How to calculate prepared food sales percentages (continued)

Example 2

Jan and Joe’s deli is a quick food and deli café. The deli has utensils on the counter for the customers to use (i.e. napkins, cup, lids, etc.) The deli sells the following combination meals:

• Combo meal #1 - Deli Sandwich, potato salad, fountain soft drink, bag of chips
• Combo meal #2 - Deli Sandwich, cup of soup, fountain soft drink
• Combo meal #3 - Deli Sandwich, cup of milk, bag of chips
• Combo meal #4 - Potato salad, bottled juice, bag of chips, piece of fruit, and two cookies

During 2017 the deli made the following sales:

Deli sandwiches (made on site)	$25,000
Sliced deli meats (only sliced and repackaged)	$10,000
Sliced cheeses (only sliced and repackaged)	$5,000
Meat and cheese platters (only sliced and repackaged)	$7,500
Potato salad (made on site, sold by volume)	$3,000
Hot soup	$5,000
2% milk (served in a cup)	$2,000
Fountain drinks	$15,000
Candy	$10,000
Bottled water	$3,000
Bottled juice (more than 50 percent juice)	$4,500
Sealed soft drinks (cans and bottles)	$6,000
Sealed beverages containing milk (i.e. cold coffee drinks)	$2,500
Coffee	$10,000
Potato chips	$2,500
Sealed milk	$2,000
Fruit	$3,500
Cheese cake (served on a plate)	$1,000
Cookies (made by the deli, wrapped in cellophane)	$2,500
Whole cakes	$1,000
Bottled beer	$1,500
Dietary supplements (sealed)	$2,500
Combo meal #1	$12,000
Combo meal #2	$11,000
Combo meal #3	$10,000
Combo meal #4	$7,000

 

Mrs. Smith, the bookkeeper, is preparing their annual calculation to evaluate whether the deli predominately sells prepared food. In making this evaluation, she must determine whether more than 75 percent of the deli’s sales are considered prepared foods. Her calculation follows:

Step 1: Calculate the 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:

Hot soup	$5,000
Coffee	$10,000

2. Combined foods (all foods where the seller combines two or more ingredients)

Deli sandwiches	$25,000
Fountain drinks	$15,000
Combo meal #1	$12,000
Combo meal #2	$11,000
Combo meal #3	$10,000
Combo meal #4	$7,000

 

Note:

• Although the potato salad is a made by the deli, it is not considered a combined food because it is sold by volume or weight. Therefore, it is excluded from this calculation.

• Even though combo meal #4 contains only one taxable item, when the items are combined into a single meal, the meal is considered combined food and included in the calculation.

• Even though the cookies are made by the deli, because they are a bakery item and no utensil is required to receive this item, it is excluded from this calculation.

• Even though the meat and cheese platters are a combination food item, these platters are not included in this calculation as a combined item because the deli is only cutting and repackaging the meat and cheeses.

 

3. Foods sold where a utensil is necessary to receive the food

Cheese cake (plate and fork required).	$1,000
2% milk (cup required)	$2,000

 

Note: Although the hot soup could be counted as either a “heated item” or “food with necessary utensil,” it is only counted in one classification.

The total amount for the numerator is $98,000 ($15,000 heated food, + $80,000 combined foods, + $3,000 utensil necessary).

Step 2: Calculate the denominator

The denominator includes food, food ingredients, prepared food, soft drinks, and dietary supplements.

1. Food would include:

Deli sandwiches	$25,000
Sliced deli meats	$10,000
Sliced cheeses	$5,000
Meat and cheese platters	$7,500
Potato salad	$3,000
Hot soup	$5,000
2% milk	$2,000
Candy	$10,000
Bottled water	$3,000
Bottled juice (more than 50 percent juice)	$4,500
Sealed beverages containing milk	$2,500
Coffee	$10,000
Potato chips	$2,500
Sealed milk	$2,000
Fruit	$3,500
Cheesecake	$1,000
Cookies	$2,500
Whole cakes	$1,000
Combo meal #1	$12,000
Combo meal #2	$11,000
Combo meal #3	$10,000
Combo meal #4	$7,000

2. Food ingredients:
The deli does not separately sell any items that are classified as food ingredients.

3. Soft drinks would include:

Fountain drinks	$15,000
Sealed soft drinks	$6,000

4. Dietary supplements:

Dietary supplements

$2,500

Note: Although the deli sold $1,500 of bottled beer, alcoholic beverages are excluded from the definition of food and are not included in the calculation.

The total for the denominator is $163,500 ($140,000 food items, + $21,000 soft drinks +$2,500 dietary supplements).
 

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   $98,000 = .599 or 59.9%
   =
d   $163,500

 

Step 4: Determination

The deli’s percentage of prepared food sales in 2017 was less than 75 percent. Therefore, they are not classified as predominately selling prepared food. During 2018, the deli may segregate its sales and is not required to collect retail sales tax on food and food ingredients. In this example the following items would be exempt from retail sales tax:

• deli meats
• sliced cheese
• meat and cheese platters
• potato salad
• candy
• bottled juice
• sealed beverages containing milk
• potato chips
• sealed milk
• fruit
• cookies
• whole cakes

Note: Sales of whole cakes remain exempt from retail sales tax as long as the deli does not provide utensils to customers who purchase cakes and the cake is four or more servings.

After 2018, they are required to recalculate their percentage of prepared food sales. If the percentage of prepared food sales remains below 75 percent, then they may continue to segregate their sales and not charge retail sales tax on food and food ingredients.

If their percentage of prepared food sales goes above 75 percent in 2018, the deli would be required to collect retail sales tax on all food items, except those items that constitute four or more servings (i.e. whole cakes, deli meat, sliced cheese, meat and cheese platters) as long as the deli does not provide the customer with a utensil when selling these items.