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Why Popular Food Delivery Services Face Tax Auditing



Tax Audits For Food Delivery Services

Have you made use of a third-party food delivery service, like DoorDash, Postmates or Uber Eats? Millions of Americans do every day, and that number has only increased as a result of the COVID-19 pandemic and subsequent stay-at-home orders.

According to Second Measure, through the end of May, sales for third-party food delivery services more than doubled on a year-over-year basis.

So, why is this a big deal, tax-wise? While these services have been on tax organizations’ radar for several years, the pandemic has highlighted the issue even further, especially as the third-party food delivery industry is one of the few that has thrived during the pandemic.

The main concern tax officials have is whether these third-party food delivery services are properly collecting and remitting taxes, particularly in the current post-Wayfair tax environment.

All combined, it’s the perfect tax liability storm.

Why Are States So Interested in Food Delivery Services?

As the third-party food delivery scene has grown over the last decade and a half, it has exploded into a multi-billion dollar industry, with current estimates from Statista projecting market revenue to reach $32 billion by 2024.

That sort of revenue is too good to ignore, especially as states look for additional revenue sources to off-set the economic impact of the shutdown.

Why Would Food Delivery Services Be Audited?

Looking at the potential revenue, it’s easy to see why states are so interested in the third-party food delivery market, but why are these services potentially facing audits? The simple answer is that due to the tax complexity in this market, it’s especially difficult to ensure that tax responsibilities are being met by these services.

First off, most states do not have specific guidance for the taxability of these services, leaving them in a nebulous grey-zone that is open to interpretation. Earlier this year, Georgia implemented a new marketplace facilitator law, which specifically included third-party food delivery services. This will likely pave the way for other states to implement similar guidance.

Beyond Wayfair-related complications, the very nature of food and beverage taxation causes additional problems. It’s one of the most complex tax areas to administer and rules vary wildly from state-to-state, or even within states. On top of that, the application of taxes to delivery fees is also inconsistent.

All these layers mean that properly complying with tax regulations, and ensuring that businesses are doing so, can be nightmarish.

Moving forward, we would expect to see tax agencies who have yet to issue specific guidance for third-party food delivery services, to do so soon. Additionally, taxation of these services may expand as states look for additional revenue sources.

Meanwhile, audits will almost certainly be issued for the biggest of the third-party delivery services. For the smaller apps, this offers a chance to ensure they are properly complying with applicable tax legislation.

Do You Have Questions About Tax Compliance?

Contact Monika Miles And Team

Monika Miles

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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