Avalara: When are mobile delivery app fees subject to Texas sales tax?







Getting takeout meant phoning a restaurant or placing an order in person. It then became possible to order online. Today, when available, delivery apps are making take-out sales easier for more and more restaurants. In fact, orders through delivery apps would be on track to overtake direct orders by the end of 2021.

COVID-19 has certainly accelerated the adoption of delivery apps, but usage of DoorDash, Grubhub, Uber Eats and similar platforms was on the rise even before restaurants had to suspend or limit in-person service. Mobile food delivery apps are now a huge industry worth over $150 billion worldwide, and they’re growing.

There are pros and cons for restaurants. On the plus side, delivery apps can help restaurants advertise and grow their customer base. Yet restaurants pay a premium for the services provided; commissions tend to range from 15% to 30%. According to McKinsey & Company, “a typical restaurant would need to significantly increase its total sales to maintain the same profit margin it enjoyed without delivery.” Meanwhile, the delivery platforms themselves are “struggling to make a profit”.

The restaurant-mobile app relationship can also complicate tax compliance.

When restaurants manage their own take-out sales, they are responsible for collecting payment and collecting, remitting and reporting applicable taxes. When a third party gets involved, it is not necessarily clear who is liable for the tax. Another frequently asked question is whether the fees charged by a restaurant delivery app are subject to sales tax.

Taxation rules vary by state, as always with sales tax, but some state laws do not yet specify the imposition of mobile delivery app fees. The more taxpayers seek to understand their responsibilities, the more governments are compelled to speak out on this issue. One of the latest states to do so is Texas, in a ruling letter requested by a mobile ordering and payment platform provider.


Texas Rules for Taxing Mobile Delivery App Fees

As the Texas Comptroller explained, the mobile delivery app accepts orders from customers on behalf of restaurants, collects payments from customers on behalf of restaurants, collects applicable taxes from customers, releases payments (minus fees) to restaurants on a weekly basis and uses a third party to process payments. It also charges restaurants the following fees:

  • Setup fee to cover initial setup and configuration

  • Service charge (percentage of weekly gross sales)

  • Credit card fees (percentage plus a fixed dollar amount per transaction)

  • Fees for optional offers for featured placement and other strategies to attract new customers

  • Optional “earn more” fees to entice customers to visit a restaurant

  • Optional monthly subscription service separate from the fees charged for the mobile app

Each of the above fees should be considered separately for tax purposes. Accordingly, the mobile application provider asked the Texas Controller to decide whether each charge is an exempt charge for a non-taxable service or a taxable charge for a taxable data processing service.

According to Section 151.0035, data processing services include “word processing, data entry, data retrieval, data research, information compilation, payroll and business accounting data production. ‘business, and other computerized data and the storage or manipulation of information’. Rule 3.330(a)(1) further defines data processing services as “the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and capturing and retrieving information “.

The controller ruled as follows:

  • The setup fee is a taxable data processing service fee.

  • Service fees are a taxable fee for a data processing service, but unlike other fees charged by the mobile app, service fees qualify for a 20% exemption for information services and data processing under Article 151.351. The mobile app is therefore responsible for collecting and remitting sales and use tax on 80% of service fees charged to restaurants.

  • Credit card charges are taxable data processing service charges. Although “settlement of an electronic payment transaction by an approved money transmitter” is excluded from the definition of data processing (Senate Bill 153, 2021), “settlement of an electronic payment transaction” does not include a marketplace provider’s fee – and the mobile delivery app is a marketplace provider. Therefore, mobile delivery application credit card charges are a taxable charge for data processing services. See Section 151.007(a)(2); Rule 3.330(d)(3).

  • Fees for optional offers are non-taxable service charges. This is similar to an advertising service, and advertising services are generally not taxable in Texas. Additionally, reward points provided through the mobile app are equivalent to gift certificates and sales of gift cards or gift certificates are not taxable.

  • The optional “earn more” fee is a fee for a non-taxable service.

  • The optional monthly subscription fee is a taxable data processing service fee (see section 151.0035).

Note that restaurants contracting with the delivery app are responsible for remitting the tax owed on the meals to the state.

Review our State-by-State Guide to Marketplace Facilitator Laws and our State-by-State Registration Requirements for Marketplace Sellers to learn more about how Marketplace Facilitator Obligations may affect your business.

Cover photo by Canva

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Avalara Inc. published this content on March 08, 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unmodified, on March 08, 2022 15:22:03 UTC.

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Analyst Recommendations for AVALARA, INC.

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