Find the last receipt you received when ordering food or drinks from a North Carolina restaurant.  How much tax did you pay?  What types of taxes did you pay?

Even if the receipt did not break out each type of applicable tax, you likely paid a minimum of two types of taxes: (1) “state” sales tax at a rate of 4.75% of the price of your meal, and (2) “local” sales taxes at a combined rate that ranges from 2.0% to 2.75% of the price of your meal, depending on the jurisdiction in which you made the purchase.  If you ordered food or drinks at a restaurant in Wake, Dare, Cumberland, or Mecklenburg County or in the Town of Hillsborough, that restaurant likely charged another tax at a rate of 1.0% of the price of your meal.  Why?  Each of these jurisdictions levies a “meals” tax—a locally imposed sales tax on “prepared food”—that applies in addition to other state and local sales taxes.

This blog post explains which state and local sales taxes apply to the purchase of prepared food in North Carolina, how these state and local sales taxes differ from meals taxes, why only a handful of North Carolina’s counties and municipalities have levied meals taxes, and how these jurisdictions collect and use the proceeds of these taxes.

Sales Taxes and the Sale of “Prepared Food” in North Carolina

Paying sales tax when purchasing “prepared food” from a vendor—whether the vendor is a restaurant, roadside hot dog stand, or a mobile food truck—is not a foreign concept to North Carolinians.  State sales taxes have applied to these types of purchases since the General Assembly’s 1933 adoption of the Emergency Revenue Act.  See N.C. Pub. Laws 1933, c. 445.  Local sales taxes have applied to these purchases since the legislature authorized counties to levy local sales taxes in 1971.  See S.L. 1971-77.  But paying an additional meals tax—a locally imposed sales tax levied solely upon the sale of “prepared food”—may seem odd in most parts of the state.

            “Prepared Food” vs. “Food”

Understanding meals tax requires a basic understanding of how North Carolina’s sales tax code distinguishes “food” from “prepared food.”  Compare G.S. 105-164.3(89) (defining “food”) with G.S. 105-164.3(179) (defining “prepared food”).  State law defines the former term to include most types of food that would be sold in a traditional grocery store or food market (e.g., produce, meat, cereal, or flour), while it defines the latter term to include most types of food that would be sold in a traditional restaurant or food truck (e.g., soup, hamburgers, cakes, burritos, soft drinks, or tea).

Although sales of “prepared food” are generally subject to all state and local sales taxes, sales of “food” are generally (1) exempt from state sales tax, and (2) subject to the three local sales taxes that all counties have adopted.  See G.S. 105-164.13B(a) (exempting “food” from state sales tax); G.S. 105-467(a)(5), -483, and -498  (respectively subjecting “food” to Art. 39, 40, and 42 sales taxes).[1]

            State and Local Sales Taxes Apply to the Sale of “Prepared Food”

At present, a retailer that makes a taxable sale of “prepared food”[2] must collect the following sales taxes from their customers:

• statewide sales tax, at a rate of 4.75% (S. 105-164.4(a)(1)a; G.S. 105-164.13B(a)(4)); and
• applicable local sales taxes, at a combined rate ranging from 2.0% to 2.75%, depending on the jurisdiction in which the “prepared food” is delivered;[3]

All counties impose local sales taxes upon the sale of “prepared food” at a combined rate of 2.0%.  See G.S. 105-467(a)(1) (Article 39 tax at a rate of 1%); G.S. 105-483 (Article 40 tax at a rate of 0.5%); G.S. 105-498 (Article 42 tax at a rate of 0.5%).  Forty-seven counties impose an additional local sales tax at a rate of 0.25%.  See G.S. 105-538 (Art. 46).  Four counties—Wake, Orange, Durham, and Mecklenburg—impose an additional local sales tax at rate of 0.5% to fund public transportation.  See G.S. 105-507.2 (Mecklenburg) and G.S. 105-509.1 (Wake, Orange, and Durham).

Where levied, meals taxes apply in addition to these state and local taxes.

“Meals” Taxes Also Apply to the Sale of “Prepared Food” in Five Jurisdictions.  Why?

In some North Carolina counties and municipalities, a retailer that sells “prepared food” must collect a separate tax—a “meals” tax—that applies (1) in addition to other generally applicable state and local sales taxes, and (2) solely to the sale of “prepared food.”  The General Assembly has never authorized all of North Carolina’s counties and municipalities to levy a meals tax, but through the adoption of local acts, it has authorized a small number of jurisdictions to levy a tax upon the sale of “prepared food.”

At present, only five jurisdictions—the counties of Wake, Dare, Cumberland, Mecklenburg, and the Town of Hillsborough—have authority to impose a meals tax under a local act.  Among other things, these local acts outline (1) the authority of each jurisdiction to levy a tax, (2) the transactions to which a tax can apply, (3) how the unit must collect and administer the tax, and (4) the permissible uses of the tax proceeds.

            Authority to Impose “Meals” Tax

In drafting a local act, the General Assembly may dictate the terms upon which a county or municipality can impose a “meals” tax.  It can, but is not required to, mandate that a tax receive voter approval prior to its levy.

Two local acts—those for the City of Monroe (2005) and Durham County (2008)—made the adoption of a “meals” tax contingent upon voter approval in a referendum.  In each jurisdiction, voters rejected the imposition of a tax.  While these acts remain “on the books,” they have no practical effect.

The remaining five local acts—those for the counties of Wake, Dare, Cumberland, and Mecklenburg, and the Town of Hillsborough—did not require voters to approve a “meals” tax.  In each case, the governing boards of those jurisdictions levied a tax without voter approval.  The 1993 local act authorizing Cumberland County to impose a “meals” tax permitted it to hold a voter referendum to approve the tax, but also allowed the county’s board of commissioners to impose a tax without voter approval.  The county did not submit the tax to a vote.

The table below reflects each jurisdiction that the General Assembly has authorized to levy a meals tax under a local act.  The local act applicable to the City of Charlotte and Mecklenburg County permitted the City to impose a “meals” tax only if Mecklenburg County did not first impose a tax at a rate of 1.0%.  See S.L. 1989-821, § 7(b).  Because the County adopted a tax at a rate of 1.0%, the City has not adopted a separate “meals” tax.

         Applicability of “Meals” Tax: Scope, Exemptions, and Refunds

                   Scope of the Tax

Each local act extends a tax—at a rate of 1.0%—to “the sales price of prepared food. . . sold within the [relevant jurisdiction] at retail for consumption on or off the premises by any retailer . . . that is subject to sales tax . . . under G.S. 105-164.4(a)(1).”[4]  In other words, the tax applies when a retailer must collect state sales tax upon the sale of “prepared food.”

Online food delivery services that qualify as “marketplace facilitators” under state law (e.g., UberEats, GrubHub, or DoorDash) also must collect and remit the proceeds of applicable “meals” tax to each taxing jurisdiction, just as they must collect and remit state and local sales taxes to the North Carolina Department of Revenue (NCDOR) when they facilitate the sale of “prepared food.”  See G.S. 153A-154.1(b); G.S. 160A-214.1(b). See also G.S. 105-164.3(133) (defining “marketplace facilitator”); G.S. 105-164.4J (imposing tax upon “marketplace facilitators”).

This table reflects the combined rates of all state and local taxes on “prepared food” in each jurisdiction that has adopted a meals tax.

                  Exemptions from Tax

Not all sales of “prepared food” are subject to the meals tax.  Each authorizing local act contains six nearly identical exemptions to the “meals” tax:

• Prepared food and beverages served to residents in boarding houses and sold together on a periodic basis with rental of a sleeping room or lodging.
• Retail sales exempt from state sales tax under S. 105-164.13.
• Retail sales through or by means of vending machines.
• Prepared food and beverages served by a retailer subject to the local occupancy tax if the charge for the meals or prepared food or beverages is included in a single, nonitemized sales price together with the charge for rental of a room, lodging, or accommodation furnished by the retailer.
• Prepared food and beverages furnished without charge by an employer to an employee.
• Retail sales by grocers or by grocery sections of supermarkets or other diversified retail establishments, other than sales of prepared food . . . in the delicatessen or similar department of the grocer or grocery section.[5]

                 Refunds of the Tax

Except for Mecklenburg County, each authorizing local act permits nonprofit organizations and governmental entities eligible for a refund of state and local sales and use taxes under G.S. 105-164.14 to also obtain an annual refund of “meals” taxes paid.[6]  For example, a private nonprofit organization that purchases food from a local restaurant in Wake County for a fundraising event would be eligible to apply for an annual refund of “meals” taxes paid, while a private organization located in Mecklenburg County would not.  None of the jurisdictions that permit refunds maintain information about how to obtain those refunds on their websites—but given the relatively low rate of tax (1.0% of the sales price), any refund to a nonprofit organization or governmental entity would be small.

          Collection and Administration of Meals Taxes

NCDOR collects and administers state and local sales taxes, but it does not collect “meals” taxes.  Instead, each municipality and county that has levied a meals tax is responsible for the collection and administration of these taxes.[7]  Taxes are payable in monthly installments, and retailers also must prepare and submit returns to the taxing jurisdictions.

Prior to October 2001, the penalties for failure to pay applicable meals taxes differed between each jurisdiction.  See, e.g., S.L. 1991-177, § 1, amending S.L. 1985-489, § 4(e) (imposing penalty of $10.00 per day for failure to file return with Dare County and penalty of 5% of the amount of tax due for failure to pay tax owed to Dare County).  The General Assembly made the penalties for failure to pay “meals” tax uniform across all jurisdictions in October 2001.  See S.L. 2001-264 (enacting G.S. 153A-154.1 (county penalties) and G.S. 160A-214.1 (municipal penalties)).  Those who are interested in these penalties should review my colleague Chris McLaughlin’s 2018 Property Tax Bulletin: Beyond the Property Tax: Collecting Other Taxes and Fees.

          Use of Meals Tax Proceeds

The local acts that authorize the imposition of meals taxes restrict the purposes for which a levying unit may spend the proceeds of these taxes.  They also dictate whether and how a levying unit may repeal a meals tax.  The General Assembly could permit a levying local government to use the proceeds for any public purpose in which the unit is authorized to engage—but in each case to date, the legislature has restricted the use of these proceeds to specific purposes.  Almost all permissible uses relate to the promotion of tourism in some way.

A detailed table accessible here summarizes the purposes for which each jurisdiction must use the proceeds of “meals” taxes and the entities, if any, to which each jurisdiction must distribute the net proceeds of the taxes.

           Sunset or Repeal of “Meals” Taxes

Two of the “meals” taxes currently in effect—those in Cumberland and Mecklenburg—have a “sunset” date, meaning that each levying county will lose the legal authority to levy a tax after a date specified in the authorizing local act.

The Cumberland County Board of Commissioners must repeal that county’s “meals” tax “when the new or expanded arena facilities for which the tax was imposed are constructed and any debt for those facilities has been paid.”  S.L. 1993-413, § 11.  A 2020 bill introduced, but not passed, in the General Assembly would have extended this sunset date to ten years following this date.  See H1177 (2019).

The Mecklenburg County meals tax will be repealed as of the latest of (1) July 1 following the final satisfaction of debt issued by or on behalf of the City of Charlotte prior to July 1, 2001 to finance the Charlotte Convention Center or any related hotel or parking facility; (2) July 1 following the final satisfaction of debt issued by or on behalf of to finance a construction contract for a 100,000 square foot expansion of the existing convention center for which a design contract was awarded prior to January 1, 2011, and (3) July 1, 2031.

The local acts for each other jurisdiction (Hillsborough, Dare, and Wake) do not include a sunset date, but permit the governing boards of each entity to repeal the tax.

Recent Attempts in the General Assembly to Authorize Imposition of a Meals Tax

Because the General Assembly has not authorized all counties and municipalities to impose a meals tax in general law, each of these entities must seek authorization—in a local act—to levy a tax upon the sale of “prepared food.”  The introduction of an authorizing bill, much less the adoption of an act, is a rare occurrence.

Since 2008, state legislators have only introduced seven bills to authorize new meals taxes in: (1) municipalities located in Brunswick County (H17, 2019); (2) a special taxing district in Richmond County encompassing the Rockingham Speedway (H316, 2019); (3) the City of Henderson (H458, 2019); (4) the Town of Scotland Neck (H260, 2019); (5) Brunswick County (H398, 2017); (6) Caswell County (S238, 2017); and (7) the City of Brevard (S876 / H1249, 2013).  The General Assembly did not pass any of these proposals.

The City of Southport’s governing board adopted a resolution in January 2023 requesting that the General Assembly authorizing the City to impose a meals tax at a rate of 1.0% for infrastructure improvements.  As of this writing, no authorizing legislation has been introduced.

_________________________________________________________________________________________________________________________________________________________________________________

[1] On January 26, 2023, a state legislator introduced a bill (H15) directing the Revenue Laws Study Committee to “study the costs and benefits reasonably anticipated from excluding groceries from local sales taxes[.]”  As of this writing, the bill has been referred to the N.C. House Committee on Finance.

[2] State law exempts certain sales of prepared food from state and local sales taxes, including sales of prepared food at public schools during the regular school day. See, e.g., G.S. 105-164.13(26) (exempting prepared food sold within a public school building during the regular school day); G.S. 105-164.13(26a) (exempting prepared food sold not for profit by a public school cafeteria to a child care center that participates in the Child and Adult Care Food Program of the Department of Health and Human Services); G.S. 105-164.13(26b) (exempting prepared food sold not for profit for or at an event that is sponsored by a public elementary or secondary school when the net proceeds of sales will be given or contributed to the school or to a nonprofit charitable organization that serves as a conduit for net proceeds provided to the school).

[3] The general “sourcing rules” for North Carolina sales taxes, which I have previously discussed here, apply when determining which local sales taxes apply to a particular sale of “prepared food.”  See NCDOR, 2023 Sales and Use Tax Bulletin § 32-6 (Jan. 1, 2023).  A sale is generally sourced to the location where the purchaser, or the individual or entity for whom the purchaser made the purchaser, receives the prepared food.  For example, the sale of prepared food that was prepared in County A but delivered to a purchaser’s house in County B would be sourced to County B.

[4] See S.L. 1993-449, § 1(c), as amended by S.L. 2001-347, § 2.21 (Hillsborough); S.L. 1993-413, § 1(a), as amended by S.L. 2001-347, § 2.19 (Cumberland); S.L. 1991-177, § 1, amending S.L. 1985-489, § 4(b) (Dare); S.L. 1989-821, § 1, amending S.L. 1983-901, § 7(c) (Mecklenburg); S.L. 1991-594, § 6 (Wake).

[5] See S.L. 1993-449, § 1(c) (Hillsborough); S.L. 1993-413, § 3 (Cumberland); S.L. 1991-177, § 1, amending S.L. 1985-489, § 4(b) (Dare); S.L. 1989-821, § 1, amending S.L. 1983-901, § 7(c) (Mecklenburg); S.L. 1991-594, § 6 (Wake).  Cumberland County’s local act also exempts “[p]repared food and beverages served on federal military reservations.”  See S.L. 1993-413, § 3(7).

[6] See S.L. 1993-449, § 6 (Hillsborough); S.L. 1993-413, § 3 (Cumberland); S.L. 1991-177, § 1, amending S.L. 1985-489, § 4(e) (Dare); S.L. 1995-458, §5, amending S.L. 1991-594, § 6(b) (Wake).  In a phone call, Mecklenburg County’s Office of Tax Collector confirmed that the County does not issue refunds of meals taxes to governmental entities or nonprofit organizations.

[7] See S.L. 1993-449, § 1(d), (e) (Hillsborough); S.L. 1993-413, §§ 4-5 (Cumberland); S.L. 1991-177, § 1, amending S.L. 1985-489, § 4(b) (Dare); S.L. 1989-821, § 1, amending S.L. 1983-901, § 7(c) (Mecklenburg); S.L. 1991-594, § 8 (Wake).