Michigan Explains Changes to Tax Treatment of “Prepared Food”

By Peter G. Pupke

The Michigan Department of Treasury has issued a release explaining the legislative changes to the definition of “prepared food” that take effect on February 1, 2024. (Notice Regarding Changes to the Tax Treatment of “prepared food,” Mich. Dept. Treas., 01/25/2024.)

Exemption for sales of “prepared food.”

The Michigan Constitution of 1963, Mich. Constitution Art. IX § 8, prohibits a tax on “the sale or use of food for human consumption except in the case of prepared food intended for human consumption as defined by law.” That tax prohibition is implemented in the Use Tax Act, Mich. Comp. Laws Ann. § 205.94d, and in the General Sales Tax Act, Mich. Comp. Laws Ann. § 205.54g, which exempt “food and food ingredients,” but generally tax “prepared food.” Effective February 13, 2024, those acts are amended by Public Acts 141 and 142 of 2023 (PA 141 and PA 142), which define “prepared food” to include (among other things) food sold with eating utensils provided by the seller (for PA 141, see State Tax Update, 10/05/2023; for PA 142, see State Tax Update, 10/05/2023).

75% “prepared food” standard.

The definition of “prepared food” introduced in PAs 141 and 142 includes “food sold with eating utensils provided by the seller.” For a seller whose “prepared food sales percentage” does not exceed 75%, the public acts do not change the general standard for what constitutes a utensil “provided by the seller.” Under that general standard, an eating utensil is “provided by the seller” only if the seller puts the utensil in a food item’s packaging, gives or hands a utensil to a purchaser, or makes available a utensil necessary for the purchaser to receive food.

A seller with a “prepared food sales percentage” over 75% is subject to the same general standard, stated above. Starting February 13, 2024, such a seller is also subject to a special standard, i.e., that a utensil is “provided by the seller” when a seller makes an eating utensil available. The Department had previously enforced that special standard through Rule 86 of the Department’s Specific Sales and Use Tax Rules, Mich. Admin. Code R205.136; but the Michigan Court of Appeals overturned the relevant part of Rule 86 in Emagine Entertainment v. Department of Treasury, 965 NW2d 720, 334 Mich App 658 (2020). In enacting PAs 141 and 142, the legislature has reinstated the pre-Emagine status quo, with some adjustments.

“Prepared food” definition.

PAs 141 and 142 amend Mich. Comp. Laws Ann. § 205.94d and Mich. Comp. Laws Ann. § 205.54g but leave many key parts of those statutes untouched. PAs 141 and 142 do not change the three categories of “prepared food”:

1. food sold in a heated state or that is heated by the seller;
2. two or more food ingredients mixed or combined by the seller for sale as a single item; and
3. food sold with eating utensils provided by the seller.

Whether food falls into one of the first two categories is based on whether the food is sold warm or hot or whether the seller made it by mixing or combining ingredients. For a food item to fall into the third category depends on the meaning of “food sold with eating utensils provided by the seller.” Though the acts do not define “eating utensil,” they offer an illustrative list: “knives, forks, spoons, glasses, cups, napkins, straws, or plates, but not including a container or packaging used to transport the food.”

Eating utensil provided by the seller.

As noted above, PAs 141 and 142 partly codify parts of the Department’s Rule 86, including when an eating utensil is “provided by the seller.” Under Rule 86, and starting on February 13, 2024, under PAs 141 and 142, a utensil is “provided by the seller” when one of the following criteria is met:

1. The seller or another person puts a utensil in a product’s packaging and that other person does not have the NAICS classification code of a manufacturer, subsector 311.
2. The seller’s business practice is to give or hand utensils to purchasers.
3. The seller makes available eating utensils necessary for the purchaser to receive the food. That is, for any food seller, the seller has provided a utensil for a food item if the seller: (1) puts the utensil in the item’s packaging; (2) gives or hands a utensil to the item’s purchaser; or (3) makes available a utensil necessary to receive the purchased item. For any food item, if the seller does one of those three things, the food item is “prepared food” and thus subject to tax. These three criteria form a general standard applicable to all food sellers.

PAs 141 and 142 also create a fourth standard, a special standard that applies only to certain sellers: the seller makes available eating utensils.

Starting February 13, 2024, that special standard provides that a utensil is “provided by the seller” when the seller makes a utensil available to the purchaser of a food item. Unlike the three-part general standard, which applies to all sellers, this special standard applies only to sellers whose “prepared food sales percentage” exceeds 75%. That percentage characterizes the proportion of food sales attributable to sales of “prepared food”; a higher percentage typifies businesses like restaurants and concession stands. How to calculate the percentage is detailed in PAs 141 and 142. The special standard does not apply to bottled water, candy, bottled soft drinks, and certain food items with multiple servings. For those items, an eating utensil is “provided by the seller” only under the three-part general standard.

Exclusions from “prepared food.”

PAs 141 and 142 do not change the statutory exclusions from “prepared food”:

• food that is only cut, repackaged, or pasteurized by the seller;
• raw eggs, fish, meat, poultry, and food containing those raw items;
• food sold in an unheated state by weight or volume as a single item; and
• bakery items, including bread, rolls, buns, biscuits, bagels, croissants, pastries, doughnuts, danish, cakes, tortes, pies, tarts, muffins, bars, cookies, and tortillas, sold without eating utensils.

Future guidance.

The Department will issue a new Revenue Administrative Bulletin, “Sales and Use Tax — Food for Human Consumption,” to replace Michigan Revenue Administrative Bulletin No. 2022-4, 03/31/2022.