Tax Cybrary

Sales Tax State Activity Update
May 2005   

Massachusetts Explores Kiddie Meal Toy Taxability

The Massachusetts Appellate Tax Board ruled that a fast food restaurant was not liable for use tax on purchases of toys for its children’s meals. The toys were not used for promotional purposes, or as “give-aways”, but were sold in the regular course of business.

Under audit, the taxpayer, a fast food restaurant, was assessed use tax on its toy purchases from an unrelated supplier. The toys were purchased using a blanket Sales Tax Resale Certificate. The Commissioner of Revenue based its findings on the contention that the taxpayer, rather than selling the toys as part of children’s meals, used the toys to promote its business of selling food.

During the appeal, the taxpayer presented evidence concerning the developing and marketing of the toys that was able to establish the toys as a popular commodity with inherent worth which greatly enhanced the value of the children’s meal. 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 taxpayer also presented an analysis breaking down the cost of each component, including that of the toy, in its three different varieties of children’s meals. The toys were assigned a “menu price” when they were included as part of the children’s meal. This price was greater than the cost of the toy. Toys could also be sold separately, and in this case were assigned a higher “menu price”. When toys were sold separately, sales tax was properly collected from the customer.

It was shown that the sales price of the children’ meals exceeded the cost of each of its components, including the toys at issue. The taxpayer sold the meals for a profit and collected and remitted sales tax based on the actual price charged to the customers on each meal.

Overwhelming evidence established the true nature of the toys as commodities sold in the course of business and not as promotional “give-away” items subject to use tax. The Tax Board ruled in favor of the taxpayer and declared the Commissioner of Revenue’s assessment of use taxes on the purchase of the toys to be invalid.

(McDonald's Restaurants of Massachusetts, Inc. v. Commissioner of Revenue, Massachusetts Appellate Tax Board, No. C262528, April 22, 2005)

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