Dunkin’ Donuts Sales Tax Mistake

A baker’s dozen is thirteen, not twelve. The term harks back to the days when a baker could be fined for giving short weight. Since it’s tough to make sure that every pastry weighs an equal amount, bakers would throw in an extra to make sure their dozen rolls, cakes, or doughnuts would measure out to the full required weight.

What does this have to do with sales tax?

Dunkin’ Donuts is being sued for overcharging customers, the crime that the custom of the baker’s dozen was supposed to end. In this case, however, nobody was complaining that the franchise’s perfectly standardized crullers were too small. Instead, franchisees were charging sales tax on goods that shouldn’t have been taxed.

A dozen (not a baker’s dozen) different northeastern franchises were the subject of an investigation that found that customers were incorrectly charged sales tax about 70% of the time. The items in question were things like coffee beans, which should not be taxed, even if they’re bought with doughnuts, which are taxable.

So were the franchisees teaching their clerks to tack on sales tax improperly and stow the pennies in secret caches until eventually, they added up to real money?

Probably not. If all the collected sales tax was remitted to the states or other taxing jurisdictions, then it was those jurisdictions that ended up profiting from the errors. If the accountants caught the overage while calculating the sales tax, the stores were stuck with the thorny question of how to identify, find, and reimburse the consumers, an overwhelming task.

But it may be just as likely that the sales tax calculations didn’t involve any invoices and the stores ended up with more money than they should have — but with no intentional wrongdoing.

New York and New Jersey, the states where the franchisees were located, have complicated sales tax laws. A bagel with no schmear is not taxable, but add cream cheese and it becomes taxable. A pretzel is not taxable unless it’s coated with chocolate, at which point it becomes taxable. For Dunkin’ Donuts the distinction was between things that could be eaten in the shop, like doughnuts, and things like sealed sacks of whole coffee beans which probably would be taken home and prepared in the buyer’s kitchen.

In other words, prepared foods vs. groceries.

In these days when people routinely buy fully-cooked rotisserie chickens in the market and bake-your-own pizza at the gas station, it can be challenging to distinguish between prepared foods and groceries. Some tax jurisdictions base the decision on the temperature of the item (when it reaches the consumer, not after that consumer has been standing in line for a while). Dunkin’ Donuts franchisees who had inattentive employees who didn’t fully grasp the distinction between a cup of coffee and a sack of coffee might have been completely innocent.

Unfortunately, an innocent mistake can be just as much of a problem as intentional wrongdoing when it comes to sales tax compliance.

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