Colorado Ruling Addresses Sales Tax on Food Sold for Human Consumption and Local Tax Uncertainty

By: Jeff Glickman, SALT Partner

At a glance

• The main takeaway: Remote sellers that collect and remit sales tax in multiple states may find it difficult and burdensome to understand each state’s taxability rules. For those that sell food, the taxability rules are even more complex, as illustrated in a recent Colorado ruling. 
• Assess the impact: For remote sellers of food and/or food products, it’s important to pay special attention to each state’s (and potentially each locality’s) definitions of what qualifies as taxable versus exempt food.   
• Take the next step: Aprio’s State and Local Tax (SALT) team can help your business understand the taxability of the products/services it sells at the state and local level to ensure you remain in compliance.   

Schedule a free consultation today to learn more!

The full story:

At the risk of identifying myself as a state tax nerd, how many of you have ever examined your grocery store receipt (my hand is raised)?  If you answered yes, you may have noticed that some of the items you bought were not subject to sales tax, others were subject to full state/local sales tax, and still others were subject only to local taxes.

That’s because the treatment of food sales for sales tax purposes is quite complex, both for the differences between state definitions of taxable and nontaxable food as well as differences that can occur in states with local taxes. Many states exempt food products sold at grocery stores. However, that exemption may not extend to prepared food that can be consumed immediately, or items considered to be candy. This can lead to some extremely particular rules. For example, large marshmallows may be taxable as candy where small marshmallows may be exempt since those are seen more as a baking product.

With the increasing number of companies that now sell food and food products, including full meals, to customers all over the country, it is important for the companies to understand the taxability of the products they sell in those states and localities. A recent Colorado private letter ruling addresses whether a remote food Company’s products are exempt from Colorado sales tax.¹

A closer look at the case

The Company has no retail locations or any physical presence in Colorado. It purchases food products on a per unit basis from an independent third-party and resells them to its customers through its website.  The third-party purchases all of the food and food ingredients and then creates the food products.  Once cooked, the food products are air-chilled and packaged with an attached nutrition label based on U.S. Food and Drug Administration (FDA) standards and then placed in insulated containers for shipment to customers. 

The Company’s website lists several different meal plans, and a typical food product will include a protein, vegetables, and whole grains (prepared salads are not offered). The food is not sold with utensils, and it not intended (or marketed) for immediate consumption, as they require further preparation to be eaten as intended (heating instructions are provided).

Under Colorado sales tax law, food is exempt from sales tax.² For this purpose, “food” means “food for domestic home consumption” as defined under the federal food stamp program.³ The following items are not considered food:

• Carbonated water marketed in containers;
• Chewing gum;
• Seeds and plants to grow foods;
• Prepared salads and salad bars;
• Packaged and unpackaged cold sandwiches;
• Deli trays; and
• Hot or cold beverages served in unsealed containers or cups that are vended by or through machines or non-coin-operated coin-collecting food and snack devices on behalf of a vendor.⁴

Unpacking the ruling

The ruling explains that based on the state’s reliance on the federal definition, food is not exempt if it is prepared or marketed for immediate consumption, such as food that is hot at the point of sale, food kept above room temperature to make it palatable and suitable for immediate consumption, and food marketed to be heated on the premises whether or not hot at the point of sale.⁵

Since the Company’s food products are not prepared or marketed for immediate consumption, they qualify as food for home consumption and are exempt from the state’s sales and use tax.

Finally, the ruling notes that Colorado home-rule jurisdictions are entitled to deviate from the state’s sales tax base with respect to certain exemptions, and the exemption for food for home consumption is one of those exemptions. Therefore, it is possible that some localities will impose their local sales tax on the Company’s food products.

The sale of food and food products is very complicated, and remote sellers need to pay special attention to each state’s specific definitions and what qualifies as taxable versus exempt food. Adding in potential local differences makes this process even more difficult to monitor. For example, on December 22, 2023, the City of Loveland, Colorado, posted an announcement on its website that effective January 1, 2024, it will begin following the state’s guidelines on the tax-exempt sale of food for home consumption. Thus, vendors no longer need to collect the city’s 3% sales tax on qualifying food products.

The bottom line

Aprio’s SALT team is experienced with these types of complex sales tax issues and can assist your business with understanding the taxability of the products/services it sells, both at the state level and at the local level, as may be required. As businesses become subject to state and local sales tax compliance in more jurisdictions due to economic nexus rules, this type of analysis will be crucial to ensuring that your business complies with all of its sales tax obligations and does not incur unexpected liabilities and penalties. 

We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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¹ Colorado Private Letter Ruling 23-003 (June 14, 2023).

² Colo. Rev. Stat. § 39-26-707(1)(e).

³ Colo. Rev. Stat. § 39-26-102(4.5)(a).  The definition under the federal food stamp program can be found at 7 U.S.C. 2012(k).

⁴ Colo. Rev. Stat. § 39-26-102(4.5)(a).

⁵ Colo. Code Regs. 39-26-102(4.5)(1)(b)(4).