When a food-service company prepares patient meals for a for-profit hospital, is sales tax due on the whole charge — including the labor and management fee — or only on the food?

Plain-English summary

A food-service / facilities-management company that prepares patient meals and runs cafeterias for medical institutions asked whether its charges to a for-profit hospital — for food, preparation labor, and a separately stated management fee — are subject to Colorado sales tax. The Department ruled that the charges for food, food-preparation labor, and the related management fee are taxable (except any portion not related to patient meals).

Why: Colorado taxes sales of tangible personal property and specifically taxes prepared meals sold by restaurants, caterers, and similar businesses (§ 39-26-104(1)(e)). For products made to order, the taxable sales price includes the seller's labor and overhead (§ 39-26-102(12)). And for-profit hospitals don't get the charitable-hospital exemption (§ 39-26-718).

The company functions as a caterer: it buys the food ingredients, employs the cooks and staff, carries its own insurance and licenses, and prepares and serves the meals. The Department reasoned that if the hospital had hired a local restaurant or caterer to make the patient meals, it couldn't shrink its sales tax by having that caterer separately bill labor, overhead, and food and then pay tax only on the food. The true object of the transaction is the prepared meal — a made-to-order product — and the labor and overhead are inseparable from it (so A.D. Stores separability doesn't apply). It would be inconsistent to tax the full price of a caterer's meal but not the identical patient meal prepared by this company. Most other states reviewed (New York, Virginia, Missouri, South Carolina, Washington) reach the same result.

Independent contractor, not agent. The hospital couldn't recast the company as merely supplying its own staff (which might make the labor a non-taxable service) — the company has substantial control over the food operation (the management fee is charged precisely for that control/expertise), carries its own insurance and licenses, and buys the food in its own name. Those are hallmarks of an independent contractor, so it's a retailer of prepared meals, not the hospital's agent.

Where the tax stops. Only charges necessarily related to patient meals are taxed. Labor/overhead not related to meals — e.g., the portion of the management fee for general housekeeping — is not taxed (though housekeeping that is meal-related, like dishwashing, stays in). The Department also flagged two scenarios it did not decide: if the hospital employed its own cooks and the company merely supplied food products, only the food cost would be taxable; and it didn't address a setup where the hospital buys the food itself and separately hires a third party only to cook and serve.

The for-profit hospital is the purchaser/consumer of the patient meals, is liable for the sales tax (including the separately stated labor and management fee), and cannot claim a resale exemption; the company must collect that tax.

Because this is a private letter ruling, it is binding on the Department only for this taxpayer and these facts and cannot be relied on by anyone else.

What this means for you

Contract food-service and catering companies

If you prepare and serve prepared meals (patient meals, cafeteria service) for a for-profit client, you're a caterer/retailer and must collect sales tax on the full charge tied to the meals — food plus preparation labor plus the related management fee. Separately stating labor or overhead doesn't carve it out; the prepared meal is a made-to-order product whose labor and overhead are inseparable. Segregate any genuinely non-meal charges (general housekeeping) to keep those untaxed.

Hospitals and institutions (for-profit)

You're the consumer of the patient meals and owe sales tax on the whole meal-related charge, with no resale exemption. The structure matters: merely buying food products (with your own staff cooking) limits tax to the food cost, but hiring a company to prepare and serve the meals makes the full meal-related charge taxable. Charitable/non-profit hospitals have a separate exemption (§ 39-26-718).

Accountants and tax professionals

The engine is "product made to order" (§ 39-26-102(12)) plus the prepared-food tax (§ 39-26-104(1)(e)): labor and overhead are baked into a taxable meal, so A.D. Stores separability doesn't reach them. The agent-vs-independent-contractor analysis (degree of control, own insurance/licenses, buying in its own name) decides whether the labor could be a non-taxable service — here, independent contractor. Watch the for-profit vs. charitable distinction and the un-decided "staffing only" structure.

Common questions

Q: Does a food-service company charge sales tax on the management fee and labor, or just the food?
A: On the full charge related to the patient meals — food, preparation labor, and the related management fee. The prepared meal is a made-to-order product, so its labor and overhead are inseparable and taxable.

Q: Can separately stating the labor or management fee make it non-taxable?
A: No. Separability (the A.D. Stores rule) doesn't apply because the true object is the prepared meal, and labor/overhead are part of a made-to-order product's price.

Q: Is any part of the charge untaxed?
A: Yes — charges not related to patient meals, such as the general-housekeeping portion of the management fee. But meal-related housekeeping (e.g., dishwashing) stays taxable.

Q: Does this apply to non-profit/charitable hospitals?
A: This ruling addresses for-profit facilities. Charitable hospitals have their own exemption (§ 39-26-718), so the analysis differs.

Citations and references

Statutes and cases:
- § 39-26-104(1)(a), C.R.S. (sales tax on TPP)
- § 39-26-104(1)(e), C.R.S. (prepared food sold by restaurants, caterers, and similar businesses)
- § 39-26-102(12), C.R.S. (made-to-order sales price includes labor and overhead)
- § 39-26-718, C.R.S. (charitable/hospital exemption — not for-profit facilities)
- A.D. Stores v. Dep't of Revenue, 19 P.3d 680 (Colo. 2001) (separability — not applicable to a prepared meal)
- Persuasive: NY, VA, MO, SC, WA rulings taxing food-service charges for patient meals

Related rulings

• [[gil-11-003-taxability-of-administrative-fees-sales-tax]] — inseparable labor/overhead in the tax base
• [[gil-13-028-bagged-or-packaged-salads]] — prepared food vs. exempt food
• [[plr-11-008-private-letter-ruling]] — food exemption boundaries

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-10-003.pdf

Original ruling text

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

PLR-2010-003
May 6, 2010

xxxxxxxxxxxxxx
Attn: XXXXXXXXXX
xxxxxxxxxxxxxx
xxxxxxxxxxxxxx
xxxxxxxxxxxxxx

Re: private letter ruling re: food service company

Dear XXXXXXXXXX:
XXXXXXXXXXXXXX ("Company") submitted a request for a private letter ruling pursuant to
Department Regulation 24-35-103.5 and relating to the application of sales and use tax to
various contractual arrangements concerning the provisioning of food and management
services to for-profit healthcare facilities. This letter is the Department's private letter ruling.
Issue
Are charges by Company to a for-profit medical institution for costs incurred to prepare
patient meals and related management fee subject to sales tax?
Conclusion
Charges for costs of food, labor costs for food preparation, and the related management fee
(except to the extent the fee is not related to patient meals) are subject to sales tax.
Background
Company provides food and facilities management services to for-profit and non-profit
medical institutions and other institutions. Company supplies patient meals and operates a
cafeteria within these medical institution. Company provides the following goods and
services:

•
•
•
•
•
•
•

Purchasing all necessary foods and supplies for food service and housekeeping
operations;
Employing and paying all necessary personnel for operation of the food service and
housekeeping operations;
Obtaining and paying for all necessary permits and licenses for operation of the food
service;
Obtaining and maintaining commercial general liability insurance in an amount
designated by the institution;
Providing worker's compensation and employer's liability insurance for all employees
employed by Company in an amount designated by the institution;
Managing, supervising, and operating the housekeeping and nutrition departments for
the institution; and
Collecting and remitting any applicable taxes.

Company charges institutions for all costs it incurs, which include food, labor, insurance,
licensing fees. Company separately charges a management fee that generally reflects
Company's overhead costs. Institutions, in turn, charge patients a flat daily rate that includes
the cost of patient meals. Company asks whether its labor charges and management fees
are subject to sales or use tax when the institution is a for-profit entity.
Discussion
A few general observations will set the background for our discussion. Colorado levies sales
tax on the sale of tangible personal property but not on the sale of services, with a few
exceptions not relevant here.1 Colorado levies sales tax on repared meals sold by
restaurants, caterers, and other similar business operations. Finally, sales tax is calculated
on the sales price, which includes, for products made to order, the retailer's costs for labor
and overhead.3 The issue presented here is whether a for-profit4 medical facility, which
engages a food service company to provide patient meals, must pay tax on separately stated
charges for labor and management fees related to the preparation of patient meals.
Most states appear to treat medical facilities as providers of services.5 As such, these
facilities are the ultimate consumer of the tangible personal property used to provide their
services and must pay sales tax on the purchases of those goods. These states treat patient
1

§39-26-104(1)(a), C.R.S.

2 §39-26-104(1)(e), C.R.S. Tax is levied on "the amount paid for food and drink served or furnished in or by

restaurants ... caterers ... and other like places of business at which prepared food or drink is regularly sold ... "

.1 §39-26-102(12), C.R.S. ("[s]ales tax is imposed on the full purchase price of articles sold after manufacture pr

after having been made to order and includes the full purchase price for material used and the services
performed in connection therewith,... ").
Hospitals are exempt from sales tax if they are charitable entities. §39-26-718, C.R.S. Our discussion here is
limited to for-profit hospitals which are not charitable entities.
5 California SBE Information Publication No. 45, 02/01/2009 ("Hospitals and other medical service facilities are
predominantly service enterprises for tax purposes and are generally considered consumers, rather than
retailers, of tangible personal property [including patient meals]. As consumers, hospitals will generally pay tax
to their suppliers"); Washington DOR regulation 458-20-119(3)(c) ("Purchases of prepared meals by not-for­
profit organizations, such as hospitals, which provide the meals to patients as a parl of the services they render'
are subject to tax); Washington Tax Determination No. 89-447, 8 WTD 175, 08/30/1989; Tennessee Revenue
Ruling 95-36, 11/02/1995.

2

meals as part of the service provided by the medical facility and not as a separate sale of
property to the patient.6 Tennessee has succinctly stated this view:
Hospitals are engaged in the business of rendering services, and are the consumers
or users of all tangible personal property or taxable services purchased for use or
consumption in connection with their operations as a hospital. .. The Hospital is clearly
liable for tax on its purchase of food for feeding its patients. If the food is acquired tax­
free by the Hospital, the Hospital, as user and consumer, would be responsible for
self-reporting sales or use tax on the cost of the portion of the food used in providing
patient meals.
Tennessee Revenue Ruling 95-36, 11/02/1995. However, at least two states view a food
service company as a service provider, just as the medical facility is viewed as a service
provider.7 In these two states, the food service company is the consumer of the patient
meals and liable for sales and use taxes when it purchases food products.
Finally, some states have addressed claims that a food service company is not selling
taxable patient meals because the company is (1) acting as agent for the medical facility
when purchasing food ingredients (and, therefore, can purchase the food exempt of tax if the
medical facility is exempt from tax), and (2) is merely filling the shoes of the medical facility's
own employee and, therefore, is providing only a non-taxable service.
We believe the better analysis is that a food service company preparing patient meals for a
for-profit medical facility is a retailer of prepared meals and must collect sales tax on all
charges necessarily related to patient meals, including related labor and management
charges. Had the for-profit medical facility engaged a local restaurant or caterer to prepare
and serve patient meals, the medical facility could not reduce its sales tax obligation on the
meals by having the restaurant or caterer separately charge for its labor costs, general
overhead costs, and food product costs and then pay sales tax only on the charge for food
products.8 In the facts presented here, Company operates as a caterer. It purchases food
ingredients, employs cooks and other staff necessary to prepare and serve patient meals,
buys worker's compensation insurance and general liability insurance, employs
administrative staff for supervision and other general administrative tasks, and incurs other
overhead costs typically incurred by restaurants and caterers. We believe it would be
inconsistent to levy sales tax on the total cost of a meal of a caterer or restaurant and not
levy sales tax on the total cost of the same patient meals prepared by the Company.
We note that most states have reached the same conclusion: a food service company's
separately stated charge for labor and management fee are included in the calculation of
Colorado does not have a statute, regulation, or publication that directly addresses the taxability of patient
meals.
7 See, e.g., ARA Hospital Food Management, Inc. v. State of Alabama., 437 So 2d 530, 02/02/1983; Sodexo
Operations, LLC. v. Division of Taxation (New Jersey) 001793-2001, 08/13/2003.
8 In AD Store v. Department of Revenue, 19 P.3rd 680 (Colo. 2001}, the Colorado supreme court held that a
retailer must exclude separately stated charges for services if they are "separable" from the sale of the taxable
property. AD Stores is not applicable here. The true object of the transaction here is the prepared meal, not the
separate food ingredients which constitute the meal. The prepared meal is a "product made to order," and the
labor and overhead incurred by a food service company to prepare such meals are inseparable from the sale of
the prepared meal. See §39-26-102(12), C.R.S. quoted in footnote 3.
6

3

sales tax. See, e.g., New York Advisory Opinion TSB-A-95(39)S, 10/10/1995; Virginia Public
Document Ruling No. 96-93, 05/16/1996 (food service company's management fee charged
to a for-profit medical institution is subject to tax); Virginia Public Document Rulings 85-202
(10/28/85), 85-214 (12/9/85) ("true object" of contract was the sale of prepared meals, not
food management service), 85-216 (12/9/85), and 86-112 (6/25/86); Missouri Private Letter
Ruling No. LR 1431, 05/29/2003 (fees paid by for-profit medical facility to food service
company to prepare and serve meals to patients are subject to sales tax); South Carolina
Revenue Ruling 93-9, 08/04/1993 (charges by food service company to medical institution
for patient meals are subject to tax); Washington Tax Determination No. 89-447, 8 WTD 175,
08/30/1989.
We also conclude that, based on the facts set forth in the Company's letter, the Company
acts as an independent contractor and not as agent for the medical facility. As we noted
earlier, some medical facilities have argued that the food service company staff are agents of
the medical facility, are merely supplanting the medical facility's own staff, and, therefore, the
food service company's labor charge is non-taxable service. Whether a food service
company is acting as an agent or independent contractor is determined by a number of
factors, including the degree of control exercised by the company. In this case, Company
has substantial control over the food service operations. Indeed, the management fee is
assessed precisely for the Company's time and expertise in exercising this control.
Moreover, Company incurs costs and engages in activities that are more characteristic of an
independent contractor than of an agent. For example, Company purchases its own
worker's compensation and general liability insurance, obtains all the necessary licenses to
operate a food service, and purchases in its own name the food ingredients that are used to
make the meals.
Together, these factors compel the determination that Company is an independent
contractor, not an agent of the medical facility. States which have considered similar claims
have reached the same conclusion.9
We acknowledge that had the institution itself employed the cook staff and the Company
simply acted as a supplier of food products to the medical facility, the medical facility's sales
or use tax liability would be limited to the cost of the food products and not included the
institution's own labor and overhead costs. Moreover, we do not address a case in which the
institution itself purchases the food products and separately contracts with a third-party who
only provides the staff necessary to cook and serve the patient meal.10 We are satisfied that
Company is a caterer as this term is used in statute and, therefore, must collect sales tax on
See, e.g., Hospital Dietary Service, Inc. v. Michigan Deparlment of Treasury, Revenue Division., 1391,
03/29/1979; In the Matter of the Petition of Sodexho USA, Inc. for Revision of a Determination or for Refund of
Sales and Use Taxes under Arlie/es 28 and 29 of the Tax Law for the Period March 1, 1998 through February ..
... , New York Tax Appeals Tribunal, Docket Nos. 820020; 820021; 820022; 820023; 820024, 11/21/2007. (food
service company not an agent of exempt charitable entity to whom company provided patient meals).
10 South Carolina Revenue Ruling 93-9, 08/04/1993); compare Hospital Dietary Service, Inc. v. Department of
Treasury, Revenue Division, 1391, 03/29/1979 (food service company not the agent of a tax exempt hospital
and, therefore, sales of patient meals, including food service company's management fee, to hospital are
subject to sales tax); Virginia Public Document Ruling No. 85-214, 12/09/1985.
9

4

all costs necessary for patient meals, including labor costs and the management fee.
However, labor costs and other overhead costs that are not related to patient meals are not
subject to tax. For example, that portion of the management fee, if any, related to general
housekeeping should not be included in the tax calculation, except if the housekeeping is
related to patient meals (e.g., labor costs for dishwashing).
The for-profit medical facility, as purchaser of tangible personal property (i.e., patient meals),
is liable for sales tax, which includes separately stated charges for labor and the
management fee. The medical facility, as a service provider of patient care, is the consumer
of these patient meals. The medical facility cannot, therefore, claim a resale exemption on
such purchases. The Company, as a retailer, is obligated to collect from the for-profit
medical facility sales tax calculated as set forth herein.
Miscellaneous
This ruling applies only to sales and use taxes administered by the Department. We
encourage you to consult with local governments which administer their own sales or use
taxes about the applicability of their taxes.
This ruling is premised on the assumption that the Company has completely and accurately
disclosed all material facts. This ruling is null and void if any representation by the Company
or assumption made by the Department in this ruling is not factually correct and such have a
material bearing on the conclusions reached in this ruling. The Department reserves the
right, among others, to independently evaluate Company's representations. This ruling is
subject to modification or revocation in accordance to Department Regulation 24-35-103.5
Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this
redacted version of the ruling 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 version of the ruling.
Respectfully,

Office of Tax Policy
Colorado Department of Revenue

5