Sales Tax Rules And Prepared Foods

Sales taxes are a fact of American life, and they are really noticeable in the area of fast food.

For instance, when a hungry consumer drives through his favorite drive-thru, he should expect to pay the price of his burger plus additional coinage to cover sales tax. Most states, counties and municipalities feed their coffers by charging a local sales tax on most every kind of purchase imaginable. Local law regulates what purchases are taxable and at what rate.

English: Picture of an authentic Neapolitan Pi...
English: Picture of an authentic Neapolitan Pizza Margherita taken by Valerio Capello on September 6th 2005 in a pizzeria (“I Decumani”) located on the Via dei Tribunali in Naples. Italiano: Fotografia di un’autentica pizza Margherita napoletana scattata da Valerio Capello il 6 settembre 2005 nella pizzeria “I Decumani” situata in Via dei Tribunali a Napoli. (Photo credit: Wikipedia)

Application of sales tax regulations is not always straightforward, though. “Prepared food” sales tax rules are different from sales tax rules on single items such as milk or bread. For example, a take and bake pizza at your local eatery incurs sales tax, but some people, and states, are confused and upset about that. Is a cold pizza that the customer has to take home and bake actually prepared food?

Amazingly, the states of South Dakota and Arkansas wrote and published rules which say that pizza which is put together in a store and the baked at home is actually a prepared, and taxable, food because the restaurant had to assemble two or more ingredients to put the product together.

The Streamlined Sales and Use Tax Governing Board says a take and bake pizza is prepared food and therefore, taxable. The state of Wisconsin has a flow chart that its Department of Revenue employs to apply sales tax regulations to pizza and everything else.

Recently, an amendment to the Streamlined Sales and Use Tax Agreement says all states can make their own decisions on which pizzas are subject to sales tax. Yes, even pizza can get complicated when it comes to the tax man.

H&R Block specializes in navigating the muddiest of tax waters for the American taxpayer.

SR&ED and the Federal Budget

The Scientific Research and Experimental Development (SR&ED) program, introduced in the 1980s, is a federal tax incentive program administered by the Canadian Revenue Agency, which provided $3.6 billion in tax assistance for research and development in 2011. In the past year, the SR&ED or SRED program was reviewed by a panel led by OpenText’s Thomas Jenkins which led to a series of recommended changes to the program presented to the federal government. Despite dramatic speculations of program overhauls in anticipation of the budget, the SR&ED program continues to be one of the most lucrative R&D incentive programs in the industrial world, with the enhanced Investment Tax Credit (for smaller businesses) rate maintained at 35%.

Current eligible SR&ED expenditures are based on salary and wages, materials, overhead, contracts, and capital expenditures. The 2012 federal budget proposed four core adjustments to the program. The proposed changes are as follows: the Prescribed Proxy Amount (PPA) method of overhead calculation is to be reduced from 65 to 55 percent of direct labour costs by 2014; capital costs will no longer be eligible for the credit in 2014 and onward; eligible third-party contract payments will decrease from 100 to 80 percent in 2013; and the General Investment Tax Credit (for large corporations and foreign-owned companies) will see a five-percent reduction from 20 percent to 15 percent in 2014.

Capital-intensive industries will be affected through the first two recommended changes. SR&ED overhead costs are calculated by one of two approaches: a direct method approach, and an indirect approach using a percentage of labour (proxy) expenditures. The Prescribed Proxy Amount (PPA) is seeing a 10-percent reduction to 55 percent in a two-phase implementation; the PPA will be reduced to 60 percent in 2013, and 55 percent in 2012. The elimination of capital from the SR&ED expenditure base will have an impact on industries reliant on the purchase and upgrade of equipment and machinery.

Currently, 100 percent of eligible sub-contract payments can be claimed as SR&ED expenditures, which will be marginally reduced 20 percent effective 2013. The largest SR&ED program savings will accumulate from the reduction of the general rate investment tax credit, applying primarily to larger corporations and foreign-owned entities. The general ITC was reduced from 20 to 15 percent.  The recommendations will have limited effect on small- and medium-sized Canadian Controlled Private Corporations (CCPCs), as these companies will retain the enhanced 35-percent ITC rate on the first $3 million of expenditures. Overall, the changes to the SR&ED program will contribute to a simplified process, supported through additional funds allocated to improving the administration of the program.

This article was written by Mahrie Boyle, SR&ED and OIDMTC Team Specialist with NorthBridge Consultants.