Lamont administration limits tax hike on prepared meals

Gov. Ned Lamont’s administration unveiled tax guidelines late Thursday that scale back the Department of Revenue Service’s original interpretation of a budget provision that adds one percentage point to the 6.35 percent sales tax on meals and prepared foods on Oct 1.

In a memo aimed at grocery stores, DRS essentially advises them to apply the new 7.35 percent sales tax rate on prepared foods to items already subjected to the sales tax, as legislators have said was their intent.

“The DRS initially interpreted the 2019 legislation to add certain circumstances where the tax would be applied,” Scott Jackson, the commissioner of revenue services, wrote to Lamont. “However, when the entire statute is read as a whole, it becomes clearer that the General Assembly did not expand the applicability of the tax, but simply increased the existing tax.”

These include prepared foods served as part of:

  • A supermarket catering service.
  • A takeout meal purchased, for example, at a deli counter.
  • A meal for consumption on premises.

DRS also formally revoked previous instructions to apply the sales tax hike to any prepared foods sold elsewhere at the grocery store and paid for at a traditional checkout counter.

These earlier guidelines had lawmakers and Lamont worried consumers would be paying higher sales taxes not only on meals, but a wide array of desserts, snack treats, washed-and-bagged vegetables and other items routinely found in supermarket aisles.

The prepared foods surcharge continues to also apply to prepared foods served in restaurants, though that was not in dispute.

“The original guidance created by DRS was too broadly interpreted and not reflective of what was intended when the budget was passed,” Lamont said Thursday evening. “Businesses and residents depend on the guidance from these policy statements to better understand the real-world impact of legislation, and the update provided today gives a more accurate indication of how the statute on prepared foods should be applied. I felt it important to act swiftly, but thoughtfully and thoroughly to ensure that what was enacted was implemented.”

The tax hike was described when legislators adopted a new state budget in early June as a straightforward boost from 6.35 percent to 7.35 percent on restaurant food and “prepared meals” sold at grocery stores and certain other retailers.

But when DRS released its first written memo to retailers earlier this month advising them on how to apply the surcharge, it covered a much wider range of prepared foods — regardless of where in the supermarket they were sold.

These items included popsicles and other frozen treats, doughnuts and bagels, pizza slices, hot dogs, smoothies, power bars, a hot bag of popcorn, and even pre-packaged bags of lettuce and spinach. Whether sold as part of a takeout or catered meal, something to be eaten on the premises, or even if taken off regular supermarket shelves — it didn’t matter.

Senate and House Republicans cried foul, arguing many of these items might not be thought of as a “meal.” The GOP also accused Lamont and his fellow Democrats in the legislature’s majority of orchestrating a “money grab” that would harm low- and moderate-income households.

Initially, both Lamont and Democratic legislative leaders responded simply by saying Republicans were hardly in a position to criticize. Democrats had made many difficult choices, they said, while successfully closing a projected $3 billion-plus deficit in the new state budget without increasing income tax rates.

Republicans, on the other hand, opted not to show their cards last spring, offering no plan to close the shortfall — after a decade of offering alternative budgets.

But things intensified late last week when the legislature’s nonpartisan Office of Fiscal Analysis revised its estimate on how much revenue the surcharge would generate.

Based upon the policy statement, OFA projected the tax would generate $158 million over this fiscal year and next — nearly 40 percent more than lawmakers anticipated. By 2020-21, consumers would pay more than $90 million per year.

By mid-day Monday, Senate Democrats announced they thought DRS had gone too far. The House Democratic Caucus followed suit by late Monday afternoon.

And on Tuesday, Lamont agreed and announced DRS had been ordered to redraft guidelines for Connecticut merchants that applied the tax to a narrower scope of prepared foods.

Legislative leaders did not comment late Thursday immediately after Lamont released the new tax guidelines.

Supermarkets have had to apply the base sales tax rate to prepared foods sold for immediate consumption on the premises, or as part of a catering or takeout service, since 2002.

Jackson wrote to Lamont Thursday that his department initially understood legislators were authorizing a higher tax rate on prepared foods regardless of where they were sold in grocery stores.

“However, when the entire statute is read as a whole, it becomes clearer that the General Assembly did not expand the applicability of the tax, but simply increased the existing tax,” Jackson added.

Keith M. Phaneuf is a reporter for The Connecticut Mirror (www.ctmirror.org). Copyright 2019 © The Connecticut Mirror.

kphaneuf@ctmirror.org

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