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Want to Sell an Ice Cream Cake? Just Fill Out These Simple Forms

Josh Barro
This article is more than 9 years old.

Mmmmmm. Taxable. (Photo credit: Wikipedia)

If you work on tax policy for a living, you have to think about a lot of complicated issues. Such as, when a corporation does business here and abroad, how do you know what part of its income is “foreign”? What is the best way to tax returns to capital? And when is an ice cream cake a baked good?

The last question is the subject of a 1,437 word bulletin from the Wisconsin Department of Revenue, which addresses the question of whether restaurants, supermarkets and bakeries should collect sales tax on the sale of ice cream cakes. As with all the best tax policy questions, the answer is, it depends.

The memo goes through ten different examples of cake sales, of which seven are taxable and three are not. Here’s an excerpt:

Example 4 – Same as Example 1, except that Restaurant A does not make the ice cream cake. However, after purchasing the ice cream cake from its supplier, Restaurant A decorates the ice cream cake according to instructions received from its customer. It adds designs and words made from frosting and edible gels. Since the retailer mixed or combined two or more foods or food ingredients (i.e., the ice cream cake and the frosting and edible gels) for sale as a single item, the ice cream cake sold by the retailer is "prepared food" and subject to Wisconsin sales or use tax.

The key issue here is that “prepared foods” are taxable, but foods that are simply bought and resold are generally not prepared foods, and baked goods are not “prepared” even if you bake them yourself, though they may be prepared if you don’t bake them but do decorate them.

If I understand the memo correctly, the rules are as follows. Ice cream cake is a taxable prepared food if you make it yourself, but not if you’re just reselling the cake. However, if the cake contains real cake layers, it’s a non-taxable baked good no matter who made it, so long as the amount of cake exceeds the amount of ice cream. (No, really: Example 9 is a cake with two cake layers and one ice cream layer, which is tax exempt; Example 10 is a cake with one cake layer and two ice cream layers, which is taxable because it doesn’t contain enough cake.) If you buy a cake from someone and then decorate it yourself, it’s taxable no matter how much flour it contains. And if you slice any cake and serve it in individual servings, or if the cake consists of fewer than four servings, or if the customer is going to eat the cake on the premises at your business, or if you give the customer utensils with his cake, it’s a taxable prepared food, though you may be exempt from that last one if the sale of prepared foods is incidental to your business.

Of course, I am open to the possibility that I have missed some nuances on the memo. If I were actually about to open an ice cream cake business in Wisconsin, I’d do more research.

There’s been some controversy in the last few years about whether online retailers should have to comply with sales tax in all the states they sell into. My view is generally that they should have to, but that states should have to administer their sales taxes in such a way that out-of-state compliance is not unduly burdensome. This cake memo is a great example of the morass that is involved in complying with a variety of sales taxes across the country—and how governments do not seem very interested in making compliance easy for retailers.

