Are the management fee and cost reimbursements paid to a food-service contractor to run a subsidized cafeteria subject to New York sales tax?

Plain-English summary

ARA Services, Inc., a food-service management company, was considering a contract with a landlord who operates a cafeteria in a Long Island building. The landlord is not an employer running a cafeteria for its own employees and would not subsidize the cafeteria for employees' benefit; the cafeteria would be open to the general public with market-based prices set to make a profit. ARA asked whether the management fee and other cost reimbursements the landlord would pay it are subject to sales tax.

The Department said yes:

• Managing a for-profit cafeteria isn't itself an enumerated service. Providing a management service to operate a for-profit public cafeteria is not one of the enumerated taxable services under § 1105(c).
• But subsidies to a food-service contractor are taxed as food-and-drink receipts. Regulation § 527.8(k) provides that when an employer subsidizes a caterer/food-service contractor, the subsidy — regardless of whether it is called a management fee, guarantee of profit, or some other designation — is taxed as a receipt from the sale of food and drink. Several examples treat management fees and subsidies as taxable food-and-drink receipts.
• Stouffer controls. In Stouffer Management Food Service v. Tully, a company operating in-house restaurant facilities under contracts with employers was liable for sales tax on reimbursed costs, management fees, and subsidy payments.
• Landlord subsidy = same result. This arrangement is analogous to an employer-subsidized cafeteria; it differs only in being landlord-subsidized. So even though the cafeteria is open to the public and priced to profit, the management fee and cost reimbursements are subject to sales tax — ARA is providing a subsidized restaurant/catering service under Stouffer.

What this means for you

A "management fee" label doesn't decide taxability

When a food-service contractor is paid a subsidy to run a food operation, New York looks past the label. Whether it's called a management fee, profit guarantee, or cost reimbursement, a subsidy to the operator is taxed as a receipt from the sale of food and drink under § 527.8(k).

Public access and a profit motive don't save the subsidy

It didn't matter that the cafeteria was open to the general public (not just employees) and priced to make a profit. What controlled was that a third party (the landlord) subsidizes the food-service contractor's operation — putting it within the Stouffer/§ 527.8(k) rule.

Contractors: expect tax on the subsidy stream, not just menu sales

If you run a subsidized dining facility under contract, plan for sales tax on the subsidy/management-fee/reimbursement payments you receive from the client, in addition to tax on what patrons pay at the register. You are the vendor required to collect tax on receipts from the patron, the client, or both.

Common questions

Q: Is a food-service management fee taxable in New York?
A: If it functions as a subsidy to the food-service contractor, yes — § 527.8(k) taxes it as a receipt from the sale of food and drink, regardless of what it's called.

Q: The cafeteria is open to the public and priced for profit — does that make the subsidy nontaxable?
A: No. The Department held the landlord's management fee and cost reimbursements taxable anyway, following Stouffer.

Q: What's the difference between this and an employer cafeteria?
A: Only who subsidizes it. The Department treated a landlord-subsidized cafeteria the same as the employer-subsidized cafeteria described in § 527.8(k).

Q: Isn't cafeteria management just a nontaxable service?
A: Standalone management of a for-profit cafeteria isn't an enumerated § 1105(c) service, but a subsidy to the operator is taxed as a food-and-drink receipt.

Citations and references

Statutes, regulations, and authorities:

• Tax Law § 1105(c) (tax on enumerated services; food-service management alone is not enumerated)
• 20 NYCRR § 527.8(k) (subsidy to a caterer/food-service contractor — however labeled — taxed as a receipt from the sale of food and drink; examples 1–5)
• Matter of Stouffer Management Food Service, Inc. v. Tully, 98 Misc 2d 1128, affd 69 AD2d 1023, lv den 47 NY2d 709 (food-service contractor liable for sales tax on reimbursed costs, management fees, and subsidy payments)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a91_68s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-91 (68)S
Sales Tax
October 28, 1991

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK

COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S910415A

On April 15, 1991, a Petition for Advisory Opinion was received from ARA Services, Inc.,
PO Box 7548, Tax Department, 19th Floor, Philadelphia, PA 19101.
The issue raised by Petitioner, ARA Services, Inc., is whether a management fee and other
cost reimbursements paid to Petitioner to operate a for-profit cafeteria which is open to the general
public will be subject to sales tax.
Petitioner is in the business of providing food service management pursuant to contracts with
clients under various fiscal arrangements. Petitioner is contemplating entering into a contract with
a prospective landlord who operates a cafeteria in building owned by him on Long Island. The client
is not an employer that is operating a cafeteria for his employees. The client will not subsidize the
cafeteria or Petitioner for the benefit of his employees. The cafeteria food and beverage prices will
be set with reference to existing market conditions for its type of business located in the general
vicinity in order to make a profit. The cafeteria will be open to the general public.
Section 1105(c) of the Tax Law imposes sales tax upon the receipts from every sale, except
for resale, of certain enumerated services. The providing of a management service to operate a for­
profit cafeteria which is open to the general public is not a service enumerated under Section 1105(c)
of the Tax Law.
Section 527.8(k) of the Sales and Use Tax Regulations provides:
(1) An employer who by contract or otherwise engages a caterer or
food service contractor to provide food and drink or, service to
employees at the employer's expense is the purchaser of food and
drink subject to the sales tax.
Example 1: Employer E provides food and drink to his employees
without charge. E contracts with a food service contractor F to
prepare and serve the food and drink for a fee to be paid by E. The
fee paid by E is subject to tax as a receipt from the sale of food and
drink.
(2) Sales of food, drink or service to employees through a cafeteria on
an employer's premises are subject to the sales tax.
Example 2: Employer E maintains a cafeteria or restaurant on his
premises for the purpose of selling food and drink to his employees.
The sale of the food and drink to the employees is taxable.

-2­
TSB-A-91 (68)S
Sales Tax
October 28, 1991
(3) When the employer subsidizes the caterer or food service
contractor, such subsidy regardless of whether it is called a
management fee, guarantee of profit or some other designation is
taxed as a receipt from the sale of food and drink.
Example 3: Caterer C agrees to charge employer E's employees a
scheduled amount for each item of food and drink it sells to them. E
agrees to pay Caterer C an amount, in addition to the employees'
payments, which would guarantee a 12 1/2 percent profit from the
sales to the employees. The amount paid by E to the caterer is a
taxable receipt from the sale of food and drink.
Example 4: Employer E enters into an agreement with Caterer C.
The agreement provides that C prepare, service and sell food and
drink to E's employees at a price mutually agreed to and in addition,
E will pay a subsidy to C for operating the facility. The subsidy will
be in such an amount to allow C to make a profit on its sales of food
and drink to the employees. However, if C's profits from the sale of
food and drink exceed a net figure, C and E will share the excess
profits in an agreed apportionment. Irrespective of the profit sharing
agreement, the subsidy paid by E is considered to be a receipt from
the sale of food and drink.
(4) If a subsidy is paid by an employer in addition to a specified
amount paid by the employee, both amounts are taxed as the receipt
from the sale of food and drink.
Example 5: Employer E will pay 50¢ to a caterer for each sale of
food and drink to E's employees. E's employees will pay any amount
due which exceeds the 50¢ paid by E. Both the amount paid by the
employee and the 50¢ paid by E are taxable receipts from the sale of
food and drink.
(5) The caterer or food service contractor is a vendor required to
collect the tax on receipts from either the employees employer or
both.
In the Matter of Stouffer Management Food Service, Inc. v. Tully, 98 Misc 2d 1128, affd
without opn 69 AD2d 1023, mot for lv to app den 47 NY2d 709, the court held that a food service
corporation which operates in-house restaurant facilities for employees, under contracts with various
employers, is liable for sales tax on reimbursed costs, management fees and subsidy payments which
are received from the corporate clients pursuant to various contracts in which the employees either
do not pay for the food or pay a small portion.

-3­
TSB-A-91 (68)S
Sales Tax
October 28, 1991

The operation of the cafeteria facilities in the instant case is analogous to the operation of the
facilities held subject to sales tax by section 527.8(k) of the Sales and Use Tax Regulations. It differs
only in that instead of being an employer subsidized cafeteria as set forth in the Regulations, it is a
landlord subsidized cafeteria.
Therefore even though the cafeteria will be open to the general public, will not be limited to
the employees of the client and will establish prices for food and beverages that will be set in order
to make a profit, the management fee and other cost reimbursements that may be paid to Petitioner
by the landlord to operate the cafeteria will be subject to sales tax since Petitioner will be providing
a subsidized restaurant or catering service as envisaged in Stouffer Management Food Service, Inc.
v. Tully, supra.

DATED: October 28, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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