If one company sells the food and a separate subsidiary provides the cooking and serving labor, are the labor charges taxable catering in NY?

Plain-English summary

The Petitioner provides food-preparation and food-procurement services to nursing facilities and senior-housing clients. It proposed a structure splitting two roles:

• The parent (Petitioner) would buy, sell, and deliver the food and related supplies to the client under its own contract, marking up its cost.
• A subsidiary (an LLC registered as a Professional Employer Organization) would, under a separate contract with the client, provide the food-preparation labor -- menu planning, cooking, serving, and cleanup -- using "worksite employees" jointly employed by the subsidiary and the client.

The Petitioner asked whether the subsidiary's labor charges are taxable, and whether it could buy the food for resale.

The Office of Counsel concluded:

• Food-prep labor alone isn't taxable. There is no sales tax on "food preparation" services by themselves under section 1105(c).
• Catering tax depends on combining food + service. Food becomes taxable under section 1105(d) when its sale is combined with cooking/serving by the vendor or by someone the vendor arranges.
• Here the two are separated, so no catering. Because the parent separately sells and delivers the food and the subsidiary separately contracts to cook and serve, the food sale is split from the preparation labor -- so the parent isn't providing catering and is only selling food (see TSB-A-10(12)S).
• Conditions. This holds only if: the subsidiary is not dominated/controlled by the parent (not operating as alter egos), and the parent doesn't supervise the cooking/serving or arrange the subsidiary's services for clients. If the parent arranges or manages those services, or the entities are alter egos, the section 1105(d) analysis changes (TSB-A-08(51)S; TSB-A-86(28)S).
• The parent's own sales. The parent must collect tax on taxable food/food-related items (candy, soda, bottled water) it sells to New York clients (unless the client gives a valid exemption certificate), and it may buy those items for resale with Form ST-120 when it resells them "as such" (section 1101(b)(4)).

What this means for you

Structuring food service to avoid the catering tax

The line between selling food (taxable only if the food itself is taxable) and catering (the whole charge taxable) turns on whether the seller also serves/cooks, or arranges for someone to. Genuinely separating the food sale from the preparation labor -- different entities, different contracts, different invoices -- can keep the labor out of the catering tax.

"Separate" has to be real

The protection collapses if the entities are alter egos (one dominates/controls the other, or their operations are intertwined) or if the food-seller arranges or supervises the cooking and serving. Keep separate contracts, banking, employees, and management, and don't have the seller market or run the labor side.

You still owe tax on taxable food you sell

Exempt grocery-type food (section 1115(a)(1)) aside, items like candy, soda, and bottled water are taxable -- collect tax when you sell them, and use a resale certificate (ST-120) to buy them for resale.

Common questions

Q: Is "food preparation" (cooking/serving) a taxable service in New York?
A: Not by itself under section 1105(c). It becomes part of taxable catering only when combined with the sale of the food by the same vendor or someone the vendor arranges.

Q: Can we split food sales and cooking into two companies to avoid the catering tax?
A: Yes, if the companies are truly separate (not alter egos) and the food-seller doesn't supervise the cooking or arrange the labor company's services. Otherwise the catering tax applies.

Q: Can the food-seller buy food for resale?
A: Yes -- it may give vendors Form ST-120 for taxable food/food-related items it resells "as such" to clients, and must collect tax on those sales unless the client is exempt.

Citations and references

• Tax Law section 1105(d) (sales of food and drink by restaurants and caterers; serving and cooking)
• Tax Law section 1105(c) (enumerated services)
• Tax Law section 1115(a)(1) (exemption for food)
• Tax Law section 1101(b)(4) (purchase for resale)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2014.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a14_34s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-14(34)S
Sales Tax
August 27, 2014

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S120828B

The Department of Taxation and Finance received a Petition for Advisory Opinion from
Redacted Redacted Redacted Redacted Redacted Redacted Redacted Redacted. Petitioner asks
whether charges by a subsidiary (“Sub”) of Petitioner for certain food preparation services provided by
“worksite employees” to a third party are subject to the sales and use tax when the employees
providing such services are employed by both the Sub and the third party (“Client”). Petitioner also
asks if it may use a resale certificate when it purchases certain food, and food related items, that will be
subject to tax when sold to a client.
We conclude that charges by the Sub to a Client for food preparation services provided by the
Sub’s employees are not subject to sales tax, provided that the Sub is not dominated and controlled by
Petitioner, or their activities are not so intertwined that they would be considered to be operating as
alter egos of each other. Moreover, Petitioner may not either be engaged in the supervision of the
cooking or serving of the food, or make the arrangements for the provision of such services with any
Client on Sub’s behalf. Petitioner must collect tax on any taxable sales of food or food related items
that it sells to any Client located in New York. In such instances, Petitioner may use a resale
certificate when it purchases the food and food related items it sells without use or alteration prior to its
sale to the Client.
Facts
Petitioner provides various food preparation services. It also provides certain administrative
services, where it assists a Client in the procurement and purchase of food and related supplies. These
services are provided primarily to Client nursing facilities and senior citizen independent housing
communities.
Petitioner is considering a business structure in which the food preparation services at a
particular location would be performed by employees jointly employed by the Client and a
Professional Employer Organization (“PEO”). Petitioner would form an LLC (the Sub) that it would
directly control. The Sub would be qualified to do business as a foreign entity in the State of New
York, and the Sub would be registered with the New York State Labor Department as a PEO, as that
term is defined by Labor Law § 916(4).
Under the proposed business structure, Petitioner’s primary business activities in New York
would be limited to providing its administrative services to and procuring and purchasing food and
related supplies for a Client that Sub has also contracted with to provide certain food preparation
services. For the purpose of the division of tasks between the Petitioner and Sub, “food preparation”
encompasses tasks provided by the Sub’s worksite employees to the Client, including general menu
planning, inventorying food and related supplies on hand, preparing lists of food and related supplies

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to be purchased by Petitioner, preparing food, cooking meals, serving prepared food, cleaning used
dishes and utensils used in the preparation of the meals, and cleaning and sanitizing kitchen equipment
at the Client’s location. Petitioner’s service of procuring and purchasing food and related supplies will
include selecting distributors and other vendors, based on the lists of food and related supplies
provided by the Sub’s worksite employees and input from dieticians, placing orders for food and
supplies and making payment for those orders. Such service will not include the handling of food or
supplies or the storage or preparation of food and supplies.
Petitioner also would provide administrative services to Sub, consistent with the corporate
services required to support a subsidiary. However, Petitioner will not provide supervision or any onsite management of Sub’s worksite employees, and no one will do so on behalf of Petitioner or any
other entity related to Petitioner. Daily on-site supervision will be the responsibility of the Client and
the Sub. Also, under no circumstances would any clients contract with, or make arrangements for,
Sub’s services through Petitioner. Petitioner would not advertise Sub’s services or otherwise promote
their availability. The Sub will bill the Client directly for the food preparation services provided by the
worksite employees. Client will also reimburse Sub for the employee’s wages. Sub does not charge
Petitioner for the employee wages, and Petitioner does not charge the Client for such amounts.
The Client also may engage Petitioner, as an independent contractor at prevailing rates, to
provide Client with general administrative services where Petitioner procures food and related
supplies. These services are billed by the Petitioner directly to the Client. These administrative
services do not include the on-site management of either the food preparation services provided by Sub
or the employees of the Sub or Client. Petitioner does not act as the agent of the Client when making
purchases from the food distributors and other vendors. It is expected that Petitioner will mark-up its
cost of these items to cover Petitioner’s general and administrative costs and to provide for a
reasonable profit. The food distributors and other vendors will issue invoices for the food and related
supplies to Petitioner and Petitioner will make payments for such invoices directly to the food
distributors and other vendors.
Petitioner is registered for sales tax purposes and has a valid Sales Tax Certificate of Authority.
When making purchases of taxable items that are intended to be resold to the Clients, Petitioner will
present to the food distributor or other vendor a Resale Certificate (Form ST-120), signed by Petitioner
and setting forth Petitioner's name, address and Certificate of Authority number.
Petitioner will collect and remit sales taxes from its Clients when selling food and related
supplies to the Clients that are subject to sales tax. However, Petitioner will not collect tax if presented
with a completed Exempt Organization Exempt Purchase Certificate (Form ST-119.1) or other valid
exemption document.
Petitioner and Sub will operate as distinct legal entities. Each will enter into separate contracts
with the Client and will invoice the Client separately for their respective goods and services. Each
entity has its own bank accounts, financial statements (which will be consolidated, together with other
controlled entities, and reflected in the consolidated financial statements of Petitioner) and employees.
Every Sub employee performing services in New York State will be a PEO “worksite employee,” thus
having an employment relationship with both Sub and the Client. The worksite employees would
work only for one client at any point in time.

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Sub would bear the cost of any administrative services provided to it by Petitioner (such as
accounting, external audits or legal services). This means that the administrative services provided to
Sub by Petitioner are charged at the prevailing rates for such services, which normally include a markup similar to what a third-party provider of such services charges. These charges will be made either
through an intercompany charge or through a direct invoice. As a registered PEO, Sub would be
subject to specific PEO reporting requirements required by the Labor Law, as well as reporting
required by its contract with the Client (including reporting payroll tax liabilities as allowed by the
provisions of the New York Professional Employer Act). See Article 31 of the Labor Law. Petitioner
and Sub would conduct business under their own names and hold themselves out to the public as
separate and distinct businesses.
Analysis
Petitioner asks whether the Sub’s charges to a Client for the “food preparation” services that
are provided by the worksite employees are subject to sales tax. Sub’s “food preparation” services
include some services, such as menu planning, which are not enumerated services subject to tax under
Tax Law § 1105(c). However, the “food preparation services” provided by the Sub include the
services of preparing and serving food for the Client which, if combined with the purchase and sale of
food, generally would be subject to tax pursuant to Tax Law § 1105(d). Section 1105(d) provides that:
The receipts from every sale of beer, wine or other alcoholic beverages or any other drink of
any nature, or from every sale of food and drink of any nature or of food alone, when sold in or
by restaurants, taverns or other establishments in this state, or by caterers… in those instances
where the vendor or any person whose services are arranged for by the vendor, after the
delivery of the food or drink by or on behalf of the vendor for consumption off the premises of
the vendor, serves or assists in serving, cooks, heats or provides other services with respect to
the food or drink.
There is no sales tax imposed upon “food preparation” services alone under Tax Law § 1105(c). Tax
Law § 1105(d)(i)(2) imposes sales tax on every sale of food and drink, or of food alone, where “the
vendor or any person whose services are arranged for by the vendor, after the delivery of the food or
drink by or on behalf of the vendor for consumption off the premises of the vendor, serves or assists in
serving, cooks, heats or provides other services with respect to the food or drink.” Thus, under §
1105(d)(i)(2), if the food preparation services are combined with the sale of the food, or the food
preparation services are arranged for by the vendor selling the food, the sales of the food would be
taxable.
Petitioner and Sub operate as two separate legal entities. As such, under the arrangement as
described by the Petitioner, the sale of the food has been separated from the food preparation services.
Petitioner will enter into a separate contract with a Client and will purchase and deliver the food and
related supplies to the Client. Petitioner will bill the Client separately for the food and related supplies.
The Sub will enter into a separate contract with the Client for the food preparation and serving services
and these services will solely be performed by Sub. Petitioner will not provide supervision or any onsite management of Sub’s worksite employees, and no one will do so on behalf of Petitioner or any
entity related to Petitioner. Daily on-site supervision will be the responsibility of the Client and the
Sub. Petitioner does not advertise Sub’s services, is not involved arranging for their availability, and

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does not promote their availability. In such case, Petitioner will not be considered to be arranging for
Sub’s service on its own behalf for the purposes of Tax Law § 1105(d). Other than providing
Petitioner a list of needed food items, Sub will not be involved with the purchasing of the food or the
related supplies. Assuming this is true, we conclude that Petitioner will not be providing catering
services pursuant to Tax Law § 1105(d) and will only be selling food items to the Client. See TSB-A10(12)S.
If Petitioner either arranges for Sub’s services to clients, or manages the provision of these
services, the analysis under Tax Law § 1105(d) would change. See TSB-A-10(12)S. Moreover, if the
activities of Sub were so dominated and controlled by Petitioner, or their activities were so intertwined
that they would be considered to be operating as alter egos of each other rather than as separate legal
entities, then the corporate structures would be disregarded and this analysis would no longer apply.
See TSB-A-08(51)S; TSB-A-86(28)S.
Petitioner also asks if separately stated charges to a Client for food otherwise exempt from tax
under Tax Law § 1115(a)(1) will be subject to tax. Petitioner anticipates collecting and remitting sales
tax on any sale of taxable items, such as candy, soda and bottled water, sold to a Client, unless the
Client is exempt from sales tax and presents a valid Exemption Certificate to Petitioner at the time of
sale. However, to the extent these items will be subject to tax when sold to a Client, Petitioner asks if
it may purchase these items using a resale certificate.
Since Petitioner is selling food and related supplies directly to the Client, Petitioner may provide
its vendors with a properly completed Resale Certificate (Form ST-120) in order to relieve those
vendors of their obligation to collect sales tax on their sales to Petitioner of items not exempt from tax
pursuant to Tax Law §1115(a)(1) that Petitioner purchases for resale “as such” to a Client. See Tax
Law § 1101(b)(4)(i)(A).

DATED: August 27, 2014

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts
set forth therein and is binding on the Department only with respect to the person or entity
to whom it is issued and only if the person or entity fully and accurately describes all
relevant facts. An Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific time period at issue
in the Opinion. The information provided in this document does not cover every situation
and is not intended to replace the law or change its meaning.