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 buys prepackaged dressing mix, blends it with other ingredients into a condiment, and sells that condiment to customers at a separately stated price. It asked: is buying the mix exempt, and is selling the condiment taxable? The answer hinges on one fact — whether the condiment carries its own price.
If the condiment is just made available (no separate charge): Colorado treats the restaurant as the user and consumer of the condiment — the same way it treats napkins, plastic utensils, and carry-out boxes. The restaurant isn't "selling" the condiment to the customer, so it must pay sales tax when it buys those ingredients from its supplier (§ 39-26-707).
If the restaurant separately states a price for the condiment: now the restaurant has made a taxable retail sale to the customer. That flips the earlier link: the supplier's sale to the restaurant is no longer a sale to the ultimate consumer. So is the restaurant's ingredient purchase tax-free? The Department works through two routes:
- Wholesale purchase for resale? That applies only when the retailer resells the item in essentially an unaltered state (A.B. Hirschfeld). Here the restaurant substantially alters the dressing mix by compounding it with other ingredients — so it's not a wholesale-for-resale purchase.
- Food-ingredient exemption? Colorado separately exempts the purchase of food ingredients that become an integral or constituent part of a food product that's ultimately sold at retail for human consumption (§ 39-26-102(20)(b)(I)). The compounded dressing mix fits — it becomes part of the condiment the restaurant sells. So the purchase is exempt under this provision, even though it failed the wholesale-for-resale test.
The throughline: a condiment given away is consumed by the restaurant (tax paid on the buy side); a condiment sold for a stated price is a retail sale (tax collected on the sell side), and the ingredients that go into it ride the food-ingredient exemption rather than the wholesale-for-resale rule.
Because this is a General Information Letter, it's general guidance only and not binding on the Department.
What this means for you
Restaurants and food-service operators
Decide which side of the line you're on. If you hand out a condiment with no separate charge, you're the consumer — pay tax when you buy the ingredients (just like napkins and to-go boxes). If you put a separate price on a house-made condiment (or other compounded food item) and sell it, you collect tax on that sale, and the ingredients that become part of it can be bought exempt under the food-ingredient exemption. Don't assume a "purchase for resale" certificate is the right tool when you substantially alter the ingredient — the exemption that actually fits is the food-ingredient one.
Food manufacturers and compounders
When you transform purchased ingredients into a new food product sold at retail for human consumption, the inputs ride the food-ingredient exemption (integral/constituent part), which is broader here than wholesale-for-resale because it doesn't require the item to be resold unchanged.
Accountants and tax professionals
Two distinct exemption theories: (1) wholesale-for-resale demands resale in "essentially an unaltered state" (Hirschfeld), which compounding defeats; (2) § 39-26-102(20)(b)(I) exempts food ingredients that become an integral or constituent part of a retail food product, which compounding satisfies. The trigger that converts the restaurant from consumer (tax on purchase, § 39-26-707 / Rule 39-26-707.1) to retailer (tax on sale) is a separately stated price for the condiment.
Common questions
Q: Does a restaurant pay tax on condiments it gives to customers?
A: Yes. If the condiment isn't separately priced, the restaurant is treated as the user and consumer (like napkins and utensils) and pays sales tax when it buys the ingredients from its supplier.
Q: What if we charge a separate price for a house-made condiment?
A: Then you've made a taxable retail sale and collect tax from the customer. The ingredients you compound into it can be purchased exempt — under the food-ingredient exemption, not as a wholesale-for-resale purchase.
Q: Why isn't the ingredient purchase a wholesale purchase for resale?
A: Because wholesale-for-resale requires reselling the item essentially unaltered. Compounding the dressing mix with other ingredients substantially alters it, so it doesn't qualify on that theory — but it does qualify under the separate food-ingredient exemption.
Q: Does this cover city sales tax?
A: No. The Department administers state and state-administered local taxes only. Colorado's self-collected home-rule cities set their own rules. Check with each home-rule city.
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)