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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 2017, 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
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
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/d = percentage
n $4,337,500 = .958 or 95.8%
=
d $4,528,500
Step 4: Determination
Mega Burgers’ percentage of prepared food sales in 2017 was greater then 75 percent. Therefore, they are classified as predominately selling prepared food. During 2018, 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 juice
- sealed milk
- fruit
- cookies
After 2018, 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 2018 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.
