The Cost of Dining Out: Meals Taxes in Major U.S. Cities

March 01, 2012

 Highest in Minneapolis, Chicago, Virginia Beach, Seattle, and Washington, D.C.

 Washington, DC, March 1, 2012-As many tourists and business travelers have learned, taxes on meals are sometimes higher than taxes on other goods. Of the 50 largest U.S. cities, 15 charge an additional meals tax on top of the regular sales tax, according to a new analysis by the Tax Foundation. The combined rates are highest in Minneapolis, Chicago, Virginia Beach, Seattle, and Washington, D.C.

Meals taxes generally apply to purchases of prepared food that are consumed either in a restaurant or taken to go for later consumption. In contrast, sales of groceries (or "non-prepared food") are completely exempt from state sales tax in 30 states and the District of Columbia and partly exempt in a further eight states. Meals taxes are usually locally imposed but are sometimes imposed at the state level.

"High taxes on prepared food are sometimes justified as a luxury tax intended to target higher-income individuals, although the diversity of takeout dining options suggests that such a tax is poorly targeted to achieve that goal," said Tax Foundation Vice President for State Projects Joseph Henchman. "One could say that it is a tax on individuals with less flexible schedules or who do not like to cook - rich or poor."

The additional meals tax rate in the top 50 cities can vary dramatically. Milwaukee, Wisconsin boasts the most modest add-on rate of 0.05%, while Denver and Washington, D.C. have the second-highest rate at 4%. Visitors to Virginia Beach, Virginia see the largest increase from the regular sales tax rate to the combined total: a 110% jump from 5% to 10.5%.

Such taxes are sometimes justified as "tourism" taxes, designed to shift tax burdens to business and vacation travelers, similar to high taxes on hotel rooms and car rentals. Because the benefit derived from added economic activity from visitors and travelers probably exceeds the government services they use during their stay, tourism taxes are generally bad policy because they shift tax burdens away from those residents who actually demand and benefit from government services.

Meals taxes can also add significant costs and lead to administrative complexity. According to the Massachusetts Department of Revenue, ordering lasagna for dinner in a restaurant is taxable, but if the same restaurant were to also sell a frozen lasagna dinner to be reheated at home, it would be exempt. Also, buying a pizza and two cans of soda is subject to the meals tax, but if the pizza is ordered to go with a two-liter bottle, the soda is exempt from the tax because it is "an unopened original container of at least 26 fluid ounces."

Tax Foundation Fiscal Fact No. 293, "Meals Taxes in Major U.S. Cities" by Joseph Henchman, Alex Raut, and Kevin Duncan is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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