Seattle Rule 5-404

Sales of meals.

(1) Introduction. Generally, this rule explains Seattle'sbusiness license tax applications to the sales of meals. More specifically,this rule gives tax reporting information to persons who provide meals withouta specific charge as well as an explanation as to how meals furnished toemployees are taxed. Persons in the business of operating restaurants shouldalso refer to Seattle Rule 5-405 and persons operating hotels, motels, boardinghouses, or similar businesses should refer to Seattle Rule 5-720.

(2) Business license tax. The sales of meals and theproviding of meals in consideration of services rendered are subject to tax as

follows:

(a) Retailing. The retailing business license tax appliesas follows:

(i) Restaurants, cafeterias and other eating places.Sales of meals to consumers by restaurants, cafeterias, clubs, and other eatingplaces are subject to the retailing tax. (See Seattle Rule 5-405 Restaurants,cocktail bars, taverns and similar businesses.)

(ii) Caterers. Sales of meals and prepared food bycaterers are subject to the retailing tax when sold to consumers."Caterer" means a person who provides, prepares, and serves meals forimmediate consumption at a location selected by the customer. The tax liabilityis the same whether the meals are prepared at the customer's site or thecaterer's site. The retailing tax also applies when caterers prepare and servemeals using ingredients provided by the customer. Persons providing a foodservice for others should refer to the subsection below entitled "Foodservice contractors."

(iii) Hotels, motels, bed and breakfast facilities,resort lodges and other establishments offering meals and transient lodging.Sales of meals by hotels, motels and other persons who provide transientlodging are subject to the retailing tax.

(iv) Boarding houses, American plan hotels, and otherestablishments offering meals and non-transient lodging. Sales of meals byboarding houses and other such places are subject to the retailing tax.

(A) Except for guest ranches and summer camps, when alump sum is charged to non-transients for providing both lodging and meals, thefair market value of the meals is subject to the retailing tax. Unless accountsare kept showing the fair market value, the tax will be computed upon doublethe cost of the meals served. This cost includes the price paid for food anddrinks served, the cost of preparing and serving meals, and all otherincidental costs, including an appropriate portion of overhead expenses.

(B) It will be presumed that guest ranches and summercamps are not making sales of meals when a lump sum is charged for thefurnishing of lodging, and meals are included.

(v) Railroad, dining car, ship, airplane, or othertransportation company diners. Sales of meals by a railroad, dining car, ship,airplane, or other transportation company served at fixed locations in Seattle,or served upon the carrier itself while within Seattle, are subject to theretailing tax.

Where no specific charge is made for meals separate andapart from the transportation charge, the entire amount charged is deemed acharge for transportation and the retailing tax does not apply to any part ofthe charge.

(vi) Hospitals, nursing homes, and other similar institutions.The serving of meals by hospitals, nursing homes, sanitariums, and similarinstitutions to patients as a part of the service rendered in the course ofbusiness by such institutions is not a sale at retail, but rather, taxableunder the applicable tax classification for the overall service rendered.However, many hospitals and similar institutions have cafeterias or restaurantsthrough which meals are sold for cash or credit to doctors, visitors, nursesand other employees. These meals are subject to the retailing tax. Some ofthese institutions also have agreements where the employees are paid a fixedwage in payment for services rendered and are provided meals at no charge. Thesales of meals to employees are subject to the retailing tax, including thevalue of meals provided at no charge to employees. Refer to the subsectionbelow entitled "Meals furnished to employees." For retirement homes,a charge for meals served is subject to the retailing tax, even if included ina rental agreement, and even if meals are for the retirement home residentsonly.

(vii) School, college, or university dining rooms. Publicschools, high schools, colleges, universities, or private schools operatinglunch rooms, cafeterias, dining rooms, or snack bars for the exclusive purposeof providing students and faculty with meals or prepared foods are notconsidered to be engaged in the business of making retail sales of meals.However, if guests are permitted to dine with students or faculty in suchareas, the sales of meals to the guests are retail sales.

(A) Unless the eating area is situated so that it isavailable only to students and faculty, the lunch room, cafeteria, dining room,or snack bar must have a posted sign stating that the area is only open tostudents and faculty. In the absence of such a sign, there will be apresumption that the facility is not exclusively for the use of students andfaculty. The actual policy in practice in these areas must be consistent withthe posted policy.

(B) If the cafeteria, lunch room, dining room, or snackbar is generally open to the public, all sales of meals, including meals soldto students, are considered retail sales.

(C) For some educational institutions, the meals providedto students are considered to be part of the charge for tuition and may not besubject to the business license tax. Public schools, high schools, colleges,universities, and private schools should refer to Seattle Rule 5-600 todetermine whether the retailing business license tax applies to the sales of mealsdescribed above.

(viii) Fraternities and sororities. Fraternities,sororities, and other groups of individuals who reside in one place and jointlyshare the expenses of the household including expense of meals are notconsidered to be making sales when meals are furnished to members.

(b) Wholesaling. Persons making sales of prepared mealsto persons who will be reselling the meals are subject to the wholesalingclassification. Sellers must obtain resale certificates from their customers tosupport the resale nature of any transaction.

(c) Service and other business activities. Privateschools, which do not meet the definition of "educationalinstitutions," operating lunch rooms, cafeterias, or dining rooms for theexclusive purpose of providing meals to students and faculty are subject to theservice business license tax on the charges to students and faculty for meals.(See Seattle Rule 5-600 for definitions of the terms "private school"and "educational institution.") Persons managing a food serviceoperation for a private school should refer to the subsection below entitled"Food service contractors."

(3) Sales by persons having a food and beverage worker'spermit. Retail vendors who are required by law to have a food and beverageservice worker's permit pursuant to RCW 69.06.010 are subject to the retailingtax on sales of prepared food products. This includes, but is not limited to,sales of sandwiches prepared or chicken cooked on the premises, deli trays,home delivered pizzas, etc...

(4) Food service contractors. The term "food servicecontractor" means a person who operates a food service at a kitchen,cafeteria, dining room, or similar facility owned by an institution orbusiness. Food service contractors may manage the food service operation onbehalf of the institution or business, or may actually make sales of meals orprepared foods.

(a) Sales of meals. Food service contractors who sellmeals or prepared foods to consumers are subject to the retailing businesslicense tax upon their gross proceeds of sales. For example, the operation of acafeteria which provides meals to employees of a manufacturing or financialbusiness is generally a retail activity. The food service contractor isconsidered to be making retail sales of meals, whether payment for the meal ismade by the employees or the business, unless the business itself is resellingthe meals to the employees.

In all cases where the meals are prepared at off-sitefacilities not owned by the institution or business, the food service contractoris considered to be making sales of meals and the retailing business licensetax applies to the gross proceeds of sale, or gross income for sales toconsumers.

(b) Food service management. The gross proceeds derivedfrom the management of a food service operation are subject to the services andother business activities business license tax. These tax reporting provisionsapply whether the staff actually preparing the meals or prepared foods isemployed by the institution or business hiring the food service contractor, orby the food service contractor itself. If the food service contractor merelymanages the food service operation on behalf of an institution or business,that institution or business is considered to be selling meals or providing themeals as a part of the services the institution or business renders to itscustomers. These institutions and businesses should refer to the subsection (2)above to determine their business license tax liabilities.

Food service management includes, but is not limited to,the following activities:

(i) Food service contractors operating a cafeteria orsimilar facility which provides meals and prepared food for employees and/orguests of a business, but only where the business owning the facility is the oneactually selling the meals to its employees.

(ii) Food service contractors managing and/or operating acafeteria, lunch room, or similar facility for the exclusive use of students orfaculty at an educational institution or private school. The educationalinstitution or private school provides these meals to the students and facultyas a part of its educational services. The food service contractor is managinga food service operation on behalf of the institution, and is not making retailsales of meals to the students, faculty, or institution. Sales of meals orprepared foods to quests in such areas are, however, subject to the retailingbusiness license tax. (Refer also to subsection above entitled "School,college, or university dining rooms.")

(iii) Food service contractors managing and/or operatingthe dietary facilities of a hospital, nursing home, or similar institution, forthe purpose of providing meals or prepared foods to patients or residentsthereof. These meals are provided to the patients or residents by the hospital,nursing home, or similar institution as a part of the services rendered by theinstitution. The food service contractor is managing a food service operationon behalf of the institution, and is not considered to be making retail salesof meals to the patients, residents, or institution. Meals sold to doctors,nurses, visitors, and other employees through a cafeteria or similar facilityare, however, subject to the retailing business license tax. (Refer also to thesubsection above entitled "Hospitals, nursing homes, and other similarinstitutions.")

(c) The following examples explain the application of thebusiness license tax to typical situations involving food service contractorsmanaging a food service operation. These examples should be used only as ageneral guide. The tax results of other situations must be determined after areview of all of the facts and circumstances.

(i) GC Inc. is a food service contractor managing andoperating an on-site cafeteria for B College. This cafeteria is operated forthe exclusive use of students and faculty. However, guests of students orfaculty members are allowed to use the facilities. All monies collected in thecafeteria are retained by B College. College B pays GC"s direct costs formanaging and operating the cafeteria, including the costs of the unpreparedfood products, employee salaries, and overhead expenses. GC also receives amanagement fee.

GC Inc. is managing a food service operation. The measureof tax is the gross proceeds received from B College. GC Inc. may not claim adeduction on account of cost of materials, salaries, or any other expense. Thegross proceeds are subject to the service business license tax. B College isconsidered to be making retail sales of meals to the guests. B College shouldrefer to Seattle Rule 5-600 to determine whether the retailing business licensetax applies.

(ii) DF Food Service contracts with Hospital A to manageand operate Hospital A"s dietary and cafeteria facilities. DF is to receivea per meal fee for meals provided to Hospital A"s patients. DF FoodService retains all proceeds for sales of meals to physicians, nurses, andvisitors in the cafeteria.

The gross proceeds received from Hospital A, in regardsto the meals provided to the patients are derived from the management of a foodservice operation. These proceeds are subject to the service business licensetax. However, DF is making retail sales of meals to physicians, nurses, andvisitors in the cafeteria. DF Food Service must pay retailing business licensetax on the gross proceeds derived from the cafeteria sales.

(5) Meals furnished to employees. Sales of meals toemployees are sales at retail and subject to the retailing business licensetax. This is true whether individual meals are sold, whether a flat charge ismade, or whether meals are furnished as a part of the compensation for servicesrendered.

(a) Where a specific and reasonable charge is made to theemployee, the measure of the tax is the selling price.

(b) Where no specific charge is made, the measure of thetax will be the average cost per meal served to each employee, based upon theactual cost of the food.

(c) Where meals furnished to employees are not recordedas sales, the tax due shall be presumed to apply according to the followingformula for determining meal count unless rebutted under particularcircumstances substantiated by the business:

(i) Those employees working shifts up to five hours, onemeal; and

(ii) employees working shifts of more than five hours,two meals.

(6) Sales of meals, beverages, and food at pricesincluding sales tax. Persons who advertise and/or sell meals, alcoholic orother beverages, should refer to Seattle rule 5-405 (Restaurants, cocktailbars, taverns, and similar businesses), and Seattle Rule 5-130 (Sellingprice--Advertised prices including sales tax) and may exclude the amount ofsales tax so collected from the gross revenue reported for business license taxpurposes. The taxability of persons operating class H licensed restaurants isspecifically addressed in Seattle Rule 5-405.

(7) Gratuities. Tips or gratuities representing donationsor gifts by customers under circumstances which are clearly voluntary are notpart of the selling price subject to tax. However, mandatory additions to theprice by the seller whether labeled service charges, tips, gratuities orotherwise must be included in the selling price and are subject to theretailing classification of the business license tax.

(8) Examples. The following examples identify a number offacts and then state a conclusion. These examples should be used only as ageneral guide. The tax results of other situations must be determined after areview of all of the facts and circumstances.

(a) ABC Hospital operates a cafeteria and sells meals tophysicians and to persons who are visiting patients in the hospital. Meals arealso provided to its employees at no charge. However, there is no accountingfor the number of meals consumed by the employees. Payroll records do recordthe number of hours worked. On average, employees working shifts of up to fivehours consume one meal while those working shifts of more than five hoursconsume two meals.

ABC Hospital is subject to retailing business license taxon the gross proceeds derived from the sales of meals to physicians andvisitors. The retailing tax also applies to the value of the meals consumed byABC"s employees. The value subject to tax is determined by the averagecost of meals consumed by the employees, based upon the actual cost of the fooditems, multiplied by the number of meals as determined through a review of thepayroll records. While the presumption is that employees working shifts of upto five hours consume one meal with those working shifts of five to eight hoursconsuming two, this presumption may be rebutted under particular circumstances.

(b) X operates a boarding house and provides lodging andmeals to ten non-transient residents. Each resident is charged a lump sum tocover both lodging and meals with no accounting for a fair market value for themeals. X is making retail sales of meals to its residents. Retailing businesslicense tax is due on the value of the meals served. This value must becomputed as double the cost of the meal, including the cost of the food anddrink ingredients, costs of meal preparation, and other costs associated withthe meal preparation such as overhead expenses.

(c) Y Motor Inn contracts with Z Company to providecatering services for a function to be held at the motor inn. Duringdiscussions concerning the services to be provided, Z Company is informed thata 15% gratuity is generally recommended. Z Company negotiates the gratuitypercentage to 10% and signs a catering contract stating that the agreedgratuity will be added. The gratuity charged to Z Company is subject to theretailing tax. This is not a voluntary gratuity since it is required to be paidas a condition of the contract. Gratuities are not considered to be part of theselling price when they are strictly voluntary.

DIRECTOR'S CERTIFICATION

I, Glen M. Lee, Finance Director of the City ofSeattle, do hereby certify

under penalty of perjury of law, that the within andforegoing is a true and

correct copy as adopted by the City of Seattle,Department of Finance and

Administrative Services.

     DATED this ______ day of July 2016.

                              CITY OF SEATTLE,

                              a Washingtonmunicipality

                         By:     ____________________________________

                                Glen M. Lee,Finance Director

                                Department ofFinance and Administrative Services

Effectivedate: July 14, 2016