Can a restaurant buy the toy premiums it includes with kids' meals tax-free as a purchase for resale?

Plain-English summary

McDonald's Restaurants of New York, Inc. buys toy premiums and theme boxes and packages them with food into "Happy Meals." The Happy Meal price includes the menu value of the food plus the retail price of the toy and box, and costs more than buying the components separately; a customer can also buy the premium without the food, at a 10–15% markup over cost. McDonald's asked whether it buys the premiums for resale (which would let it buy them tax-free).

The Department held they are not purchased for resale.

• Property used as a component of a service isn't bought for resale. TPP that a vendor buys and supplies to customers as part of its service is not purchased for resale. The Department cited Albany Calcium Light (gas cylinders supplied with gas, no separate charge, not for resale) and U-Need-A-Rolloff (trash containers supplied with a removal service, not for resale).
• The toys are promotional items tied to a taxable meal. McDonald's buys the premiums as advertising or promotional material in connection with its sale of food and drink, which is taxable under § 1105(d)(i) — not to resell them as such. So the purchase is not a purchase for resale under § 1101(b)(4), and McDonald's pays tax when it buys the toys.
• The exception: a toy sold on its own. In the unusual case where a customer asks for a premium without a Happy Meal, McDonald's must collect sales tax on that retail sale, and it may apply for a credit for the sales or use tax it already paid on that premium.

What this means for you

"For resale" means you intend to sell it as such — not give it away with a service

The resale exclusion lets you buy tax-free only if you truly intend to resell the item as such. If you buy something to hand to customers as part of a meal, a service, or a promotion — and the customer isn't separately paying for that item as a distinct purchase — you are the consumer of it and owe tax when you buy it. Free-with-purchase giveaways generally fall on the taxable-to-you side of the line.

The taxable meal already carries the tax

Because the food-and-drink sale is itself taxable, the toy folded into the meal isn't separately resold — its cost is part of what McDonald's pays tax on as a promotional input. You don't get to treat the bundled premium as a tax-free resale and then not charge the customer separately for it.

If you do sell the item by itself, collect tax — and reclaim what you paid

When the same premium is genuinely sold on its own, that is a taxable retail sale you must collect on. To avoid paying tax twice on that unit, you can claim a credit for the tax you paid when you bought it.

Common questions

Q: Can a restaurant buy kids'-meal toys tax-free for resale?
A: No. They are promotional items supplied with a taxable meal, not purchased for resale, so the restaurant owes tax when it buys them.

Q: Why aren't the toys "for resale" if the meal price includes them?
A: Because they're bought as advertising/promotional material tied to the taxable food sale, not to be resold as such (Albany Calcium Light; U-Need-A-Rolloff).

Q: What if a customer buys just the toy, without a meal?
A: Then it's a taxable retail sale — collect sales tax on it, and you may claim a credit for the tax you already paid on that premium.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1101(b)(4) — purchase for resale
• Tax Law § 1105(d)(i) — tax on food and drink sold by restaurants

Cited authority:

• Albany Calcium Light, Inc. v. State Tax Commission, 44 NY2d 987 (1987)
• U-Need-A-Rolloff Corporation v. New York State Tax Commission, 67 NY2d 690 (1986); TSB-H-84(16)S
• Amherst Cablevision, Inc., TSB-H-80(208)S; Radiac Research Corp., TSB-H-83(32)S; Laux Advertising, Inc. v. Tully, 67 AD2d 1066 (1979)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a90_32s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90 (32) S
Sales Tax
June 29, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890920A

On September 20, 1989 a Petition for Advisory Opinion was received from McDonald's
Restaurants of New York, Inc. McDonald's Plaza, Oak Brook, Ill. 60521.
The issue raised by Petitioner, McDonald's Restaurants of New York, Inc., is whether
premiums (toys) purchased by McDonald's restaurants are purchased for resale.
Petitioner purchases various articles of tangible personal property in the form of premiums
(toys) and theme boxes. These premiums are packaged with various combinations of food items
which are referred to as "Happy Meals." The price of this "Happy Meal" package consists of the
retail value of food items as stated on the menu board and the retail selling price of the premium and
theme box. The price of the "Happy Meal" which includes the toy or premium, is greater than if each
of the "Happy Meal" components were purchased separately. In addition, a restaurant can sell the
premiums without the food components of the "Happy Meal" should the customer so desire. The
premium is sold at retail at a 10 to 15% markup over its cost.
Generally, section 1105(a) of the Tax Law imposes a sales tax on receipts from every retail
sale of tangible personal property unless otherwise excluded or exempted. Section 1101(b)(4)(i)
defines "retail sale" as a "sale of tangible personal property to any person for any purpose, other than
(A) for resale as such...". The effect of this provision is to remove property purchased for resale from
the application of the sales tax imposed under Section 1105(a) of the Tax Law.
Section 1101(b)(5) of the Tax Law defines "sale" as any transfer of title or possession or
both, exchange or barter, rental lease or license to use or consume, conditional or otherwise, in any
manner or by any means whatsoever for a consideration....
Section 1105(d)(i) of the Tax Law provides in part:
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, including in the amount of such receipts any cover, minimum,
entertainment or other charge made to patrons or customers (except those receipts
taxed pursuant to subdivision (f) of this section): . . .

TP-9 (9/88)

-2­
TSB-A-90 (32) S
Sales Tax
June 29, 1990

Tangible personal property purchased by a vendor and supplied to its customers as a
component of its services to its customers is not purchased for resale within the meaning of section
1101(b)(4) of the Tax Law. Thus, it has been held that gas cylinders were not purchased for resale
where the seller of the gas did not impose a separate charge for the use of its cylinders, but rather
treated the cost as a cost of selling the gas itself. Albany Calcium Light, Inc. v. State Tax
Commission, 44 NY2d 987 (1987). Moreover, the nominal demurrage charge imposed by the seller
for the late return of cylinders was regarded by the court as merely incidental to the selling of the
gases since the seller did not acquire the cylinders with the expectation of collecting these unusual
charges.
Similarly, it has been held that where a vendor purchased trash containers for use as part of
a trash removal service with no distinguishable consideration being paid by the customers of such
service for the containers, such containers were not purchased for resale. U-Need-A-Rolloff
Corporation, Dec St Tax Comm, January 20, 1984, TSB-H-84(16)S; aff'd U-Need-A-Rolloff
Corporation v The New York State Tax Commission 67 NY2d 690, (1986). (See also: Amherst
Cablevision, Inc., Dec St Tax Comm, September 19, 1980, TSB-H-80(208)S; Radiac Research
Corp., Dec St Tax Comm, December 29, 1982, TSB-H-83(32)S; Laux Advertising, Inc. v. Tully, 67
A.D.2d 1066 (1979)).
Thus to qualify for resale, tangible personal property must be purchased with the intent to
resell it as such and not to use it as a component of a service provided to a customer.
Since Petitioner purchases the premiums for use as advertising or promotional material, in
connection with the sale of food and drink taxable pursuant to Section 1105(d)(i) of the Tax Law and
not as tangible personal property to be resold as such or as a component of other tangible personal
property pursuant to Section 1105(a) of the Tax Law, their purchase is not one for resale. However,
in those unusual situations where a customer requests a premium without the purchase of a "Happy
Meal", Petitioner would be required to collect the sales tax on such sale and it may apply for a credit
for sales tax paid or use tax paid on the premium thus sold.

DATED: June 29, 1990

s\PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.