Planet Money - How the burrito became a sandwich (Classic)

Episode Date: May 18, 2022

A sandwich is generally defined as something delicious slapped between two slices of bread. New York tax code would beg to differ. | Subscribe to our weekly newsletter here.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. Sometimes it's the most mundane distinctions that give us a glimpse into how the systems around us work. And today's show is one of our favorite examples of that. It originally ran in 2014. In New York State, there is a sales tax on sandwiches. It's in the law, If you buy a sandwich in a restaurant or a grocery store, in most places in the state, you pay close to 8% tax. Now, that's simple enough, right? We all know what a sandwich is. It's something delicious slapped

between two slices of bread. But when it comes to taxes, nothing is simple. I have here New York State Tax Bulletin ST-835. It's entitled, What is Considered a Sandwich? This document is a couple pages long, and it goes into excruciating detail on sandwiches, both hot and cold. For instance, you don't have to have two slices of bread. A sandwich for tax purposes is defined as, and I'm quoting here, made on bread or on bagels, on rolls, in pitas, in wraps, or otherwise, and regardless of the filling or the number of layers. There's this whole list of examples. A buttered bagel? Officially, that's a sandwich. A hot dog? Sandwich. A taco? Not a sandwich. But a burrito? According to the state of New York, a burrito is supposed to be a sandwich. A burrito is legally a sandwich.

Hello and welcome to Planet Money. I'm Steve Henn and I'm joined by my friend and colleague, Elise Hu, the NPR reporter who first drew our attention to New York's bizarre definition of a burrito. Hey, Elise. What an introduction. Hi, Steve. Hey. So today on the show, we consider the sandwich and all other takeout food as a parable of taxation, because it seems like every tax ends up like this sandwich tax. Every tax becomes a complicated list of definitions and exemptions and ultimately confusion. A tax has a very simple purpose. You know, the government sees money flowing back and forth in the economy somewhere. It sees this money piling up. It sees revenue. And it decides it wants a piece of it, a cut.

So it passes a law. And that law usually starts out as something really simple, something basic, something that you can express in a single sentence. Right. So when it comes to taxing food, the story actually begins back in the 1930s. It was the Depression, as you probably remember, and states needed money. So they came up with a sales tax, which was a tax on everything people bought. It applied to grocery stores and restaurants. Simple. And then just two years later, there was this moment, and this moment always comes with a new tax, where someone stood up and said, but wait, it's the but wait moment. Someone thinks of one exemption.

In the case of food, it sounded obvious, actually, because we were in the middle of the depression. Why make it more expensive for people to buy things like bread and milk? So that simple law, right? We're just going to tax all retail sales, tax all food. At that point, it gets more complicated. States, including California, said, retail sales, tax all food. At that point, it gets more complicated. States, including California, said, OK, no tax on groceries, just food and restaurants. Bill Leonard's now retired, but he helped shape California's tax policy for years. The original theory was that only more wealthy people could afford to eat out in restaurants, and therefore they could afford to pay a sales tax on top of their meal.

But once you carve out an exemption in tax law, once somebody says, but wait, that's an opening. There's more but waits to come. Somebody who sells food will start finding exceptions. Other folks will find exceptions. The arguments start and they essentially never stop. The next thing you know, it takes several law books and someone with 30 years of tax experience in California to answer a simple question. So if I bought cold pastrami from a grocery store, would that be taxed? No, that's tax exempt. Hot pastrami? That's a prepared food and you'd pay sales tax on the value of it. And what about if the cold pastrami was in a sandwich? If it was a cold pastrami sandwich that you took out, that is, you supposedly ate at home,

it would not be taxable. If you ate it inside, that is, you sat down as if it were a restaurant, it would be taxable. What about cold pastrami laid out on a deli tray? What about cold pastrami laid out on a deli tray? It depends, to quote someone. It depends as to whether that is served with hot prepared food, like a hot fondue, and that you're paying for it right there, or whether you're just buying it off of the tray. Pastrami with fondue? Yeah, I have no idea. But apparently in California, cold pastrami served with fondue is subject to sales tax. But I wasn't done yet. I was determined to stump this guy. What if it was a hot pastrami sandwich that I heated up in a microwave in the and ate somewhere else.

That, yeah, I'm going to have to go check the books. I believe that is taxable under California law. Ha, wrong. According to page four of publication 22 from the California Board of Equalization, myself heated pastrami, tax exempt. I got him. I kind of think of this as the 7-11 rule. Or I would say the pastrami proves what we're going to call the first principle of taxation. Taxes inevitably get more complicated. There are always exemptions to the exemptions. And I'm going to posit the second principle of taxation. The more complicated the tax, the harder people will work to avoid it. In our takeout food parable, we were amazed by all the clever ways people have tried to exploit the difference between grocery stores and restaurants. So take that law we mentioned at the beginning, the sandwich slash burrito regulations of New York State.

We first heard about these New York State documents defining a sandwich from Noah Veltman. He's a computer programmer for WNYC in New York. He got so curious about the story of how a burrito legally became a sandwich in New York that he filed a freedom of information request to find out more about how the sandwich law is enforced. And reading through those documents was kind of amazing. You see people selling cold tomato pie and arguing it should be tax-free. There are juice bars arguing about whether aloe vera juice is a food or a nutritional supplement. We also saw a bunch of companies trying to avoid the sandwich tax. For instance, there was a home food delivery service that had wraps that were subject to this tax. So they came up with a clever way to avoid it.

Sell the wraps unassembled. Hey, it's not a wrap. It's a tortilla and some vegetables and some chicken. It's groceries. They sent a letter to the state saying that they were selling their wraps unassembled. Like, here's your tortilla. Stuff it yourself. The state ruled, OK, here's your tortilla, stuff it yourself. The state ruled, okay, you got us, no tax. And then there was Bob Mathias. He had this little pizza shop in Lockport, New York, which you'd normally think of as a restaurant, right? Taxed up the wazoo.

But Bob was clever. He noticed that bakeries in his neighborhood were selling things that looked a lot like pizza slices. In fact, they were selling pizza slices. I'd go into a bakery, and they didn't have to charge tax on the exact same thing that we were doing. In New York, bakeries were tax-exempt because, you know, bread's a necessity, like groceries. So Bob changed the name of his company from the Pizza Oven to the Pizza Oven Baking Company.

He put the word baking right in the name. And just like that, a bakery. He could take pizza, warm from the oven, sell it to a customer tax-free. But if he tried to reheat the slice or put in a heating lamp, he'd owe the state money. If you tried to keep the slices warm, then you were keeping it in a ready-to-eat state, and that was a taxable event then. Bob Mathias is sort of a tax hero to pizzerias in New York. Pizza places that want to make an issue out of this now don't have to pay sales tax on slices, as long as their customers don't mind lukewarm pizza. So once again, what we have here, this is not just about takeout food.

This actually happens with every tax law. Taxes will inevitably get more complicated and Byzantine, and taxpayers, they get creative. And Steve, you came up with the third fundamental principle of taxation. Yeah, I did. So the third fundamental principle of taxation is when taxes get complicated enough, the only people who are both motivated and capable of following the ins and outs of tax policy are professionals. Heavily taxed industries employ entire armies of lawyers and lobbyists searching for that next opportunity to say, but wait, shouldn't we change just this one little

thing? Yeah, you see this with telecommunications. You see this in banking. Anytime there's rulemaking or Congress goes to write banking reform laws, for example, the main people who show up, of course, are the bankers, the lobbyists for the bankers, right? They're the only ones who actually understand what the hell is going on. And in the world of food taxes, you see the same exact thing. Famous case, the California cake versus candy fight of 1971. Now, if you were in this industry, you'd know what I was talking about. David Doerr has been a tax policy analyst in California since the 50s. He's watched every tax fight in the state unfold. And David says in the early 70s, the candy lobby came up to the state capitol in Sacramento and made this case that they were being discriminated against.

At the time, candy was taxed, but other desserts, like cake, cake was tax-free. And the candy people, they had this exhibit of desserts showing which ones were taxable and which ones were tax-exempt. The exhibit was passed around to the committee members, and they ate the exhibit. So this board wasn't just pictures of the candy. There were actual things. So it made an impact. It definitely made an impact.

So they basically passed around desserts to the committee deciding whether or not to tax desserts. Right. See? So what started out 80 years ago to help folks during the Depression as the simple, noble tax exemption for grocery stores ends up benefiting big candy and big cake. And this is why economists are always saying, if you're going to tax, for God's sake, make the tax simple. Loopholes just beget more loopholes. And all these loopholes are just incentives for companies to hire more lobbyists and tax lawyers and fancy accountants, none of whom actually make anything. I mean, the lobbyists for the candy people don't make candy more delicious.

True, but sometimes all these tax shenanigans, sometimes by accident, may actually contribute to making the world a more delicious place. actually contribute to making the world a more delicious place. After the break, one cherished institution that might not have existed without these shenanigans, the drive-thru. Could I get a double-double animal stylestyle medium-rare, well-done fries, and a large Diet Coke? In-N-Out burger. Oh, that sounds so good. Here you go, sir.

Thanks a lot. Thank you. So, I'm very passionate about drive-thrus. The drive-thru flourished because it's convenient, and it probably got a little boost in the early days because of the kinds of tax loopholes we've actually been talking about. Oh, it definitely did. But let me take you back for a second to the moment when the drive-thru was invented. It's 1948 in California, and Harry and Esther Snyder wanted to open a burger joint. It would become In-N-Out, but they just had this tiny triangle of land in L.A. It was so small that

their building was 10 feet by 10 feet. Only two people could fit inside. They had no tables, no chairs, no space to park. But Harry invented this little nifty two-way speaker to take orders. Stacey Perman wrote the book on the business, In and Out. When they started, people were really confused. They didn't know what to do. And they actually had to educate people how to use the speakerphone. And they had two young sons at the time. I think they were 10 and 11. And sometimes they would send their sons out there to, you know, train people how to use the speakerphone. This was likely the world's first drive-thru. And even though people were confused by it, there was a financial benefit to that speakerphone. At burger places where you sat down, you had to pay taxes. At

drive-ins and car hops where you ate in the car, you had to pay taxes. But at In-N-Out? On the drive-through part of their business, did In-N-Out have to pay taxes? No. No. So I can't really prove that tax law inspired the drive-through, but it certainly helped. The founders of In-N-Out Burger, they were fastidious people. They kept track of everything. David Doerr, the tax expert, says In-N-Out and all drive-thrus had this competitive advantage in the 50s and 60s. So we asked the company if this was the real reason for the drive-thru. And In-N-Out spokesman says he doubts that Harry and Esther

devoted much time to thinking about state sales tax. Whatever the truth of the matter, in 1971, California changed the law again and started taxing drive-thrus. Actually, it was how the state made up for the lost revenue when it stopped taxing candy. So now my double-double medium-rare animal-style burger, my well-done french fries, my large Coke, they're no longer tax-free. All right. So as hungry as I am, I'm as interested in the sales tax. That food was seven bucks. The sales tax? There it is. Sixty-one cents. Now, if I had bought an ice cream, it would have been another story. The ice cream would have been tax-free.

So how do you fix this mess? Many economists say you need to go back to where we started 70 years ago. Back to something simple. Maybe just a sales tax on all food. But wait, what's food again? Is chewing gum food? Crap. That was Steve Henn and Elise Hu from 2014.

It is listener question time here at Planet Money, and we want to hear from you. Do you have some money-related conundrum that you've seen in your city or community that you want answered? Or are you facing a puzzle in your life that you think economics might be able to solve? If so, send us a voice memo with your question at planetmoney at npr.org. You might end up on the podcast. We really do listen to every single one. That's planetmoney at npr.org. We're also on TikTok, Facebook, Twitter, Instagram, at planetmoney. Thanks to Noah Veltman for turning us on to the crazy tax policies of New York State. Today's rerun was produced by Dave Blanchard. It was mastered by Robert Rodriguez. The original episode was produced by Thea Bennett. Planet Money's executive producer

is Alex Goldmark. I'm Alexey Horowitz-Gazi. This is NPR. Thanks for listening.