The boom in services delivering food to millions sheltering at home during the Covid-19 pandemic is prompting a closer look into whether they’re properly collecting and remitting state and local taxes.
Internet- and app-based platforms such as DoorDash, Grubhub, Postmates, Seamless and Uber Eats were already on tax administrators’ radar, but the pandemic has heightened such concerns. Now, one lawmaker in New York is demanding that the state’s Department of Taxation and Finance audit the companies. The action comes as New York City and other municipalities pass ordinances capping the commissions and fees charged by food delivery companies.
The conflict is just the latest example of the tax uncertainty that emerges when a tech business model is laid over a mature industry, often triggering audits, litigation and eventually legislation. In this regard, Grubhub, DoorDash and Uber Eats face the same compliance gauntlet Expedia.com and Hotels.com encountered a decade ago with local lodging taxes, and Amazon.com and Wayfair encountered in the last five years with state sales and use taxes applied to e-commerce transactions.
Reacting to the size of food-delivery commissions and fees that shave already thin profit margins for restaurants, lawmakers in Chicago, Los Angeles, New York, San Francisco, Seattle and Washington D.C. have all imposed emergency rules in the last month capping commissions at 15%.
“Billion-dollar tech companies are bleeding New York City’s mom and pop restaurants dry,” said councilman Francisco P. Moya after Mayor Bill de Blasio signed commission-capping legislation.
Compliance is a Significant Challenge
The tax laws that apply to those charges are just as complex.
Alex Thacher, a state and local tax partner in the San Jose office of the tax consulting firm Armanino, said the same food delivery transaction could be taxed a dozen different ways depending on the jurisdiction.
Another Factor: Wayfair
Tax duties for third-party food delivery companies vary under marketplace facilitator laws passed in nearly 40 states since the Supreme Court’s 2018 South Dakota v. Wayfair ruling.
Marketplace laws, Thacher said, generally require online platforms to collect and remit taxes on behalf of their third-party sellers. Some states have characterized services such as Grubhub and DoorDash as marketplace facilitators with tax collection duties, while others have exempted them. For instance, Uber Eats determined it is required to collect tax in 31 states. A half-dozen states including California, Illinois and Utah generally don’t impose marketplace duties on food delivery companies.
Targets for Audit?
New York State Sen. Brad Hoylman (D) recently called for audits by the Department of Taxation and Finance. In a letter to the department in January, Hoylman said, “it is unconscionable that some of these companies—many of which are backed by billions of dollars in venture capital investments—may be failing to collect and remit basic sales tax.” The department didn’t respond to Bloomberg Tax’s request for comment on its audit practices.
If states decline to audit third-party delivery services, plaintiffs’ attorneys might file failure-to-collect actions on behalf of local units of government or false claims act suits on behalf of states, said Richard Pomp, a law professor specializing in state and local tax issues at the University of Connecticut School of Law.
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By Michael J. Bologna
June 5, 2020