home home Doing business home Business types home Industry specific guides home Prepared food guide home Tax Information for Retailers of Prepared Food Tax Information for Retailers of Prepared Food

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:

n = percentage $4,337,500 = .958 or 95.8%
d $4,528,500

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.

Back arrow Previous | Table of Contents | Next Forward arrow