Restaurants, bars, and the foodservice industry overall have certainly been slow to recover from the pandemic-induced revenue shortages of 2020. Keeping both the lights on and people employed have become the main priority for all businesses, regardless of industry. It is no mystery that many restaurants are still working with limited staff. The last thing they need right now is an audit as if any audit is ever enjoyable. However, given the potential strain on most state budgets in the not too distant future, audits may be inevitable. We’re pleased to share the following restaurant-specific tips to be aware of in case the five-letter word does occur:
For Here or To Go?
Believe it or not, auditors are human too. In fact, they also eat, sometimes three times a day, occasionally even outside of the house! If you are really lucky, you will spot them out on the town, even stopping into a local ice cream scoop shop for dessert. And the minute that order is placed, if your cashier doesn’t say “Would you like that for here or to go?”, the auditor wheels begin turning. Congratulations, you just earned yourself an audit.
Sad but true, it has happened. Given today’s popularity of the fast-casual lunch and dinner options, the “for here or to go” question has become more important than whether or not you want that “biggie sized.” Where that food item is consumed will drive the taxability of the sale.
Often referred to as the “grocery rule,” many states impose sales tax on food orders to be consumed on-premises. What used to only be relevant at fast-food chains is of utmost importance at the fast-casual line at the local Mexican fad, or the food court inside the dying shopping mall, and even at the ice cream truck if there just happens to be a park bench nearby with “onsite” seating available. Yes, it is the law, and yes, auditors love their job that much.
It was once explained at a national tax conference as the “hot nuts” rule. Slightly paraphrased, but something like this: if you purchased those warm peanuts to eat on-premises, i.e. while they were hot, taxable. If you planned on eating them at home, exempt grocery purchase.
Please make sure the employee entering the order understands that asking the simple question “Is this for here or to go?” means far more than putting the customer’s food in a bag or on a tray. It could mean the difference in saving thousands of dollars in tax assessments and penalties.
Liquor Consumption Tax Audits
In addition to the state and local sales tax, and, in some instances, the meals and beverage tax, businesses in some states are on the hook for any one of the following excise taxes on alcohol: distilled spirits tax, beer excise tax, wine excise tax, liquor by the drink tax, and probably a handful more with different names. Historically speaking, alcohol excise taxes pre-date sales taxes, dating back to the 1700s.
The vast majority of these taxes are imposed on a determinable amount of alcohol: a barrel, a gallon, a bottle, etc. However, in some jurisdictions, alcohol taxes may also be imposed on an individual pour. In a perfect world, all pours should be roughly the same. Any good bartender knows about how many pours can come out of a specific liquor bottle depending on its size. However, once you start figuring in over-pours toward the end of the night along with complimentary drinks for that good tipper, how on earth are you supposed to measure that?
When it comes to audit defense, fewer taxes have proven to live by the “guilty until proven innocent” standard as persistently as the liquor by the drink tax. Most states that impose such a tax (i.e. Tennessee) have a standard deduction for regular occurrences such as shrinkage and spillage. Anything extraordinary that happens beyond these “standard” deductions must be well documented, and sometimes even that is not enough.
The most important thing is to notate major shortfalls with as much detail as possible in order to boost the success rate upon audit. Items are mistakenly entered into inventory when they are not actually received, and full cases of bottles have been known to be dropped a time or two. In addition to making the proper accounting entries, notes should be included to describe the details and timing of the event that led to the error.
There are certainly other complexities that go into liquor consumption audits such as pricing issues and new product offerings that could drive additional exposure. However, measurement issues are the most common. The bottom line is if you are making sales of any type of alcoholic beverage, it is your responsibility to understand the possible multiple layers of collecting and remitting the various excise taxes in your jurisdiction.
Indirect tax audits are never a picnic, but with the added layer of tax treatment and unique tax types, restaurants have more to be prepared for than the average business taxpayer. If you know of a potential issue that may exist with your company or would like to speak to one of our experts to mitigate these risks, please contact us so we may assist you.
Article written by:
Judd Ballard, CPA
Senior Manager, State & Local Tax Services