Delivery Apps' Latest Struggle? Sales Tax
Restaurant delivery companies have received a lot of scrutiny recently—and rightfully so: Even if everything is on the up and up, the industry is now worth billions so someone should be keeping tabs on it. But as has often been the case with tech companies—especially those operating within the "gig" economy—what's "up and up" isn't always clear, in part because many existing laws weren't built for these types of businesses. For instance, this week, the D.C. Attorney General sued DoorDash for its so-called "deceptive" tipping model. Likewise, New York City has cracked down on Grubhub on a number of fronts—one of them being the company's high fees for restaurants, but even then, the city has talked about invoking a bit of a legal loophole to lower them.
Yesterday, another big gray area was a hot topic: sales tax on delivery fees for customers. Interestingly, Grubhub which has faced the brunt of many of the attacks against delivery companies, pays sales tax on all of its delivery fees, but other major providers like DoorDash and Uber Eats are reportedly more lax.
"Taxation of food delivery is a hot mess," Stephen Kranz, a tax lawyer with McDermott Will & Emery, told the Wall Street Journal, one of two sites that tackled this subject on Wednesday. "In general though, delivery fees are more often than not taxable." And speaking to Recode, Hayes Holderness, a state tax policy expert and assistant professor at the University of Richmond School of Law, had a similarly ambiguous take. "I would feel very uncomfortable if I were tax counsel for one of those companies if those taxes weren't being collected," he said.
But "uncomfortable" is different than "non-law-abiding," and the general consensus seems to be that it's simply not clear whether delivery fees should be taxed or not—and even then, it likely varies by individual jurisdiction or even situation. For instance, Casey Wells at the California Department of Tax and Fee Administration told Recode the state's laws depend on how the partnership between the restaurant and delivery provider is set up (and then declined to speculate on how the laws applied to companies like DoorDash or Grubhub).
Meanwhile, the WSJ went out and actually ordered the same thing from a Subway in San Francisco through DoorDash, Uber Eats, and Grubhub and found that while Uber Eats and DoorDash only collected sales taxes on the price of the food, Grubhub collected sales tax on both food and fees—which based on the above, sounds about right.
But Grubhub CEO Matt Maloney seemed adamant about his company's tax-paying stance. "We have been audited by multiple states, multiple times, and in every case we were required to collect and remit sales tax on delivery fees," he told Recode. And unsurprisingly, he had a message for his competitors when speaking to the WSJ: "The 34 states that have told us to tax our service and delivery fees need to audit everyone in our industry to make sure we're following their tax laws," he said.
But it could be argued that, by paying its taxes, Grubhub may be putting itself at a disadvantage. Passing taxes on to the customer can raise prices, making the lower prices of your competitor more appealing. And even though companies can be ordered to pay back taxes down the road, better to beat out your competition now and deal with the government later—or at least that is one approach.
Overall, the issue of sales tax on delivery fees proves something we've seen repeatedly: Though nothing is simpler than sitting on your couch and ordering dinner from your phone while watching Netflix, everything that makes that transaction easy for you is very complicated for everyone else.