New York Advisory Opinion TSB-A-95(39)S: Is a food service contractor's charges to a substance-abuse treatment facility -- for meals, on-site labor, supplies, nutritional analysis, and management services -- exempt as a sale for resale, or at least partly exempt as a professional fee?

Plain-English summary

Ambassador Food Services Corporation provides food products to a for-profit client that operates a facility treating patients with substance abuse problems -- the client houses patients during treatment, provides meals (including special diets), and bills patients a daily rate for its services (patients' insurance, including Medicaid, in turn covers those daily fees). There's no written contract between Petitioner and its client. Each patient receives three daily meals: two are prepared at Petitioner's own commissary and transported to the client's facility, while the third is prepared and served on-site by Petitioner's own employees. Petitioner bills its client separately for cold meals, hot meals, bulk food, on-site labor, supplies, nutritional analysis, and management services. Petitioner asked two questions: whether its meal sales to the client are exempt as sales for resale, and if not, whether at least the portion of the charge relating to food preparation, transportation, management services, and nutritional analysis is exempt as a professional fee, leaving only the supplies/raw-materials portion taxable.

The Department answered no to both. Tax Law § 1105(d)(i) imposes tax on receipts from every sale of food and drink sold by restaurants, taverns, other establishments, or caterers -- and this provision, unlike many others in the sales tax article, contains NO resale exclusion. So even though Petitioner's client resells the meals to its patients (bundled into its daily rate), Petitioner's own meal charges to the client can't be deemed a tax-free sale for resale. On the second question, the Department applied its subsidized-cafeteria regulations (20 NYCRR § 527.8(k)) by analogy: those regulations establish that when an employer engages a food service contractor to provide meals to employees, ANY subsidy the employer pays the contractor -- whether labeled a management fee, profit guarantee, or something else -- is itself taxed as a receipt from the sale of food and drink, not carved out as an untaxed professional service. The Department found Petitioner's role functionally identical: Petitioner runs the ENTIRE food service operation for its client -- ordering food and supplies, preparing meals, providing nutritional analysis, on-site labor, and other management services -- the same kind of comprehensive operation the regulations already tax when an employer subsidizes a contractor's cafeteria for its employees. The only difference here is that the "subsidizing" party is a health care facility paying for meals delivered to its patients rather than an employer paying for meals for its employees -- a distinction the Department found didn't matter, citing its own prior ARA Services opinion involving the same kind of health-care food service arrangement, and the Stouffer Management Food Service case upholding tax on a food contractor's management fee. So Petitioner's entire charge -- food, on-site labor, supplies, nutritional analysis, and management fees alike -- is taxable as a receipt from the sale of food and drink.

What this means for you

Food service contractors serving hospitals, nursing homes, or treatment facilities

Don't expect a resale exclusion on your meal charges just because your client resells or bundles those meals into fees it charges its own patients or residents -- Tax Law § 1105(d) has no resale carve-out for food and drink sales, so your full charge to the facility is generally taxable.

Contractors trying to separate "management fee" or "professional service" charges from food costs

A management fee, subsidy, profit guarantee, or similar charge tied to operating a client's food service system is treated as part of the taxable receipt from selling food and drink -- however the charge is labeled, expect the whole package (labor, nutritional analysis, management services included) to be taxed alongside the raw food costs, not carved out as an exempt professional fee.

Healthcare and treatment facilities contracting out food service

If you engage a contractor to run your facility's entire food operation, be aware that essentially all of what you pay that contractor -- not just the ingredients -- will likely be subject to sales tax, similar to how an employer-subsidized cafeteria arrangement is taxed.

Common questions

Q: Why doesn't it matter that the client ultimately resells the meals to patients through its daily rate?
A: Because Tax Law § 1105(d) taxing food and drink sales doesn't include a resale exclusion the way many other sales tax provisions do -- the tax attaches at Petitioner's own sale to its client, regardless of what the client does with the meals afterward.

Q: Is there any way to structure the arrangement so labor/management charges escape tax?
A: Based on this ruling's reasoning (and the subsidized-cafeteria regulations it relies on), no -- any subsidy, fee, or charge connected to operating the food service system for the client is taxed as part of the food and drink sale, regardless of how it's designated on the invoice.

Q: Does this ruling only apply to healthcare/treatment facility arrangements?
A: No -- the Department expressly extended by analogy the same rule the regulations already apply to employer-subsidized employee cafeterias; the underlying principle (a food service contractor's full charge, including any subsidy or management fee, is taxable) isn't limited to healthcare settings.

Citations and references

Statutes and regulations:

• Tax Law § 1105(d)(i) (tax on sale of food and drink; no resale exclusion)
• 20 NYCRR 527.8(k) (subsidized employee cafeterias and food service operations)

Prior rulings and cases referenced:

• ARA Services, Inc., Advisory Opinion, Commissioner of Taxation and Finance, October 28, 1991, TSB-A-91(68)S
• Stouffer Management Food Service, Inc. v. Tully, 98 Misc. 2d 1128, affd without opn 69 A.D.2d 1023, mot for lv to app den 47 N.Y.2d 709

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a95_39s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (39)S
Sales Tax
October 10, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S950323B

On March 23, 1995, a Petition for Advisory Opinion was received from Ambassador Food
Services Corporation, 3269 Roanoke Road, Kansas City, Missouri 64111.
The issues raised by Petitioner, Ambassador Food Services Corporation, are:

1. Whether its sales of meals to its client are exempt as sales for resale.
2. Whether, if such sales are not exempt sales for resale, the portion of the charge which
   relates to food preparation, transportation, management services and nutritional analysis is exempt
   from tax as a professional fee, so that only the portion relating to supplies and raw materials is
   subject to tax.
   Petitioner provides food products to its client which operates a facility to provide medical
   treatment to patients with substance abuse problems. Petitioner's client is a for profit corporation
   which houses patients during treatment, provides meals including special diets, and bills patients a
   daily rate for its services. There is no written contract between Petitioner and its client. Patients of
   Petitioner's client receive three meals each day at the facility. Two of the daily meals are prepared
   at Petitioner's commissary and transported to the client's facility. The other meal is prepared and
   served at the client's facility by Petitioner's employees. Petitioner provides, and bills its client for,
   cold meals, hot meals, bulk food, on-site labor, supplies, nutritional analysis and management
   services. Petitioner's client in turn charges daily fees for patients (which include the cost of meals)
   to insurance carriers, including Medicaid.
   Section 1105(d)(i) of the Tax Law imposes a tax upon:
   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):
   (1) in all instances where the sale is for consumption on the premises where
   sold;
   (2) in those instances where the vendor or any person whose services are
   arranged for by the vendor, after the delivery of the food or drink by or on behalf of
   the vendor for consumption off the premises

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of the vendor, serves or assists in serving, cooks, heats or provides other services
with respect to the food or drink; and
(3) in those instances where the sale is for consumption off the premises of
the vendor, except where food (other than sandwiches) or drink or both are (A) sold
in an unheated state and, (B) are of a type commonly sold for consumption off the
premises and in the same form and condition, quantities and packaging, in
establishments which are food stores other than those principally engaged in selling
foods prepared and ready to be eaten.
In an analogous situation relating to meals provided to employees. Section
527.8(k) of the Sales and Use Tax Regulations provides:
(k) Subsidized employee cafeterias and food service operations.
(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 acafeteria 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.

(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 anagreement with caterer C. The agreement
provides that C prepare, serve 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

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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 set 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 cents 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 cents paid by E. Both the amount paid by the
employee and the 50 cents 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 employee, employer or both.
In the instant case, Petitioner provides food products to its client while acting as a food
service contractor for its client. Petitioner's receipts from the sale of such food products are subject
to tax under Section 1105(d)(i) of the Tax Law as receipts from the sale of food and drink. See
section 527.8(k)(1) of the Sales and Use Tax Regulations. Section 1105(d) does not provide for an
exclusion from tax for sales of food and drink for resale. Petitioner's meal charges to its client,
therefore, cannot be deemed to be sales for resale.
Section 527.8(k)(3) of the Sales and Use Tax Regulations provides that the subsidy received
by a food service contractor from an employer which provides meals to its employees, regardless of
whether such subsidy is called a management fee, guarantee of profit or some other designation, is
taxed as a receipt from the sale of food and drink. See 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. In
the management of the food service system for its client, Petitioner runs the entire operation.
Petitioner orders the food and supplies, prepares the meals, and provides nutritional analysis, on-site
labor by its own employees and other unspecified management services. In sum, the essence of
Petitioner's service to its client is to operate the food service facility for the client. Petitioner's
provision of food service at the client's facility is analogous to the operation of the facilities held
subject to tax by Section 527.8(k) of the Sales and Use Tax Regulations. Petitioner's situation differs
only in that instead of providing food services subsidized by an employer for its employees as set
forth in the Regulations, Petitioner provides food services subsidized by a health care facility for its
patients. See ARA Services, Inc., Adv Op Comm of T & F, October 28, 1991, TSB-A-91(68)S. The
management fee and other cost reimbursements that may be paid to the petitioner by the client to

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provide such food service for the client will be subject to sales tax, therefore, as receipts from the
sale of food and drink.

DATED: October 10, 1995

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.2