Bamboozled: Coffee tax creates quite a stir : The Complexity of New Jersey Sales Tax Rate & Coffee

Karin Price Mueller for The Star-Ledger  writes Death and taxes, right?  But what about wrongly being charged sales tax? Or not paying when you’re supposed to?  Not only the consumer, but the State of New Jersey, ends up Bamboozled.  The state said it collected $8.14 billion in sales and use taxes last year.   We imagine you understand the sales tax. Use tax, according to the state, is defined as a tax that’s imposed when "taxable goods and services are purchased for use in New Jersey but sales tax was not collected by the retailer in the state of purchase or was collected at a rate less than the New Jersey sales tax rate."  So when sales tax isn’t collected or the state’s 7 percent isn’t collected in full, the purchaser is liable for the use tax.  But this column isn’t about the use tax. It’s a lesson in the sales tax, thanks to two readers who had differing sales tax experiences at several Dunkin’ Donuts stores.

First, the case of Andy Rehorn of Metuchen. He said he visited a Clark Dunkin’ Donuts on Feb 11 to purchase a Box O’ Joe, a 10-cup box of prepared and brewed coffee. The receipt shows he paid $15.99 and no sales tax.

"The very next day, Feb. 12, I went into another Dunkin’ Donuts in Edison and was charged $19.99 and tax of $1.40," Rehorn said. "While I realize the price of a Box O’ Joe can vary store to store, charging tax in one store and not in another tells me something is wrong."  Rehorn said he didn’t notice until he filled out expense forms for his company.   The same week, Bamboozled received an e-mail from William Masi of Elizabeth, who had a different tax dispute with a different Dunkin’ Donuts store.

He said he would buy Dunkin’ Donuts coffee beans regularly, and he’d make the coffee at home. "I went to buy my coffee beans one day at a Maplewood store and saw right away that I was charged sales tax on the purchase," he said. "I informed the person who rang me up that I wasn’t charged sales tax on my previous purchase about one week before, and was curtly told that the register figured the tax automatically."   Masi said he wasn’t in the mood to fight, and he reasoned that there could have been a change in the law.

 

But then he called the state Division of Taxation, which confirmed that there was no change in the law and that coffee beans and already-ground beans are still a nontaxable item. Brewed coffee is taxable.

Masi said he took the receipt to the store, spoke to the manager and got a refund on the tax. He also reported it to the Dunkin’ Donuts corporate office, which sent him a gift card.

Several months later, around the holidays, Masi said there was a shortage of bean coffee at Dunkin’ stores, and only the already ground beans were available.   "I needed bean coffee since their ground coffee hurt my stomach, but the beans that I ground coarser at home didn’t," Masi said. "I finally found a store on Stuyvesant Avenue in Union that had bean coffee."

But at the register, he said, he was charged sales tax.

"I informed them this was a nontaxable item, but they wouldn’t take the tax off and I left without the coffee," he said. "I called corporate again and I was informed that this was a franchise and while they had the company name, they could do things they wanted to do without corporate permission, but I was hopeful when I hung up that a call would be made to the store."

He said he headed back to the store several days later, hoping the store had been re-educated, but he was again charged sales tax.

During some back-and-forth arguments, Masi said he explained what corporate had told him: that beans and grinds are not taxable in New Jersey. Things got heated and he was asked to leave, he said, and he left coffeeless.

He no longer shops at Dunkin’ Donuts, he said, but buys beans at a local supermarket.

"The scanners at the checkout don’t tax the coffee, which is how it should be," he said.

WHAT’S THE BIG DEAL?  A couple of quarters or dollars in sales tax that isn’t really due may not sound like a big deal, but think volume.

 

There are 800 Dunkin’ Donuts franchises in New Jersey, and while we’re sure not all make mistakes with sales tax, we’re willing to bet it’s not just those mentioned here. And other retailers may make similar errors.   The errors must be costing New Jersey a bunch of dough in uncollected taxes, while consumers who are being wrongly charged the tax are overpaying.

The state Division of Taxation said it doesn’t have an estimate on losses due to uncharged sales taxes. Dunkin’ Donuts, which is based in Canton, Mass., said New Jersey’s stores are owned and operated by individual franchisees, who are expected to comply with all applicable state and federal laws.

Dunkin’ said it also had a conversation with franchisees after our inquiries.   "We have been assured by the franchise owner that he has taken the necessary steps to educate his crew members about New Jersey’s sales tax to ensure this doesn’t happen again," spokesman Justin Drake said. "We apologize for any inconvenience this may have caused our guests."

Thanks to Dunkin’ for trying to correct the errors.  Indeed, the taxation issue can be confusing.

Taxation spokesman Bill Quinn said unless the size of the coffee bean package was very small — small enough to be a self-serve package that was sold with a utensil — it should have been treated as a standard food item and sales tax should not have been charged.

"As for the ‘Box O’ Joe,’ assuming this was heated prior to sale, it should have been treated as a prepared food item on which it would be correct to charge sales tax," he said.

So what else is and isn’t covered by sales tax? The list is too long to have here, but you can read a full description of what is and isn’t covered in the New Jersey Sales Tax Guide on Taxation’s website. 

If you find that a business isn’t correctly taxing products you buy, first look for a resolution with the business. If that doesn’t work, you can file Form A-3730 with Taxation, asking for a refund.

Taxation doesn’t take a hard line, generally, if a business is making errors with sales tax rules. Quinn said it typically talks to the business about it, encouraging it to make whatever corrections or adjustments are necessary to their systems to correct the problem.

"Typically, in these cases, businesses are cooperative because they have made a good faith error and are not seeking to enrich themselves by collecting and pocketing sales tax revenues they are not entitled to receive," Quinn said.

However, where customers suspect that a business is not properly paying its taxes or is otherwise acting in violation of the law, they can notify Taxation with an online form on the Citizens against Tax Cheats, or CATCH, web page or by calling (609) 292-6400.