The Happy Meal Toy Tax? May 27, 2005 Alicia Hansen Alicia Hansen When you think of McDonald’s Happy Meals—child-size portions of fast food and a small toy packaged in brightly colored boxes—taxes are probably the last things that come to mind. But McDonald’s restaurants in Massachusetts recently had to deal with the unhappy subject of taxation. Under audit, the restaurant chain was ordered by the Commissioner of Revenue to pay use taxes on the toys it purchased from an unrelated supplier for its children’s meals. McDonald’s appealed, claiming that, “The toys were not simply an inducement to purchase the food, but rather an integral part of the meals, whose price, marketing, value, and desirability were affected by their inclusion.” The Massachusetts Appellate Tax Board agreed and declared the assessment of use taxes invalid. (Click here for full story.) This case underscores two serious tax issues. First, state tax codes are so complex that it is often difficult, time-consuming and expensive for businesses, especially small businesses, to determine which items and services are taxable. Second, business-to-business sales and use taxes are more likely than point-of-sale taxes to cause economic distortion, and they are not visible to consumers, or transparent. The Tax Foundation’s State Business Tax Climate Index shows that business-to-business sales taxes are detrimental to a state’s business climate. Stay informed on the tax policies impacting you. Subscribe to get insights from our trusted experts delivered straight to your inbox. Subscribe Share Tweet Share Email Topics Center for State Tax Policy Massachusetts State Business Tax Climate Index Tags Compliance Costs and Tax Complexity