How to Calculate Prepared Food Sales Percentages
Example 3
Mega Burgers Inc. is a large
fast food corporation with six locations in the state of Washington. They also
have several locations outside of Washington. Previously, Mega Burgers had
segregated their sales and did not charge retail sales tax on exempt food items
(food and food ingredients) as previously allowed under the rule (WAC
458–20–244). Mega Burgers has utensils (i.e. napkins, lids, plastic ware,
straws, etc.) on the counters for customer use. Mega Burgers decides they
would like to see if they can continue to segregate their sales and not have to
charge sales tax on all items.
In 2007, Mega Burgers Inc made the following sales: (Even
though Mega Burgers has six locations in Washington, because they are a single
entity they must combine all sales for all Washington locations when making
this calculation. They do not have to include locations outside of Washington.)
| Hamburgers/cheeseburgers |
$835,000 |
| Fish burgers |
$450,000 |
| French fries |
$325,000 |
| Onion rings |
$275,000 |
| Milkshakes |
$650,000 |
| Fountain drinks (soda pop) |
$1,000,000 |
| Bottled water |
$30,000 |
| Bottled juice (more than 50% juice) |
$10,000 |
| Coffee |
$92,500 |
| Sealed milk |
$25,000 |
| Fruit (apples/oranges) |
$11,000 |
| Cookies |
$115,000 |
| Combo meal #1 (cheeseburger, french fries, soft drinks) |
$535,000 |
| Combo meal #2 (fish burger, onion rings, milkshake) |
$175,000 |
Mr. Smith, their CPA, is preparing their annual calculation to
evaluate whether Mega Burgers predominately sells prepared foods. In making
this evaluation, he must determine whether 75 percent or more of their sales
are considered prepared foods. His calculation follows:
Step 1
Calculate the Numerator
Numerator: The
numerator includes the following items: (Items are to be counted only once in
the numerator, even if they qualify under more than one
classification.)
1. All foods sold in a heated state:
| Hamburgers/cheeseburgers |
$835,000 |
| Fish burgers |
$450,000 |
| French fries |
$325,000 |
| Onion rings |
$275,000 |
| Coffee |
$92,500 |
2. Combined foods (all foods where the seller combines two
or more ingredients)
| Combo meal #1 |
$535,000 |
| Combo meal #2 |
$175,000 |
| Fountain drinks (combined syrup and water) |
$1,000,000 |
| Milkshakes (combined mix and syrup) |
$650,000 |
Note:
Although the cookies are made with two or more ingredients, they
are exempt from this calculation, because they are classified as a bakery
item.
3. Foods sold where a
utensil is necessary to receive the food.
Milkshakes (cup required to receive drink, except counted in
#2 above)
Fountain drinks (cup required to receive drink, except counted
in #2 above)
The total amount for the numerator is $4,337,500 ($1,977,500 heated food, + $2,360,000 combined foods,
+ $0 utensil necessary)
Step 2
Calculate the Denominator
Denominator: The denominator includes food, food ingredients,
prepared food, soft drinks, and dietary supplements. (Items are to be counted
only once in the denominator, even if they qualify under more than one
classification.):
1. Food includes:
| Hamburgers/cheeseburgers |
$835,000 |
| Fish burgers |
$450,000 |
| French fries |
$325,000 |
| Onion rings |
$275,000 |
| Milkshakes |
$650,000 |
| Bottled water |
$30,000 |
| Bottled juice |
$10,000 |
| Coffee |
$92,500 |
| Sealed milk |
$25,000 |
| Fruit |
$11,000 |
| Cookies |
$115,000 |
| Combo meal #1 |
$535,000 |
| Combo meal #2 |
$175,000 |
2. Food ingredients:
Mega Burgers does not separately sell any items that are
classified as food ingredients.
3. Soft drinks include:
| Fountain drinks |
$1,000,000 |
4. Dietary supplements:
Mega Burgers does not sell any items that are classified as
dietary supplements.
The total for the denominator would be $4,528,500 ($3,528,500 food items, + $1,000,000 soft drinks).
Step 3
Calculate the Percentage
The percentage of prepared food sales is determined by dividing
the numerator (n) by the denominator (d). In
this example the calculation would be:
Step 4
Determination
Mega Burgers’ percentage of prepared food sales in 2007 was greater
then 75 percent. Therefore, they are classified as predominately selling
prepared food. During 2008, Mega Burgers is required to collect retail sales
tax on all sales of food items.
This includes items that were not previously subject to retail sales tax:
- bottled water
- bottled juice
- sealed
milk
- fruit
- cookies
After 2008, if Mega Burgers wants to be able to segregate their
food sales and not charge sales tax on those items classified as food and food
ingredients, they must recalculate their prepared food sales based on 2008
sales figures. In the alternative, if Mega Burgers determines that it is not
worth their time and effort to conduct this calculation, they may simply
continue to charge retail sales tax on all food items.
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