CITY COUNCIL AGENDA ITEM
ACTION REQUESTED:
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Pass the ordinance amending Section 3-1-9 of the Naperville Municipal Code - Food and Beverage Tax
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DEPARTMENT: Finance Department
SUBMITTED BY: Raymond Munch, Director of Finance
BOARD/COMMISSION REVIEW:
N/A
BACKGROUND:
In April 2004, the City exercised its home rule authority to establish a 1% Food & Beverage Tax, which is applied to the purchase of prepared food and beverages sold in restaurants and other establishments throughout Naperville. The City established this tax to fund what is now known as the Special Events and Community Arts (SECA) Grant Program. The SECA Grant Program provides funding for City services to support social and artistic special events, as well as provide supplemental funding to entities that offer cultural experiences for residents and visitors of Naperville. Over time, the Food & Beverage Tax revenue has grown to support other needs, including public safety pensions, social service grants, supplemental support for Naper Settlement and abating property taxes for debt service.
Recent changes in the food and beverage industry have created inequity in the application of the Food & Beverage Tax. Specifically, an industry trend of drive-thru and mobile order pickup establishments has emerged in recent years in response to changing consumer behaviors. These types of establishments are not subject to the current definition of Retail Food Facility and are therefore not subject to the tax. A review of this issue brought to light other inconsistencies that arise from that definition and the resulting application of the Food & Beverage Tax within the community.
The ordinance presented here seeks to amend the definition of Retail Food Facility to establish clear and consistent application of the tax across the food and beverage industry.
The first reading was held on October 21, 2025. The City Council directed staff to add an exemption for temporary mobile vending and update the Retail Food Facility definition to include mobile food/beverage vending and ice cream trucks.
DISCUSSION:
The drive-thru concept has been common among the quick-serve restaurant industry for many years. That model historically consisted of drive-thru windows attached to restaurants with on-premises dining rooms. However, industry trends have shifted in recent years, particularly after the global pandemic of 2020. Many quick-serve restaurant brands have moved toward drive-thru and mobile order pickup only concepts. These meet the demands of the modern consumer at a lower cost to the business due to their smaller space requirements and lower labor costs. One industry report noted that over 60% of quick service restaurant orders now come through drive-thru, online and mobile app ordering platforms, and the trend is expected to continue rising.
Since 2023, four drive-thru-only concepts have been approved in Naperville, with a fifth pending approval. Those include:
• Dunkin Go at Rt. 59 & Diehl Rd. (Ord. 23-066; 5/16/2023)
• Scooter’s Coffee at Rt. 59 & Glacier Park Dr. (Ord. 23-143; 11/7/2023)
• 7 Brew Coffee at Ogden Ave. & Iroquois Ave. (Ord. 24-025; 4/24/2024)
• Chick-fil-A at Rt. 59 & Lacrosse Ln. (Ord. 24-124; 11/19/2024)
• Dutch Bros. Coffee at Naper Blvd. & 75th St. (pending)
Under the current definition, most of these locations are not required to collect and remit the Food & Beverage Tax based on the definition of Retail Food Facility. That definition reads as follows:
Retail Food Facility:
1. Includes any place at which food items or beverages are served and/or prepared for immediate consumption by a business which provides for on premises consumption of said food or beverages, including, but not limited to, those establishments commonly called an inn, restaurant, eating place, drive-in restaurant, bakery, buffet, cafeteria, cafe, lunch counter, fast food outlet, catering service, coffee shop, diner, sandwich shop, soda fountain, tavern, bar, cocktail lounge, soft drink parlor, ice cream parlor, tearoom, delicatessen, movie theater, hotel, motel or club. Where a facility is only partially intended to permit on site consumption of food (such as a grocery store with a prepared food service area), only that portion of the facility selling prepared food shall be considered a retail food facility.
2. Includes all food and beverage sales by vendors at Ribfest, Last Fling, and Naper Days as well as such other communitywide festivals for which any permit is required and approved by Council and a condition is included therein imposing this tax.
As emphasized by the underlined language, the definition specifically applies to businesses that provide for on-premises consumption. This has been interpreted by staff to mean permanent on-premises seating. That said, if a business has on-premises seating, the Food & Beverage Tax is applicable to all sales regardless of whether the order is placed for dine-in, carryout, drive-thru or delivery.
While the emergence of drive-thru-only concepts brought this inequity to light, there are similar inequities created through this narrow definition. The following is another example:
• Business A is a full-service pizza restaurant offering dine-in, carryout and delivery. Because of the on-premises dining, the Food & Beverage Tax applies to all sales. Business B is a pizza restaurant offering carryout and delivery only. Because there is no on-premises dining, the Food & Beverage Tax does not apply to any sales.
In the example above, both businesses generate significant sales from carryout and delivery; however, the tax is only applicable to Business A. This provides Business B an advantage in that the final cost of a similar delivery order is 1% less due to the exclusion of the tax.
One of the key principles of any revenue policy is equity, or fairness. More specifically, horizontal equity is the principle that the distribution of the tax burden should be distributed among persons or businesses in comparable circumstances.
Staff believes the current application of the Food & Beverage Tax conflicts with this principle and recommends amending the definition of Retail Food Facility to remove language that requires on-premises seating.
In addition, staff recommends several other minor changes in line with the goal of creating equity throughout the ordinance.
• Removal of temporary food and beverage vendors from the definition of Retail Food Facility. The application of the Food & Beverage Tax for community festivals is inconsistent and administratively burdensome. At present, the only community festival requiring remittance of the Food & Beverage Tax is the Last Fling. Over the past two years, the registration and collection of taxes from temporary vendors has been challenging. In 2024, the Last Fling netted less than $1,500 in Food & Beverage Tax revenue.
• Removing confectionery stores from the list of exemptions. Confectionery stores produce a wide variety of foods prepared for immediate consumption, including candies, cookies and ice cream. The business type is more closely aligned with business included in the definition of Retail Food Facility, such as ice cream shops and bakeries, as opposed to other exempt businesses like school and hospital cafeterias, care centers and not-for-profit entities.
• Updates were made throughout to capitalize defined terms within the code.
Additional Changes from First Reading
• “Mobile food or beverage or ice cream vehicles” were added to the definition of Retail Food Facility.
• Section 3.2 adds an exemption for temporary, mobile vendors, which are defined as those operating for less than 10 calendar days within a calendar year.
The effective date for these changes is recommended for January 1, 2026. The Finance Department will communicate the changes with affected businesses upon approval.
FISCAL IMPACT:
Staff analyzed state sales tax data for businesses that could be easily identified as affected by this amendment. Based on that analysis, staff estimates the change could result in approximately $200,000 in additional Food & Beverage Tax revenue beyond the $6.8 million in projected revenue for 2025.