separately contract with the same Client to provide food preparation services performed by the Subsidiary’s worksite employees. Those food preparation services would include food preparation, cooking meals, serving prepared food, cleaning dishes and utensils, and cleaning and sanitizing kitchen equipment at the Client’s location.
Subsidiary would contract directly with the Client for the provision of those food preparation services. Subsidiary would bill the Client for those services, and the Client would reimburse the Subsidiary for the worksite employee wages. Parent would not supervise or provide any on-site management of the Subsidiary’s employees.
Parent would not act as agent of Client when making food purchases from distributors. When purchasing food items subject to sales tax, Parent would provide the distributor or vendor with a Resale Certificate (Form ST-120).
Parent and Subsidiary would operate as separate and distinct legal entities and hold themselves out to the public as such. Each would have its own bank account, financial statement, and employees. Every Subsidiary worksite employee will have an employment relationship with both the Subsidiary and the Client.
Background. The sale of prepared food and beverages, when sold by restaurants or other establishments for on- or off-premises consumption, or by caterers, is subject to sales tax. This includes where the vendor, or a person “whose services are arranged for by the vendor,” after delivery of the food or drink “serves or assists in serving, cooks, heats or provides other services with respect to the food or drink.” Tax Law § 1105(d)(i)(2) (emphasis added). Food preparation services alone, however, are not an enumerated service subject to sales tax under Tax Law § 1105(c).
Ruling. The question presented was whether the Subsidiary’s charges to its Client for food preparation services – such as cooking and serving meals at the Client’s facilities – provided by the Subsidiary’s “worksite employees” would be subject to sales tax, where the Parent separately furnishes the food products to the Client. The Department ruled that, under the specific facts presented, those charges would not be subject to sales tax.
According to the Department, where, as here, the sale of food and the furnishing of food preparation services are performed by separate legal entities, pursuant to separate contracts and separate invoices, and with no supervision or on-site management by the Parent, the Parent will not be considered to be “arranging for” the Subsidiary’s food preparation services for that Client. As a result, the Department concluded that the Subsidiary’s food preparation service charges will not be subject to sales tax.
The Department was careful to limit its ruling to the facts presented, mindful that Parent and Subsidiary would be related parties, with substantial control by the Parent, and that sales tax would otherwise be imposed if the food preparation services are arranged by the same vendor that sold the food items. Thus, the Advisory Opinion is expressly conditioned on the separateness of Parent and Subsidiary, and on the recited fact that Parent will not arrange for the furnishing of food preparation services by the Subsidiary, and the Subsidiary will not be involved in the Parent’s purchase of food and related supplies.
According to the Department, the analysis would also change if the Subsidiary’s activities are “so dominated and controlled” by Parent, or the two entities’ affairs are “so intertwined” that Parent and Subsidiary are considered to be “alter egos.” In that case, the Department will disregard the corporate structure and treat Parent and Subsidiary as together providing a single taxable catering service.
The Advisory Opinion reflects a cautious recognition by the Department that the activities of one related entity will not necessarily be attributed to the other related entity for sales tax purposes if the parties maintain the requisite operational separateness. It should be kept in mind that in addition to requiring operational separateness, the Department will also look to whether the related entities are “alter egos,” either because the activities of one are dominated and controlled by the other, or the activities are “intertwined.” These are necessarily subjective standards that can make it difficult to obtain the desired level of certainty on this issue. These caveats notwithstanding, the Department’s ruling provides important guidance to the food services industry (and likely other industries) in structuring their services to avoid unintended (and undesirable) sales tax consequences.