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Food Delivery Services as Marketplace Facilitators

Effective January 1, 2019, businesses that meet the definition of marketplace facilitator must collect and remit Iowa sales tax and applicable local option sales tax for sales made or facilitated on the business’s marketplace if the business receives $100,000 or more in gross revenue from those sales. Very generally, a marketplace facilitator is a business that provides infrastructure or support for retail sales to occur and collects the sales price, processes payments, or receives compensation from the retail sale. 

One type of business that may qualify as a marketplace facilitator is a food delivery service company. If a business allows customers to order food and handles the payment for the customer, the business likely qualifies as a marketplace facilitator. Businesses interested in learning more about whether they may be obligated to collect sales tax as a marketplace facilitator should read the Department’s marketplace facilitator guidance and Iowa Code section 423.14A

The service of delivering prepared food itself is not taxable. Iowa Code section 423.1(51) defines “sales price” for purposes of Iowa sales tax. Excluded from “sales price” are certain charges that are “separately contracted for” and “separated stated” on a bill. A service fee is typically charged because of the mere purchase of a product, whereas a delivery fee is for a separate item (delivery service), which is not a taxable service. 

The following examples are intended to illustrate some possible situations involving different types of businesses and the obligation to collect tax in Iowa. The first example involves a food delivery service company that receives a customer’s order and payment and delivers the food from a restaurant. The second example involves a business directory company that receives a customer’s order and payment, but utilizes a food delivery service company to deliver the food from a restaurant. 

Example 1:

F is a food delivery company that operates a website and mobile application where customers may order food from a local restaurant and have it delivered by F. R is a local restaurant that sells its food on F’s website and application. C is a customer who lives in a jurisdiction that imposes a 1% local option sales tax. 

F charges a mandatory $5.00 service fee on all orders made through its website or application. F also charges for delivery, which changes depending on the amount of food ordered and the distance the driver must travel. Assume both F and R have nexus in Iowa. 

C makes the following delivery order from R:

3 large pizzas . . . . . . . . . . .$20.00 each = $60.00 
3 orders of breadsticks . . .  $7.50 each = $22.50 
5 bottles of pop. . . . . . . . . . $2.50 each = $12.50

Food Total: . . . . . . . . . . . . .$95.00
Service Fee: . . . . . . . . . . .  $5.00
Delivery Fee: . . . . . . . . . . . $7.50
TOTAL (pre-tax): . . . . . . . .$107.50

The total tax due is $7.00 = 7% tax on $100.00. Delivery charges, including charges for food delivery, are not subject to sales tax. Therefore, the $7.50 amount charged to C for the delivery is not considered in the total sales price subject to tax. The service fee, however, is included in the sales price.

Therefore, the total C must pay for the order is $114.50 = $7.00 (7% of taxable $100.00) + $107.50 (total due pre-tax).

Who must collect and remit the tax?

Scenario 1

C makes the order and schedules delivery though F’s website. F collects the entire amount of $114.50. From this amount, F keeps the $5.00 service fee and the $7.50 delivery fee. Through its agreement with R, F is also entitled to retain 10% of the sales price collected for the sale of R’s products. 

Here, the total sales price for R’s products (“Food Total”) is $95.00. Therefore, F retains $9.50 ($95.00 x 10%) and tenders to R the remaining $85.50 to R. 

Here, F is responsible for the collection and remittance of the $7.00 sales tax, regardless of the fact that it ultimately tendered the majority of the sales price to R. F is a marketplace facilitator, and R’s sales through F’s marketplace are marketplace sales. Therefore, F must collect and remit sales tax on all of its marketplace sales. In this example, R has no collection and remittance obligation with respect to C’s purchase.

Scenario 2

Same facts as Scenario 1, except that instead of retaining a portion of the sales price on marketplace sales of R’s products, F purchases the products directly from R at the time F picks up the products for delivery, and then F resells the products to C upon delivery.

The result is the same as Scenario 1. Here, rather than making marketplace sales of R’s products, F itself is the direct marketplace seller of R’s products. After providing a completed exemption certificate to R, F would purchase the products from R tax exempt as a sale for resale, and R would have no obligation to collect tax from F at that time. F would then collect the full $114.50 from C and remit $7.00 to the Department.

Example 2: 

B is a business directory company that operates a website and a mobile application where the public reviews businesses. B’s website and mobile application also allow customers to order and pay for food from restaurants which are then delivered by a third party delivery company. B does not deliver food to customers, but charges a mandatory $5.00 service fee and a delivery fee which varies depending on the agreement it has with the third party delivery company.

F is a food delivery company that operates a website and mobile application where customers may order food from a local restaurant and have it delivered by F. F also delivers food to customers who ordered through B’s website or mobile application.

R is a local restaurant that sells its food on B’s and F’s website and mobile application. C is a customer who lives in a jurisdiction that imposes a 1% local option sales tax.

Assume B, F, and R have nexus in Iowa.

C makes the following delivery order from B:

3 large pizzas . . . . . . . . . . .$20.00 each = $60.00
3 orders of breadsticks . . .  $7.50 each = $22.50
5 bottles of pop. . . . . . . . . . $2.50 each = $12.50

Food Total: . . . . . . . . . . . . .$95.00
Service Fee: . . . . . . . . . . .  $5.00
Delivery Fee: . . . . . . . . . . . $7.50
TOTAL (pre-tax): . . . . . . . .$107.50

The total tax due is $7.00 = 7% tax on $100.00. Delivery charges, including charges for food delivery, are not subject to sales tax. Therefore, the $7.50 amount charged to C for the delivery is not considered in the total sales price subject to tax. The service fee, however, is included in the sales price.

Therefore, the total C must pay for the order is $114.50 = $7.00 (7% of taxable $100.00) + $107.50 (total due pre-tax).

Who must collect and remit the tax?

C makes the order and schedules delivery though B’s website. B collects the entire amount of $114.50. From this amount, B keeps the $5.00 service fee and F keeps the $7.50 delivery fee. Through B’s agreement with R, B is also entitled to retain 10% of the sales price collected for the sale of R’s products.

Here, the total sales price for R’s products (“Food Total”) is $95.00. Therefore, B retains $9.50 ($95.00 x 10%) and tenders to R the remaining $85.50 to R.

Here, B is responsible for the collection and remittance of the $7.00 sales tax, regardless of the fact that it ultimately tendered the majority of the sales price to R. B is a marketplace facilitator, and R’s sales through B’s marketplace are marketplace sales even though F delivers the customer’s order. Therefore, B must collect and remit sales tax on all of its marketplace sales. F merely provides a delivery service, which is not subject to sales tax. In this example, R and F have no collection and remittance obligation with respect to C’s purchase.