When a restaurant buys dressing mix, compounds it into a condiment, and sells it to customers, is the purchase of the mix taxable and the sale of the condiment taxable?

Plain-English summary

A restaurant described buying a dressing mix, combining it with other ingredients, and selling or providing the resulting condiment. The Department discussed how a separately stated price can affect the analysis, but it said a General Information Letter does not make a specific determination.

The letter says that when a condiment is provided without a separate charge, the restaurant may be treated as the user and consumer. When a separate price is stated, the transaction is likely a retail sale. The Department then discusses, conditionally, the wholesale-for-resale rule and the food-ingredient exemption. It says a separately stated food ingredient may qualify for the food-ingredient provision, but it does not apply that conclusion to the company's facts.

What this means for you

A separately stated price is a relevant fact, but it does not by itself establish that the ingredient purchase is exempt. The tax result depends on the transaction and the applicable exemption requirements. The GIL does not decide whether the restaurant's compounded dressing mix qualifies.

Common questions

Q: Does this letter decide that the restaurant's ingredient purchase is exempt?
A: No. It discusses the food-ingredient exemption and says a separately stated price is likely a retail sale, but it expressly makes no specific determination.

Q: Does compounding automatically satisfy the food-ingredient exemption?
A: No. The letter does not apply the exemption to the company's facts. Whether the ingredients become an integral or constituent part of a retail food product must be evaluated under the applicable rule.

Q: Why does the separately stated price matter?
A: The letter says a separately stated price is likely a retail sale, while a condiment supplied without a separate charge may be treated as consumed by the restaurant. It does not decide the resulting tax for a particular transaction.

Citations and references

Statutes, rules, and cases:

• § 39-26-707, C.R.S. (restaurant is user/consumer of unpriced condiments, napkins, utensils, carry-out boxes; pays tax on its purchases)
• § 39-26-102(20)(b)(I), C.R.S. (exemption for food ingredients that become an integral or constituent part of a food product sold at retail for human consumption)
• 1 CCR 201-1, Rule 39-26-707.1(1) (condiments treated as consumed by the restaurant)
• A.B. Hirschfeld v. City and County of Denver, 806 P.2d 917 (Colo. 1991) (wholesale purchase for resale requires resale in essentially unaltered state)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-18-009.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL18-009
June 13, 2018
XXXXXX
Attn: XXXXXX
XXXXXX
XXXXXX
Dear XXXXXX,
You submitted a request for guidance on behalf of XXXXXX (“Company”) regarding the application of sales tax to charges for the purchase of food ingredients and the subsequent sale of a food product to customers subject to tax. The Colorado Department of Revenue (“Department”) issues general information letters and private letter rulings. A general information letter provides a general overview of the relevant tax issues, but is not binding on the Department. A private letter ruling provides a specific determination for a specific set of facts, is binding on the Department but not on the taxpayer, and requires payment of a fee. For more information about general information letters and private letter rulings, please see Department Rule 1 CCR 201-1, 24-35-103.5. The Department treats this request as a general information letter. It is important to remember that general information letters, such as this one, are general discussions of tax law and are not binding on the Department. If Company would like the Department to issue a private letter ruling on the issue raised here, Company can submit a request and pay the fee in compliance with Department Rule 1 CCR 201-1, 24-35-103.5. Issue Is Company’s purchase of prepackaged dressing mix, which Company mixes with other food products to produce a condiment, exempt from tax and is the subsequent sale of the condiment to customers subject to tax? Background Company operates restaurants. Company purchases dressing mix packages from a supplier and compounds it with other food ingredients into a food product it sells to its customers at a separately stated price. Discussion When a restaurant makes condiments available to customers, the condiments are not treated as if they are sold to customers, just as napkins, plastic utensils, or carry-out boxes

are not treated as sold to the customer.1 Rather, the restaurant is viewed as the user and consumer of these products and, therefore, must pay sales tax when these items are purchased from suppliers.2 The presumption underlying this rule is that the restaurant has not separately stated a price for the condiments. If a restaurant separately states a price for a condiment, then the restaurant has engaged in a taxable retail sale. In such cases, the sale by the supplier to the restaurant is not viewed as a sale to the ultimate consumer. It then becomes important to determine whether the sale to the restaurant is a wholesale purchase for resale and, if not, whether any exemption applies to such sale. A wholesale purchase for resale applies if the retailer resells the item in essentially an unaltered state.3 If the restaurant substantially alters the food ingredient by compounding it with other food ingredients, then the purchase of the food ingredient is not a wholesale purchase for resale. Although a restaurant’s purchase of food ingredients may not qualify as a wholesale purchase for resale, Colorado exempts the purchase of food ingredients that become an integral or constituent part of a food product that is intended to be ultimately sold at retail for human consumption.4 As discussed above, a separately stated price for a condiment is likely a retail sale. Miscellaneous This letter represents the good faith opinion of Department personnel who are knowledgeable on state taxes issues. However, the Department does not make a specific determination on any of the issues raised and the Department is not bound by this general information letter. The Department administers state and state-administered local sales and use taxes. This letter does not address sales and use taxes administered by home-rule cities and homerule counties. You may wish to consult with local governments which administer their own sales or use taxes about the applicability of those taxes. Visit our web site at www.colorado.gov/tax for more information about state and local sales taxes. Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter will be made public within 60 days of the date of this letter. Please let me know in writing within that 60 day period whether you have any suggestions or concerns about this redacted letter. Sincerely,

Office of Tax Policy
Colorado Department of Revenue

1 § 39-26-707, C.R.S.

2 § 39-26-707, C.R.S.; 1 CCR 201-1, Rule 39-26-707.1(1)

3 A.B. Hirschfeld v. City and County of Denver, 806 P.2d 917 (Colo. 1991) 4 § 39-26-102(20)(b)(I), C.R.S.

2

DR 4010A (06/11/14)