Was a donut shop a taxable drive-in merely because it had takeout windows, 15 parking spaces, and outdoor trash receptacles?

Plain-English summary

A donut shop made about 70% of its sales to go through two walk-up or drive-up windows. Customers also could eat inside at a U-shaped counter with 16 stools. The lot had 15 parking spaces and seven nearby trash receptacles.

The audit treated the business as a drive-in and taxed nonbulk takeout-window sales because it believed the parking primarily existed for customers to eat donuts purchased at the windows. The outdoor trash receptacles were cited as supporting evidence.

At the hearing, photographs, testimony, and other evidence showed that the parking spaces primarily served customers who ate inside and shop employees. Eating in cars was only a secondary use. Under the quoted drive-in rule, tax applied when parking was provided primarily for patrons to consume the purchased food or drinks.

Because that primary-use test was not met, the hearing officer concluded the shop was not a drive-in and recommended granting the petition.

Common questions

Did takeout windows automatically make the shop a drive-in?

No. The source examined the primary purpose of the parking facilities.

Did trash receptacles near the parking spaces prove drive-in status?

No. They supported the auditor's view, but the hearing evidence established a different primary use for the parking.

Was every takeout donut sale addressed separately?

The audit had taxed window sales except bulk sales, but the recommendation resolved the dispute by rejecting the shop's drive-in classification.

Was the recommendation the final Board action?

The source does not show a later final disposition.

Citations and references

• California Sales and Use Tax Regulation 1603(b) (quoted and applied in the analysis)
• The source's contention section separately prints “Regulation 1623(b).”

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/550-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/550-0585.pdf

Original ruling text

STATE OF CALIFORNIA

550.0585

BOARD OF EQUALIZATION

In the Matter of the Petition For Redetermination )
Under the Sales Taxes and Use Tax Law
)
)
)
E--- & J--- C--)
dba A--- F--- DONUT SHOP
)
)
Petitioner

DECISION AND RECOMMENDATION OF
HEARING OFFICER

Account No. SR – XX-XXXXXX

The above-entitled matters came on regularly for hearing on Tuesday, April 4, 1978, in Long Beach, California. James E. Mahler, Hearing Officer. Appearances for Petitioners:

Mr. D--- F--Attorney at Law
Mr. J--- C--Mrs. E--- C---

Appearing for the Board:

Mr. Sidney Katz
District Principal Auditor
Ms. Bev Conley
Auditor

PROTEST
Petitioners protest the assessment of sales tax pursuant to an audit covering the period April 1, 1974 through March 31, 1977, and a determination issued September 15, 1977. The protested tax is measured by: State, Local and County Claimed sales of food products not allowed.

CONTENTION
The donut shop is not a “drive-in” within the meaning of Regulation 1623 (b).

$XX,XXX

E--- & J--- C--SR – XX XXXXXX

-2-

May 23, 1978
550.0585

SUMMARY
Petitioners own and operate a donut shop. There has been no prior audit. Several hundred customers purchase donuts at the shop each day. Some customers come inside the shop, while others walk or drive up to a “take out” window. There are two such windows, one on each side of the shop. About 70 percent of petitioners’ sales are on a “to go” basis. The remainder are to customers who desire to eat their donuts inside the shop. For the convenience of these customers, the shop has a u-shaped counter with sixteen stools. The shop is located on a lot which has parking spaces for fifteen cars. Seven trash receptacles are situated near the parking spaces. At least two or three employees are present whenever the shop is open. The audit concluded that the shop is a “drive-in”, similar to a McDonald’s or Jack-in-the-Box, and that all sales through the “take out” windows (except bulk sales) are therefore subject to tax. The basis for this conclusion was a determination that parking spaces are provided primarily for use by customers in consuming donuts purchased through the windows. The fact that trash receptacles are situated near the parking spaces was viewed as evidence supporting this determination. ANALYSIS AND CONCLUSIONS In relevant part, subdivision (b) of Regulation 1603 provides: “DRIVE-INS.” Tax applies to sales of drinks or food ordinarily sold for immediate consumption on or near a location at which parking facilities are provided primarily for the use of patrons in consuming the products purchased at the “drive-in” establishment. . . . At the preliminary hearing, petitioners offered photographs, testimony and other evidence which establishes that the parking spaces were intended primarily for use by customers eating inside the shop and by employees, and only secondarily for customers who wish to eat in their cars. Accordingly, the shop is not a “drive-in” within the meaning of Regulation 1603, subdivision (b). RECOMMENDATION It is recommended that the petition be granted.

_______
JAMES E. MAHLER, HEARING OFFICER

_______
5/23/78
Date