New York Law Review

Celestial Food of Massapequa Corp. v. New York State Tax Commission, 63 N.Y.2d 1020 (1984): Distinguishing Taxable Overhead from Items for Resale

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Celestial Food of Massapequa Corp. v. New York State Tax Commission, 63 N.Y.2d 1020 (1984)

Items such as napkins, straws, and plastic utensils provided by a fast-food restaurant to its customers are considered overhead expenses that enhance customer comfort, rather than items purchased for resale, and are therefore subject to sales tax.

Summary

Celestial Food, a fast-food restaurant, challenged a New York State Tax Commission regulation requiring them to pay sales tax on items like napkins, straws, stirrers, and plastic utensils. The restaurant argued that these items should be exempt from sales tax as items purchased “for resale as such,” similar to food packaging. The New York Court of Appeals reversed the lower courts, holding that these items are not integral to the product being sold like packaging, but rather are akin to overhead expenses. Therefore, the regulation requiring sales tax on these items was valid.

Facts

Celestial Food of Massapequa Corp., a fast-food restaurant, purchased paper and plastic items, including napkins, straws, stirrers, and plastic utensils, for use by its customers. The New York State Tax Commission assessed sales tax on these items, pursuant to a regulation (20 NYCRR 528.20 [d] [2]). Celestial Food challenged the regulation, arguing that these items should be exempt from sales tax because they are effectively resold to the customer as part of the meal.

Procedural History

Celestial Food initiated a legal challenge to the Tax Commission’s regulation. Special Term ruled in favor of Celestial Food, declaring the regulation invalid. The Appellate Division affirmed the Special Term’s decision. The New York State Tax Commission appealed to the New York Court of Appeals.

Issue(s)

Whether the purchase of napkins, straws, stirrers, and plastic utensils by a fast-food restaurant constitutes a “retail sale of tangible personal property” subject to sales tax, or whether such purchases are excluded from sales tax as items purchased “for resale as such” under New York Tax Law § 1105(a) and § 1101(b)(4)(i)(A).

Holding

No, because items like napkins, straws, and plastic utensils are not a critical element of the product sold and are more akin to overhead expenses that enhance the customer’s dining experience, they are not purchased “for resale as such” and are therefore subject to sales tax.

Court’s Reasoning

The Court of Appeals distinguished its prior holding in Matter of Burger King v. State Tax Comm., 51 N.Y.2d 614 (1980). In Burger King, the court held that packaging materials were purchased “for resale as such” because they are a critical element of the product being sold. The court reasoned that “a cup of coffee cannot be purchased without a container,” but items like napkins and utensils are not essential to the product itself. The court stated that such items “are more akin to items of overhead, enhancing the comfort of restaurant patrons consuming the food products.” The court rejected the Appellate Division’s broad reasoning that customer expectations justified the tax exemption, finding that such reasoning had “potentially limitless application.” The court emphasized that only items “necessary to contain the product for delivery can they be considered a critical element of the product sold, and excluded from sales tax.” The court effectively created a test focusing on whether the item is *necessary* to deliver the product to the consumer. Items which are merely convenient, or expected, are taxable overhead. The court thus upheld the Tax Commission’s regulation, finding that it did not conflict with the Tax Law.

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