In our recent indirect tax article, we discussed the importance of knowing when to properly tax food items for on-premises consumption. Similarly, inconsistent treatment of the product taxability (i.e., prepared food vs. prepackaged food) can also lead you down a path of potential exposure that builds over time if not handled correctly on the front end of your point-of-sale (POS) system…ultimately making the POS system a POS.
Appropriate Mapping of Product Taxability
The changing landscape of taxability related to products and services has businesses in all industries scrambling to keep up with proper taxability determinations. Unspecific to any industry, entering new states (either physically or economically) creates added risk of exposure if you do not properly vet the taxability of your product offering.
As it relates to the foodservice industry, one of the more difficult distinctions in determining product taxability is the prepared food vs. prepackaged food dilemma. As one might expect, different states have different definitions and interpretations of each. In some states, the manner in which food is prepared may take precedence over the temperature, how it is displayed, or how soon and where the food is to be consumed. Generally speaking, prepackaged food is expected to be consumed off-premises and therefore not taxable. On the other hand, made-to-order foods such as sandwiches are generally taxable, especially if they are going to be consumed on-premises. However, there are always exceptions. It’s sales tax after all.
In many areas of the country, the taxability of candy, desserts, and soda goes against the exempt grocery “ideology.” Because such items do not necessarily meet the “necessity” standard inherent in the grocery exemption, many states tax each of those items regardless of where they are consumed, how they are prepared, or even how they are packaged. The sale of beverages alone is a discussion for another day. Is it caffeinated? Carbonated? Artificially sweetened? The answer to each question may flip to taxability or invite more questions.
The common theme in all of these products and delivery methods is that they need to be properly mapped in your POS system so that sales tax can be appropriately charged. Depending on the system, there can be thousands of sales tax codes, and choosing the incorrect code can set the wheels in motion for potential exposure. There is quite a bit of upfront work that needs to be done when setting up a POS system and answering many of these food-related questions appropriately as early as possible will help to eliminate sales tax issues in the future.
Maintaining Proper Rates
Just as important as the taxability of the product offering is the utilization of charging the appropriate sales tax rate. Not all states exempt food items altogether, and some tax them at a lower rate. In large metro areas like Atlanta or Houston, city and county lines are just blurry enough that sometimes even addresses for that corner location can cause a headache.
Added to the complexity of making sure rates are correct and current, states like Ohio have several different county rates spread across the state ranging from a combined rate of 6.5% to as high as 8%, determined based on the situs of sale. For once, brick-and-mortar stores and fixed restaurant locations have it easy; one fixed and relatively easily determinable rate. However, the local breakfast chain is shipping prepackaged sausage via online sales to customers all over the country, or the Maine lobster shack that has promised “fresh” one-day shipping, has instantly opened itself up to the myriad of sales tax rates that await.
Finally, a new “happening” entertainment district that just opened up touting new sales tax revenue to support other local development added its own additional rate to taxable sales. Such local add-on sales tax rates can catch some businesses by surprise and can be costly if not identified timely. Don’t be surprised if the new add-on sales tax requires a separate filing, on paper, not included with the state return.
Managing all of these rates and additional sales taxes can be a daunting task, but fortunately, there are programs available that are easily integrated into a POS system. Depending on the complexity, these rates can be updated in real-time or on a periodic basis. However, regardless of the rate system, it is important to make sure that the proper rates (i.e. reduced rates, food and beverage sales taxes, etc.) are available, and are being applied to the proper items.
Report Generation and Sales Tax Remittance
Upon entering new states, once registrations, vendor licenses, and product taxability are set up, the next logical step is ensuring that sales tax is being collected from the customers and remitted to the correct jurisdictions. Having everything set up in the POS system to collect sales tax properly is half the battle. The ability of the POS system to create readily usable reports on a monthly basis to properly streamline the sales tax compliance process is the other half. This is the point where the other components of the process (mapping/rates) come together to determine whether or not the right steps were taken on the front-end setup of the POS system.
It is imperative to know what the POS back-end reporting capabilities are so that reports can be generated accordingly. Some systems may only be able to provide a report of just sales tax collected and total sales, but not actually tie the sales tax back to specific transactions forcing taxpayers to “back into” taxable sales. Whereas other systems will allow taxpayers to drill down to the line item detail to determine what items were taxed and at what rate(s). Obviously, the latter will create cleaner, more audit-ready reports, but depending on the complexity of the restaurant’s offering, it may not be necessary when balancing costs and benefits.
With even minor tweaking, the majority of POS systems are capable of handling all of the issues above – taxing the right products, at the right rates and remitting the sales tax on time – but it requires the appropriate team of advisors and technology professionals to ensure the job is done correctly.
GBQ’s State & Local Tax Services team stands ready to assist you and your business.
Article written by:
Judd Ballard, CPA
Senior Manager, State & Local Tax Services