Flin International Corp. v. State Tax Assessor, KEN AP-00-84
| Decision Date | 20 May 2002 |
| Docket Number | KEN AP-00-84 |
| Parties | FLIK INTERNATIONAL CORP., Petitioner v. STATE TAX ASSESSOR, Respondent |
| Court | Maine Superior Court |
SUPERIOR COURT CIVIL ACTION
This matter is before the court on petitioner's motion for summary judgment. The underlying action is a petition for review pursuant to M.R. Civ. P. 80C in two counts both based upon the assessments and reconsideration decision of the respondent. Count I asks the court to find the decision in error and unlawful to the extent the respondent assesses a tax and interest with respect to "operating cost reimbursements and management fees." The second prayer for relief asks the court to find error in the Assessor's determination of 7% sales tax for meals sold by the petitioner at all places of business.
Petitioner has moved for summary judgment alleging the lack of genuine issue of material fact and its entitlement to judgment as a matter of law. Respondent responds with regard to said motion agreeing with no genuine issue as to any material fact but asserting that the Assessor is entitled to judgment as a matter of law.
In 1997, Compass Group USA, Inc. and MBNA America Bank, NA entered into a "Manual Food and Vending Services Agreement," referred to as "the contract." Compass then assigned its rights and obligations under the contract to its wholly-owned subsidiary Flik International Corp., the petitioner herein. During the audit period in question, the petitioner managed and operated cafeterias owned and equipped by MBNA at MBNA facilities in Belfast and Camden for the service of food to MBNA employees at those facilities. Flik provided all services to manage and operate the cafeterias and purchased all food products that were sold. The patrons of the cafeterias paid an established price for the food at the cafeterias based upon the cafeteria menus. The petitioner collected and remitted sales tax based upon the price charged to the cafeteria patrons. MBNA set the stated price to be charged to the patrons. In its interest in increased productivity by keeping employees on the premises these prices were generally at or below local retail prices. The cost of operating the cafeterias exceeded the gross sales revenues at the cafeterias. In addition to the cafeteria sales revenues from the sales of food to the patrons, Flik received an amount directly from MBNA, referred to by the petitioner as the "contract payment." This contract payment was an amount equal to the cafeteria operating expenses per week plus a management fee equal to the greater of 3% of cafeteria sales or a minimum dollar amount plus an overhead charge equal to the greater of 2% of cafeteria sales or a minimum dollar amount less the total of the cafeteria sales revenues in the same month. The "management fee" was really a "guaranteed profit" inasmuch as Flik did not manage any MBNA employees. The respondent State Tax Assessor assessed the sales tax on the amount of the contract payments plus cafeteria revenues.
Under the contract, in addition to the cafeteria sales as described, the petitioner also acquired, prepared and served food and drink to MBNA's invited guests at MBNA's sponsored events, acting in the capacity as a caterer. In addition, Flik also served food and drink in MBNA's daycare facilities and sold items at a sundry shop known as the "Gold Post." In February of 1998, Flik obtained a class I - Qualified Caterer License for the sale of liquor to allow it to sell liquor at special catered events held by MBNA. However, Flik separated its catering activities so that "Camden Catering" and "Belfast Catering" handled catering for meetings held in conference rooms at the MBNA facilities where MBNA employees worked and where no alcohol was served and the "special functions" catering unit handled catering at all events where alcohol was served. Under its liquor license, the petitioner named Ginley Hall as its licensed premises. Ginley Hall is located in Northport separate and apart from the cafeterias in Camden and Belfast. Under its license, Flik was authorized to sell liquor wherever it provided its meals. However, in order to legally serve liquor at locations other than Ginley Hall and for only a specific time period, it was required to submit an application to be approved by the municipality and the State Liquor Commission. This was referred to as "temporary permit." While Flik had an underlying license to sell alcoholic beverages at any location, subject to the requirement for temporary permit, it never sought nor obtained a temporary permit to serve liquor in any of the Belfast or Camden cafeterias, the Gold Post or the MBNA child care facilities.
Flik collected sales tax at the regular 6% or the 5 1/2% rate on cafeteria sales, Gold Post sales and child care center sales as well as the catering of MBNA workplaces by the Belfast Catering and Camden Catering units. Flik collected tax at the 7% rate on all sales by the special functions catering unit. The Assessor assessed sales tax at the 7% rate on all sales by Flik of food after January, 1998 other than the sales by the special functions catering unit which had already been taxed at that rate.
In a nutshell, MBNA contracted with the petitioner to operate cafeterias for its employees at their place of employment at subsidized pricing. The purpose was to provide an environment for the employees to remain in the building, enjoy competitive of low costs meal costs, have a place to "brown bag" and to receive an elevated level of service provided by an extra level of staffing and a longer level of operating hours. MBNA guaranteed Flik all of its overhead expenses and a profit. In addition to operation of the cafeterias, petitioner operated a catering service licensed to sell alcohol which provided such catering services to both nonalcohol workplace functions and social events on and off premises where alcohol was served.
The State Tax Assessor considers Flik to be a catering organization selling food under terms of a contract in which the price of the food is the contract price, i.e., the cost of sales plus the subsidy. In addition, the State Tax Assessor considers the possession by Flik of a class I liquor license to require an elevated rate of taxation on all its food sales based upon its authority to serve liquor under all circumstances. Petitioner objects indicating that consideration exists for the management fees and overhead operating costs by virtue of the additional staffing and longer hours provided by the petitioner, all for the benefit of MBNA and its employees. Further, under a theory that a licensed caterer is licensed at any location, all sales are in contemplation of transactions under the license and therefore subject to the higher tax.
There is no law in Maine on the issue of whether cost reimbursements and subsidies should be included in the sale price for taxation purposes. Apparently, the arrangement between MBNA and Flik is not uncommon in the industry and there are several extrajurisdictional cases that are entirely on point. There is, however, a split within those cases on whether sales tax may be assessed on so-called "management fees." In Szabo Food Service v State Board of Equalization, 46 Cal.App. 3d 268, 119 Cal. Rptr. 911 (1975), the case most heavily relied on by Flik, the court ruled that where subsidies could not be traced to particular sales of particular meals, they were not consideration for the sale of cafeteria meals. Instead, the court found that the subsidy provided "an incentive [for the food service provider] to provide cafeteria service to employees at reasonable prices." Id. at 272. See also Dining Management Services, Inc. v. Comm'r of Revenue, 404 Mass. 335, 534 N.E.2d 1178 (1989); Chet's Vending Service, Inc. v. Dep't of Revenue, 71 Ill.2d 38, 374 N.E.2d 468 (1978); H-W Corp. v. Dep't of Revenue, 15 Mich. App. 554, 166 N.W.2d 822 (1967). This is precisely the argument Flik presents to this court. The contract payments it receives are not taxable because the consideration received in exchange for the transfer of a tangible item of food is entirely received at the cafeteria cash register. The contract payments are instead fees for cafeteria operation and management services sold to MBNA.
The State relies on cases from Georgia and New York holding exactly the opposite. In Davis v. Chilivis, 42 Ga.App. 679, 237 S.E.2d 2 (1977), the court decided that sales tax was due on the full sales price of the meals regardless of the fact that payment for the food came from two different sources by two different methods. The court analogized the total amount tendered to the food service provider as the functional equivalent of the full sales price paid by the purchaser/employee at the cash register. Similarly, in Stouffer Management Food Service, Inc. v Tully, 415 N.Y.S.2d 559 (1978), the court ruled that reimbursed costs and management fees were subject to sales tax where employees paid a reduced price for food. In addition, to the extent that petitioner argues the contract payments are simply fees for cafeteria operation, and management services sold to MBNA, the nexus for all activities under the contracts is the sale of food and that clearly such services that are affiliated with the sale of food come within the statute in question.
The quandary for this court is that the analyses provided by the case law submitted by both petitioner and respondent appears sound. The cases wherein the employer pays all of the costs of food for employees is not difficult to analyze since the only criteria for sale of the food is the contract price. There is no question but that some of the fees paid by MBNA are directly related to the sale...
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