Not lovin' it: McDonald's sues over Happy Meal toy tax tally

It's the fast food equivalent of a Zen riddle: Is a McDonald's Happy Meal toy worth as much in a Happy Meal box as on its own?

No, according to a petition filed by McDonald's Restaurants of Canada in B.C. Supreme Court last week.

The fast food giant is appealing a B.C. Ministry of Finance tax assessment that concluded the company's 23 B.C. restaurants had underpaid provincial tax on three years' worth of Happy Meal toys sales.

Single versus group sales

The assessment covers the period from July 1, 2013 to June 30, 2016.

A Happy Meal consists of items sold "together as a meal typically comprised of an entree, a side and a drink for a single group price," which is cheaper than the amount the customer would pay if the same items were bought individually.

It also comes with a toy.

According to the court documents, "a small percentage of McDonald's customers wanted to purchase toys in an individual transaction."

The company didn't promote or advertise the single sales, nor did it display the price, but "if a customer asked the employee at the customer order counter or at the drive-thru about purchasing a toy in an individual transaction, McDonald's accommodated the request."

While provincial sales tax is not charged on food, toys are considered taxable tangible personal property under the Provincial Sales Tax Act.

And that includes toys sold alongside food in a Happy Meal.

The petition claims the province calculated the fair market value of Happy Meal toys based on the same price McDonald's charged customers who wanted to buy a single toy without buying a Happy Meal.

By contrast, McDonald's says the company set its fair market value for toys sold as part of a Happy Meal to include the 43 to 50 per cent discount customers got by buying all their individual meal items as a group.

700 Happy Meals a week

Although the exact amount of the penalty is not specified in the court documents, an affidavit from McDonald's Western Canada regional controller estimates that McDonald's sells 700 Happy Meals per week at each restaurant location.

That would amount to more than 2,511,000 Happy Meals around the province for the time period in question.

The documents say the price of a single toy during the time period in question ranged from $1.67 to $2.12.

But the regional controller said McDonald's determined the price of toys sold as part of Happy Meals as ranging from $0.95 to $1.11 — "equal to the price of a toy sold as an individual item less a 44 per cent discount."

The company argues that the Ministry of Finance was wrong to assume that the fair market value of a toy sold as part of a "group transaction" was the same as one sold in an individual transaction.

Failing that, McDonald's claims it should not be penalized because the company acted with due diligence using the services of "a team of competent professional employees."

The Ministry of Finance has not yet filed a response. None of the allegations has been proven in court.