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.
