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A tax loophole for bagels: An NYC company added another, inner bagel hole

AILSA CHANG, HOST:

It is tax day. But, of course, we don't just pay taxes once a year, right? There's sales tax. There's also the sandwich tax. That's a tax people in some states, like California, Massachusetts and New York, pay for prepared foods. And one company found a tax loophole for a New York delicacy. NPR's Stacey Vanek Smith reports.

STACEY VANEK SMITH, BYLINE: Here in New York, a lot of things are legally considered sandwiches. And if you buy them, you have to pay a sandwich tax. A wrap? Technically a sandwich. A hot dog? That's a sandwich. A burrito? Somehow also a sandwich. A bagel? If you slice it and throw some cream cheese on it, it's a sandwich.

RYAN KLEPPER: Sandwich tax - 8.875%.

VANEK SMITH: Ryan Klepper is the director of restaurant operations for H&H Bagels. I met him at an H&H inside of New York's bustling Penn Station. He says that 8.875% adds up.

KLEPPER: I believe on a bagel with cream cheese is $4.10. And I'm not a mathematician, but I believe the tax is $0.36.

VANEK SMITH: Grand total - $4.46, all because of a Depression-era measure meant to keep taxes off of groceries but charge extra for restaurant food. Now, if you order just a bagel at H&H, not sliced, no cream cheese, you do not pay the sandwich tax. And this got H&H thinking, is there a way to give people a bagel with cream cheese that does not involve that bagel getting sliced open?

KLEPPER: If we filled the bagel with cream cheese, it could be not subject to the tax.

VANEK SMITH: Like, injected it in.

KLEPPER: Injected it in. It's a lot similar to how they would fill a Boston cream or a jelly doughnut.

VANEK SMITH: Behold the tax-free bagel, brought to you by H&H Bagels and Philadelphia cream cheese. No slicing, no schmearing, no sandwich tax. Total cost - $1.90.

Did you get a tax-free bagel?

JONATHAN GOULD: I got a tax-free bagel.

VANEK SMITH: What made you - what inspired you to get it?

GOULD: I like the rebellion, OK? I like the rebellion.

VANEK SMITH: Jonathan Gould (ph) had just gotten off the train from New Jersey.

Would you mind giving it a try and telling me what you think?

GOULD: Sure.

(SOUNDBITE OF WRAPPER CRINKLING)

GOULD: It's good. I mean, it's good for what the purpose of it is.

VANEK SMITH: So what out of 10 would you say?

GOULD: Oh, I don't like to rate things. This doesn't have the flavor. It's just, like, doughy. I don't know. You know, three-ish.

VANEK SMITH: Oh, OK.

GOULD: Yeah, three-ish. I think any serious New Yorker who knows bagels, this is on the lower end of the bagel scale.

VANEK SMITH: But on a rebellion scale, 10 out of 10. Happy tax day.

Stacey Vanek Smith, NPR News.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

Stacey Vanek Smith is the co-host of NPR's The Indicator from Planet Money. She's also a correspondent for Planet Money, where she covers business and economics. In this role, Smith has followed economic stories down the muddy back roads of Oklahoma to buy 100 barrels of oil; she's traveled to Pune, India, to track down the man who pitched the country's dramatic currency devaluation to the prime minister; and she's spoken with a North Korean woman who made a small fortune smuggling artificial sweetener in from China.