My company subsidizes an outside contractor that runs our employee dining facility, covering whatever costs exceed daily meal sales -- is that subsidy taxable, and can our QEZE (Empire Zone) certification exempt it?

Plain-English summary

Sensis Corporation hires an outside contractor to manage its in-house employee dining facility and serve meals daily. Employees pay for their own meals, but when those daily sales don't cover the contractor's full costs, Sensis pays the difference — subsidizing the operation. Sensis asked whether any part of what it pays the contractor is exempt from New York sales and use tax under the Qualified Empire Zone Enterprise (QEZE) exemption, since Sensis is certified as a QEZE business.

The Department held the subsidy payments are fully taxable, and not eligible for the QEZE exemption. New York taxes receipts from the sale of food and drink "sold in or by a restaurant... or by caterers" (Tax Law §1105(d)). A Department regulation (20 NYCRR §527.8(k)(3)) specifically provides that when an employer subsidizes a food-service contractor, that subsidy is taxed as a receipt from the sale of food and drink — no matter what the parties call it (management fee, profit guarantee, subsidy, or otherwise). New York courts back this up: in Stouffer Management Food Service Inc. v. Tully, the Court of Appeals held that a food-service company's payments from a corporate client under a reimbursed-cost/subsidy/management-fee arrangement were themselves "sales of food and drink" for sales tax purposes. Applying that rule here, every reimbursable expense Sensis pays its contractor for running the dining room — whether nominally for food costs or for management functions — counts as a taxable restaurant-meal receipt to the contractor.

That fixed characterization is exactly why the QEZE exemption can't help. The QEZE exemption (Tax Law §1115(z)) exempts sales of tangible personal property and certain services (those described in Tax Law §1105(a), (b), and (c)) when sold to a certified QEZE business. But restaurant meals are taxed under a different provision — §1105(d) — which isn't on the QEZE exemption's list. Because the subsidized meals are legally "restaurant meals" under §1105(d), not one of the categories the QEZE exemption covers, Sensis's QEZE certification provides no relief here, however broadly it might otherwise apply to Sensis's other purchases.

What this means for you

Employers who subsidize an in-house cafeteria or dining facility run by an outside contractor

Whatever you pay a food-service contractor beyond what employees pay for their meals is taxed as restaurant-meal receipts — the label you put on the payment (subsidy, management fee, guaranteed profit, cost reimbursement) doesn't change that. Budget for sales tax on the full subsidy amount, not just on employee-paid meal receipts.

QEZE-certified businesses

Don't assume your QEZE exemption reaches every purchase your company makes. It's keyed to the specific Tax Law subsections it lists (§1105(a), (b), (c)) — categories like restaurant meals under §1105(d) fall outside it entirely, no matter how broadly your business otherwise qualifies for Empire Zone benefits.

Accountants and tax professionals

The controlling authority here — the regulation at 20 NYCRR §527.8(k)(3) plus Stouffer Management Food Service Inc. v. Tully — is a durable, frequently-cited rule for any employer-subsidized food-service arrangement; it forecloses any argument that structuring the payment as a "management fee" rather than a straight meal-cost reimbursement changes the sales tax result.

Common questions

Q: If I call my cafeteria subsidy a "management fee" instead of a meal-cost reimbursement, does that avoid sales tax?
A: No. The regulation and case law treat the payment as a taxable restaurant-meal receipt regardless of how it's labeled — subsidy, guarantee of profit, management fee, or otherwise.

Q: My company is a certified QEZE (Empire Zone) business — does that exempt our cafeteria subsidy?
A: No. The QEZE exemption only covers sales/services taxed under specific Tax Law subsections (§1105(a), (b), (c)); restaurant meals are taxed under a different subsection (§1105(d)) that the QEZE exemption doesn't reach.

Q: Who actually owes and collects this tax — my company or the contractor?
A: The opinion frames the subsidy as taxable receipts to the contractor from its sale of restaurant meals, consistent with the contractor being the vendor of the meal service.

Q: Does this ruling apply to my company's dining-facility arrangement?
A: Not automatically. This is an Advisory Opinion binding only on Sensis Corporation and only as to the facts it described. Your contract structure and certification status may differ.

Citations and references

Statutes and regulations:

• Tax Law §1105(d) (tax on receipts from restaurant meals)
• Tax Law §1115(z) (QEZE sales and use tax exemption, limited to §1105(a)-(c) categories)
• 20 NYCRR §527.8(k)(3) (employer subsidy of food-service contractor taxed as restaurant receipts)

Cases referenced:

• Stouffer Management Food Service Inc. v. Tully, 98 Misc.2d 1128, 415 N.Y.S.2d 559 (1978), aff'd, 69 A.D.2d 1023, 414 N.Y.S.2d 948, appeal denied, 47 N.Y.2d 709

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2008.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a08_59s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-08(59)S
Sales Tax
October 10, 2008

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

PETITION NO. S080620B

Petitioner, Sensis Corporation (Company), asks whether the New York sales and use tax applies to the costs
reimbursed by Company to a contractor (Contractor), who is responsible for managing all aspects of the operations of
Company’s dining facility, as well as for serving meals daily. The Company subsidizes the operation of the dining
facility by paying the costs that exceed the revenue generated from daily sales of meals to the employees. Petitioner
asked whether any of the costs paid by Company are exempt from the New York sales and use tax under the qualified
empire zone enterprise (QEZE) sales and use tax exemption. We conclude that the costs paid by the Company are
subject to sales tax.
The New York sales tax is imposed on the receipts from every sale of food and drink, when it is sold in or by a
restaurant….or other establishments….or by caterers”. Tax Law §1105(d). When an employer subsidizes a food
service contractor, the subsidy is taxed as a receipt from the sale of food and drink, regardless of whether the
reimbursement is called a management fee, guarantee of profit, or something else. 20 NYCRR §527.8(k)(3).
New York court decisions have held the same. The Court of Appeals has held that payments to a food service
business, under contract to operate an in-house restaurant serving employees of the business’s client, constituted
“sales” that rendered the business liable for sales tax on the reimbursed costs. The court said that “[t]he amounts
received from the corporate clients under the reimbursed costs, subsidy and management fee arrangements are sales of
food and drink within the intent and meaning of the statute.” Stouffer Management Food Service Inc. v. Tully, 98
Misc.2d 1128, 415 N.Y.S.2d 559 (1978), aff’d, 69 A.D.2d 1023, 414 N.Y.S.2d 948, appeal denied, 47 N.Y.2d 709, 419
N.Y.S.2d 1025. In light of the regulation and court cases directly on point, any reimbursable expenses paid by
Company to Contractor for dining room operations, whether the expenses are for food or for management functions,
are deemed receipts from restaurant meals, and, thus are taxable receipts to Contractor for purposes of the New York
sales and use tax.
Petitioner asks whether Company would be exempt from the sales tax charged by Contractor to Company on
reimbursable amounts if Company is certified as an Empire Zone business under Article 18-B of the General
Municipal Law and as a Qualified Empire Zone Enterprise (QEZE) by the Department of Taxation and Finance.
Under §1115(z) of the Tax Law, the receipts from the retail sale of tangible personal property described in §1105(a) of
the Tax Law and the receipts from the services described in §1105(b) and (c) are exempt from the New York sales and
use tax if sold to a QEZE. The meals subsidized by Company are taxed under §1105(d), and therefore are not eligible
for the New York QEZE sales tax exemption.

DATED: October 10, 2008

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of 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.