Restaurant delivery powered by smartphone apps has become a fiercely competitive and fast-growing business, as DoorDash, GrubHub, Postmates, and Uber Eats go head-to-head in the streets of cities like Philadelphia for market share.
But behind the scenes, some of those companies are engaged in a dance with officials in Harrisburg and other state capitals over whether they are charging enough sales tax.
As of Tuesday, the four biggest food-delivery apps were charging sales tax on food, but industry leader DoorDash (which also owns Caviar) and Postmates were not collecting the tax on service and delivery fees. Even on the food, Postmates was charging just a 6% sales tax in Philadelphia, not the required 8%.
The confusion is the latest example of tax laws struggling to keep pace with emerging industries and tech-enabled services seeking exemptions from regulators, who have typically been slow to catch up. It’s giving consumers a slight break on price, to the detriment of the taxman.
Some delivery services have fallen in line. For instance, GrubHub (and subsidiary Seamless) and Uber Eats were charging 8% sales tax in the city on the entire order, including service and delivery fees, according to an Inquirer test of the apps. (The tax is determined based on the location of the restaurant, not the delivery address.)
That’s what they should be doing, officials said.
“In Pennsylvania, the food delivery companies should be collecting sales tax on the entire purchase price, which includes the cost of food, delivery and service fees,” a spokesperson for the Pennsylvania Department of Revenue said.
DoorDash and Postmates both said they were working to get into compliance with Pennsylvania law, but also suggested that their business models could warrant different treatment and that it is not entirely clear what they should be doing without strict guidance from Pennsylvania regulators.
There’s nothing vague about service and delivery fees, according to Verenda Smith, deputy director of the Federation of Tax Administrators, a Washington nonprofit trade group for tax collectors. “Delivery and service fees have either been taxed or not been taxed, depending on what the state chose its policy to be,” she said.
New Jersey, for example, does not require sales tax to be charged on third-party food delivery services, according to a spokesperson for the state’s Office of the Treasurer. The state’s sales tax is 6.625%.
Pennsylvania has not estimated how much revenue it has lost on service and delivery fees since Postmates entered the market in 2014 and DoorDash joined it in 2017.
In Philadelphia, where an extra 2 percentage points are tacked onto the state’s 6% sales tax, officials referred questions on the levy to the state Revenue Department. The first 1% extra goes to the city; the second is split between the city and the School District, with the first $120 million going to the schools and whatever is left going for the city’s pension funds.
On individual transactions, the amount of uncollected sales tax is small. For example, on a $29.17 order from the Applebee’s in Center City, DoorDash charged sales tax of $1.56. That is 65 cents or 29%, less than the $2.21 it would have charged if it included the service fee of $2.14 (11% of the food bill) and a $5.99 delivery fee.
Because the money is not collected, undercharging for sales tax does not fatten the bottom lines of the companies, but it gives them a slight price advantage.
The question of whether sales tax is being collected on service and delivery fees has also arisen in New York, where State Sen. Brad Hoylman called for a sales tax audit of the industry. Its sales grew 41% last year, according to Second Measure, a data analytics firm.
The failure of DoorDash and Postmates to collect sales tax on service and delivery fees is playing out against the backdrop of a landmark U.S. Supreme Court decision in 2018 enabling states to require companies to collect sales taxes and remit them to the state even if the companies have no physical presence in the state.
States have responded to that ruling by requiring what are called “marketplace facilitators” (Amazon as a platform for third-party sellers, for example) to collect sales tax on items sold through their sites and turn them over to state revenue departments. This means that Amazon counts as the retailer responsible for collecting sales taxes, even if there’s a remote seller in the background.
California and Maryland excluded delivery services from their marketplace facilitator laws, according to the Multistate Tax Commission, which operates through committees of state officials to create model tax laws and regulations that states can choose to adopt or modify.
Pennsylvania did that with DoorDash in 2018, but then regulators changed their position last September.
“Since then,” DoorDash said in a Jan. 22 email, "we have been working in good faith to better understand the implications of this change. We are grateful to have received additional clarity as recently as yesterday and intend to fully comply with the guidance we have received from the commonwealth.”
The company is working on modifications to its software to give it the flexibility to remit any required taxes. Under its existing model, DoorDash collected taxes on the food and sent them to restaurants for payment to the state.
Postmates, like DoorDash based in San Francisco, did not respond to a question last week about why it charges only 6% sales tax on food in Philadelphia, but earlier it emailed a statement about its dealings with Pennsylvania tax officials:
“As tax laws in the on-demand economy are rapidly evolving across different jurisdictions in the nation, we are actively in touch with the Pennsylvania Department of Revenue about the distinct products available to merchants and customers on the platform and how tax laws apply to each vertical.”
“They’re just stalling,” said Robert Strauss, a professor of economics and public policy at Carnegie Mellon University. “It’s a question of trying to arbitrage in a somewhat gray area until it becomes uncomfortable. The reality is, people are not that price-sensitive.”