Government

NY Bagel Shop Finds Loophole To Get Around The State's Sales Tax

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Most states with sales tax laws tend to apply them inconsistently when it comes to food. For example, most food products are not subject to the tax because it will make basic necessities more expensive for people with limited income. But prepared food in a restaurant is usually taxable.

What constitutes prepared food can be complicated and confusing. In 2019, the New York State Department of Taxation of Finance issued a bulletin announcing that sandwiches are subject to sales tax. The bulletin does not define what a sandwich is but gives a laundry list of examples. To my knowledge, the agency has not ruled on whether KFC’s Double Down (two slices of bacon and two slices of cheese with two fried chicken filets serving as the buns) would be considered a sandwich.

This has led to New York’s infamous “Bagel Tax.” A whole bagel can be purchased tax free. But if it is sliced, then it would be considered a sandwich and subject to the sales tax. This might not mean much to those who eat out occasionally. But for people who need a daily garlic bagel with cream cheese, the incremental sales tax can add up.

Last week, the New York chain H&H Bagels announced that it has found a way to get around New York’s sandwich tax. It would serve a whole bagel with the cream cheese stuffed inside the bagel. This would avoid slicing the bagel so that it would not be considered a sandwich. The price of the tax-free bagel is $1.90. Considering that its plain cream cheese bagel sells for $4.90, that is quite the tax-free bargain. But unfortunately, this was a limited time offer which ended on April 18, which is the deadline to file tax returns (unless an extension is filed).

I am skeptical as to whether their cream cheese-stuffed bagel is actually tax free. According to the New York tax bulletin, a taxable sandwich includes “[B]agel sandwiches (served with butter or with spreads, or otherwise as a sandwich).” Also, in New York, heated or prepared meals and foods sold for on-premises consumption are also subject to sales tax. Would a New York tax auditor consider the cream cheese-stuffed bagel to be a sandwich or a prepared meal which can be subject to sales tax? We will probably never know since the stuffed bagel was only available for a limited time and probably accounted for a small amount of bagel sales.

Because of the confusion as to what constitutes heated or prepared food that could be subject to sales tax, many states, like New York, give extensive examples as to what types of foods are exempt and what is taxable.

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As mentioned earlier, customers are not likely to notice or care about the sales tax. But restaurant businesses are likely to care because they are cost sensitive. Restaurants tend to have low profit margins and many fail within the first five years. This is due to labor and supply costs which have risen markedly in the last few years due to the pandemic and inflation. Because of its complexity, compliance with sales tax laws which require good accounting and record keeping, can be an added expense to restaurants. And those that do not comply may have to pay back taxes, penalties and interest.

H&H Bagels’ limited-time sale of its tax-free bagels was a lighthearted attempt to sell lower-priced bagels close to the very stressful deadline for filing tax returns. But the State of New York might have something to say if these bagels were to permanently stay tax free.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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