SIMMONDS RESTAURANT MANAGEMENT, INC., SRM 2, INC., SR OF IOWA, L.C. (2006) (O) (ST)
Topic Code: R216Resale Document Reference: 06300083
BEFORE THE IOWA DEPARTMENT OF REVENUE
HOOVER STATE OFFICE BUILDING
DES MOINES, IOWA________________________________________________________________________
IN THE MATTER OF *
*
SIMMONDS RESTAURANT * DIRECTOR'S FINAL ORDER
MANAGEMENT, INC., * ON APPEAL
SRM2, BURGER KING 6049 *
SR OF IOWA, L.C., BURGER KING 9266 *
11404 West Dodge Road, Suite 650 * DOCKET NO. 05-30-1-0025
Omaha, Nebraska 68154-2576 * DOCKET NO. 05-30-1-0026
* DOCKET NO. 05-30-1-0027
SALES/USE TAX *
________________________________________________________________________STATEMENT OF THE CASE On December 31, 2004, the Iowa Department of Revenue, (Department), issued Notices of Assessment to Simmonds Restaurant Management, Inc., SRM 2, and SR of Iowa, L.C. (Protestors) for sales/use tax for the period January 1, 1999, through June 30, 2003. Protestors filed Protests to the assessments on February 25, 2005. The Protests were consolidated for hearing. Jurisdiction rests within the Department pursuant to Iowa Code §§ 17A.12 and 422.73(1) (2003). Answers to the Protests were filed on October 13, 2005. A hearing was held on May 23, 2006. At the hearing, the Protestors called as a witness Paula K. Glissman, Protestors' Chief Financial Officer. The Department called as a witness David Casey, Manager of the Tax Policy Section of the Department. On July 25, 2006, the Administrative Law Judge issued a Proposed Decision. The Administrative Law Judge affirmed the assessment. On August 18, 2006, Protestors filed an appeal of the Proposed Decision issued by the Administrative Law Judge to the Director of Revenue. On October 17, 2006, the parties presented oral arguments on appeal before the Director of Revenue. The issue on appeal from the Proposed Decision is whether the customers who obtain napkins, straws and plastic lids from the courtesy counter are provided those items as part of the sale of the meal. FINDINGS OF FACT The Director adopts and incorporates into this decision Findings of Fact made by the Administrative Law Judge in the Proposed Decision, with additions and modifications as set forth below:1. Q. How are your meals and food packaged?
A. Basically there's three different ways that the meals can be packaged and served to the customers.
Obviously when a customer comes through the drive-through lane the sandwich, french fries, drink are handed out the drive-through window in a sack.
And depending on what the customer ordered - Well, with every order they'll receive a napkin through the drive-through lane. If it was a drink, they'll receive a straw and a lid. And if they order chili, they would receive a spoon. If they order a salad, they would receive a plastic fork. That is all placed in the bag and handed out.
At the front service counter the customer then would receive an empty cup, which then they would fill themselves at the self-service drink counter, where then they would obtain the lid and the straw at the condiment or courtesy counter. (Glissman, Tr. pp. 13, 14)2. Q. And is the lid, the straw included with the meal?
A. Yes, it is. As part of our food costing, for every menu item we associate paper costs with those menu items. You know, every menu item gets costed with the cost of a napkin. You know, if it's a drink, it gets costed with the cost of a lid and a straw. If it's a salad, it also gets costed with a napkin and the disposable plastic serving utensils that you would use to eat that salad.
Q. So the price of the meal paid by the consumer includes all of this plastic ware and napkins and straws?
A. Yes, it does. (Glissman, Tr. pp. 14, 15)3. Q. And is the price of the meal different for those who pick it up through the drive-through or those who dine in and use the courtesy counter plastic ware?
A. No, the price at the drive-through window, if you walk in and take the food out, or you purchase the food at the front counter to eat in the restaurant, that menu price is the same.
(Glissman Tr. p. 15)4. Q. So the only items being taxed with regard to the issue of this Rule 16.11 issue is the lids, straws, and napkins that were distributed for the over-the-counter customers?
A. Correct. (Glissman Tr. p. 24)5. Q. I think earlier in your testimony you mentioned that there were three different types of customers that you sell to. One you explained was the drive-through customer. The other was the walk-in, over-the-counter customer. But the third one, what's that?
A. And that's - Yes. I can clarify that. The customer that walks in and orders at the front service counter, then that customer can either go out and eat in the dining room or they can take their food to go from the front service counter back out to their vehicle.
Q. For that kind of customer do your employees put the napkins and things in the sack at that time, or do they leave that up to the customer?
A. The napkins - It depends on what the customer has ordered. In all cases the customer gets their lid and their straw from the courtesy counter. And we will put a napkin or the two napkins per menu item in that for the carryout, walk-in customer. (Glissman, Tr. pp. 30, 31)6. Q. And would you kind of explain how that rule is interpreted or how the department interprets that rule?
A. The department treats this rule as saying that if these items are sold as part of the meal, then they would be considered purchased for resale, and therefore their purchase would be exempt.
If the items are given away by the retailer or are available for distribution for the customer of the retailer, then they are considered to be not for resale, they are considered to be consumed by the retailer of the food items. (Casey Tr. pp. 34, 35)7. Q. Now, for the items that are put in the sack or something, how does the department treat that then?
A. If they are part of the retail sale, they are considered to be an integral part of the retail sale, then they would be considered a purchase for resale. It would be included in the selling price of the item that's actually sold by the retailer.
Q. And that item, then, would be provided to the customer at the time of the sale?
A. Our position would be that would have to be provided to the customer at the time of the sale, physically given to them as part of the physical sale of the property.
Q. And the physical sale of the property would be what, in your opinion?
A. It would be all of the items that are actually delivered to the customer.
Q. And would that occur at the time the money is exchanged between the customer and the retailer?
A. Presumable that would be part of it, yes. (Casey Tr. pp. 35, 36)8. Q. Going back to Exhibit A again, to the first two pages, going back to Rule 52.3, aside from the fact that the current rule has a couple examples on it that the old rule does not, are the two rules basically the same?
A. I think they're basically the same. I think the newer Rule 16.11 probably updates some of the language and then also adds some examples.
Q. And the department has been treating the sales of not just fast-food restaurants but any kind of restaurant or food establishment in this manner for how many years?
A. Well, they've been treating it this way since I've been here. So they've treated these items as consumable items for as long as I can recall. (Casey Tr. P. 37)9. Q. It is the department's position that when a meal is purchased at a fast-food restaurant such as Burger King the customer is right in assuming that napkins, plastic lids, straws are part of the purchase of their meal?
A. It's the department's position that in order to meet the resale exemption the items have to be sold as part of the meal, included with the meal in order to be classified as a retail sale and in order for the resale provision to come into effect. (Casey Tr. p. 44)10. Q. Now, is it the department's position that the napkins, plastic cups, and straws provided to the customer at the drive-through window is part of the meal?
A. The department allowed a 50 percent exemption on that because of the fact that the cups, the napkins, the straws were given directly to the customer at the time of the sale.
Q. So your answer is yes?
A. Yes.
Q. Does the price of the meal include the cost of the napkins, plastic lids, and the straws?
A. Based on the testimony today, I would say yes.
Q. Is the purchase of napkins, plastic lids, straws, et cetera, by Burger Kind restaurant from the supplier for products distributed through the drive-through subject to sales tax?
A. At the time of the purchase?
Q. Yes
A. No. They would be exempt at the time of purchase.
Q. And they are a sale for resale and compliant with the Code?
A. That would be correct.
Q. And when a meal is purchased at a fast-food restaurant such as Burger King, are the plastic lids, et cetera, provided for the customers who purchased the meal for carryout that are placed in a bag by the restaurant employee part of the purchase of the meal?
A. Yes.
Q. Does the price of the meal include the cost of napkins, plastic lids, and straws?
A. Yes.
Q. Is the purchase of the napkins, plastic lids, and straws by the taxpayer restaurant or Burger King from the supplier for products distributed as I just state subject to the sales tax?
A. Products distributed how again?
Q. In the same manner as I just - those questions.
A. Where they're given to the -
Q. At the courtesy counter, but the napkins and the straws are put in the bag for the person to carry out.
A. Yes
Q. And it's a sale for resale?
A. Yes.
Q. And it's compliant with the statute?
A. Yes.
Q. When a meal is purchased at Burger King, are the napkins, plastic lids, and straws provided to the customers who purchase meals for dine-in which are placed on the tray by the restaurant employee for the customer part of the meal?
A. They are placed on the tray so that they are given to the customer at the time of the sale, yes, they would be for resale.
Q. Does the price of the meal include the price of the napkins, plastic lids, et cetera?
A. Yes.
Q. Is the purchase of the napkins, plastic lids, and straws by the taxpayer or by Burger King from the supplier for products distributed in that manner subject to sales tax?
A. At the time of purchase?
Q. Yes.
A. No.
Q. And it's a sale for resale?
A. Yes.
Q. And it's compliant with the Code?
A. Yes
Q. And when a meal is purchased at Burger King and plastic lids, straws, and napkins that are located on the courtesy counter are used solely by the customers who purchase a meal, are they part of the meal.
A. In our opinion, no.
Q. And it's your opinion that the price of the meal does not include the cost of napkins, plastic lids, or straws?
A. No, it's not our opinion that the price does not include that. It's our opinion that they are not part - provided as part of the sale of the meal. (Casey Tr. pp. 45- 49)CONCLUSIONS OF LAW The issue before the Director is whether the customers who obtain napkins, straws and plastic lids from the courtesy counter are provided those items as part of the sale of the meal. The Director must decide whether these items were purchased for resale and resold to the customers or were purchased and consumed by the Protestors in the operation of their businesses. Iowa Code § 422.43(1) (2003) imposes a tax on the gross receipts from all sales of tangible personal property, consisting of goods, wares and merchandise sold at retail in the state to consumers or users. Iowa Code § 422.42(15) (2003) defines retail sale or sale at retail in relevant part as:"Retail sale" or "sale at retail" means the sale to a consumer or to any person for any purpose, other than for processing, for resale of tangible personal property or taxable services, or for resale of tangible personal property in connection with taxable services….* * * Statutes which impose taxes are construed liberally in favor of the taxpayer and strictly against the taxing body. Iowa Auto Dealers v. Iowa Dept. of Revenue, 301 N.W.2d 760, 762 (Iowa 1981). However, when the taxpayer relies on a statutory exemption, the exemption is construed strictly against the taxpayer and liberally in favor of the taxing body. Iowa Auto Dealers v. Iowa Dept. of Revenue, 301 N.W.2d 760, 762 (Iowa 1981). Doubts are resolved against exemption. A purchase for resale is a tax exemption. Iowa Code § 422.42(15) (2003) Section § 422.42(15) must be strictly construed with all doubts resolved in favor of taxation. Heartland Lysine v. Dept. of Revenue and Finance, 503 N.W.2d 587, 588 (Iowa 1993). The burden of proof is on Protestors seeking an exemption and challenging a Department assessment. Dial Corporation v. Iowa Dep't. of Rev., 634 N.W.2d 643, 646 (Iowa 2001); Iowa Code § 421.60(6) (2003). Department rule 701 IAC 16.11 is the Department's interpretation of the resale of paper products. Rule 16.11 provides:Paper plates, paper cups, paper dishes, paper napkins, paper, wooden or plastic spoons and forks and straws. When paper, wooden or plastic cups, plates, dishes, napkins, spoons and forks are sold with tangible personal property and expended by such use, the sale of such properties to retailers shall be considered sales for resale. The gross receipts from the sale of such items by retailers to consumers or users shall be subject to tax.When these articles are sold in connection with service or for free distribution by retailers apart from a retail sale, the transaction shall be deemed to be a retail sale to the retailer and shall be taxable. Sales of reusable placemats to retailers who sell meals shall be subject to tax.EXAMPLE 1. A retailer purchases napkins, disposable forks and knives for the retailer's restaurant. The retailer provides these items free of charge, apart from the retail sale of food at the retailer's restaurant. Sale of these items to the retailer is a retail sale and is subject to tax.EXAMPLE 2. A retailer purchases napkins, disposable knives and forks for the retailer's restaurant. The retailer sells these items with tangible personal property to the retailer's customers. The sale of these items to the retailer is considered a sale for resale and is not subject to Iowa sales tax at the time of purchase.This administrative rule represents the Department's interpretation of Iowa Code §422.42(15) (2003). Because particular matters that have been vested by a provision of law in the discretion of the agency, weight is given to the agency's interpretation. See City of Marion v. Iowa Dept. of Revenue & Fin., 643 N.W.2d 205, 206 (Iowa 2002). Iowa Code § 17A.19 (11) (2003). The Director has reviewed the decisions relied on by the parties. In Celestial Food of Massapequa Corp. v. New York State Tax Comm., 63 N.Y.2d 1020, 473 N.E.2d 737, 738 (Ct App. 1984), the Court found the napkins, stirrers and eating utensils not critical elements of the product sold and not purchased for resale. In Shamrock Foods Co. v. City of Phoenix, 157 Ariz. 286, 757 P.2d 90, 93 (Ariz. 1988), the Court found the eating utensils, straws, and napkins resold with the meal even when located at a courtesy counter. Neither case is dispositive as both cases rely on state tax definitions different from Iowa's. The cases are instructive and it should be noted that in both decisions the application of the law on resale was applied consistently to all the retailer's purchases of eating utensils, straws, and napkins purchased by the restaurant. The Director must decide whether the customers who obtain napkins, straws and plastic lids from the courtesy counter are provided those items as part of the sale of the meal. The record indicates customers of Protestors purchase food and drink. As part of Protestors' pricing, the cost of a napkin is added to every menu item, the cost of a lid and a straw is added to every drink, and the cost of disposable plastic serving utensils that you would use to eat a salad are added to every salad. The price paid by the consumer for the meal includes plastic ware, napkins and straws. (Glissman, Tr. pp. 14, 15) It makes no difference whether the customer uses the drive-through window, walks in and takes the food out, or eats in the restaurant, that menu price paid by the customer for the food and drink is the same. (Glissman Tr. p. 15) When a customer purchases a drink inside the store at the counter, the customer would receive an empty cup which they would fill themselves at the self-service drink counter where they would also obtain the lid, the straw, and the napkin. (Glissman, Tr. pp. 13, 14) Department rule 701 IAC 16.11 provides in relevant part:When paper, wooden or plastic cups, plates, dishes, napkins, spoons and forks are sold with tangible personal property and expended by such use, the sale of such properties to retailers shall be considered sales for resale. . . . EXAMPLE 2. A retailer purchases napkins, disposable knives and forks for the retailer's restaurant. The retailer sells these items with tangible personal property to the retailer's customers. The sale of these items to the retailer is considered a sale for resale and is not subject to Iowa sales tax at the time of purchase. The Department has taken the position in rule and in testimony that plastic lids, straws and napkins are products of the type resold to customers by retailers like the Protestors. Iowa Code § 422.42(15) (2003) by definition exempts from sales tax tangible personal property purchased for resale. The primary consideration in Department rule 701 IAC 16.11 is whether the napkins, plastic lids, and straws are sold with tangible personal property or for free distribution by retailers apart from a retail sale. The Department asserts that in order to meet the resale exemption the items have to be sold as part of the meal. (Casey Tr. p. 44) The Department and the Hearing Officer relied on rule 701 IAC 16.11 to justify different results on the taxation of the napkins, plastic lids, and straws for drive-through and inside the store courtesy counter distribution. The Director finds a resale exemption exists when the items are sold as part of the meal. The Director further finds that the napkins, plastic lids, and straws were purchased by the customers as part of the meal notwithstanding their availability at the courtesy counter. The Department's witness testified to four scenarios for the distribution of napkins, plastic lids and straws. In three of the four scenarios, the items were determined by the Department to be resold to Protestors' customers. First, it was the Department's position that the napkins, plastic lids, and straws provided to the customer, who purchased at the drive-through window, are part of the meal, resold to the customer and exempt at the time of Protestors' purchase from sales tax. The price of the meal to the customer includes the cost of napkins, plastic lids, and straws. Second, it was the Department's position that the napkins, plastic lids, and straws provided to the customer, who purchased the meal inside the restaurant for carryout and are placed in the bag by the restaurant, are part of the meal, resold to the customer and exempt at the time of Protestors' purchases from sales tax. The price of the meal to the customer includes the cost of napkins, plastic lids, and straws. Third, it was the Department's position that the napkins, plastic lids, and straws provided to the customer, who purchased the meal inside the restaurant for dine-in which are placed on the tray by the restaurant, are part of the meal, resold to the customer and exempt at the time of Protestors' purchases from sales tax. The price of the meal to the customer includes the cost of napkins, plastic lids, and straws. Only in the fourth scenario was it the Department's position that the napkins, plastic lids, and straws obtained by a dine-in customer from the courtesy counter were not part of the meal, not resold to the customer and were not exempt at the time of Protestors' purchases from sales tax. (Casey Tr. pp. 45- 49) The fourth scenario is similar to the first three scenarios. The napkins, plastic lids, and straws were purchased by the customers as part of the meal. The customer paid the same price, expected and received napkins, plastic lids, and straws. The Department has determined that napkins, plastic lids, and straws are resold with tangible personal property. (Casey Tr. pp. 45- 49) Consideration is given for these items even when located at a courtesy counter. The price is the same and the customer expects these items as a part of the price of the meal. The customer has to go to the courtesy counter with a cup to obtain his/her drink. (Glissman, Tr. pp. 13, 14) The courtesy counter is an extension of the walk up counter and where the purchase is completed. The retail sale concludes at the courtesy counter with the drink, napkins, straws and plastic lids.CONCLUSION The Director holds the customers who obtain napkins, straws and plastic lids from the courtesy counter are provided those items as part of the sale of the meal. Those items were purchased for resale by Protestors pursuant to Iowa Code § 422.42(15) (2003). The Director's decision is the final order of the Iowa Department of Revenue. Dated at Des Moines, Iowa, this 25th day of October, 2006. IOWA DEPARTMENT OF REVENUE
BY__________________________
Mark R. Schuling, Director
Bonnie B. Mackin, Executive Secretary