COVID-19 has frustrated the foodservice industry and, as a result, many bars, restaurants, and food manufacturers are trimming their operating costs and overhead to keep their business running. Sales tax savings are not always top of mind as these businesses consider daily operations, but it is important to note that many states provide significant foodservice-related sales tax exemptions. With a little upfront due diligence and proper planning, sales tax savings can be the main course on a restaurant’s strategic tax menu.
Sales tax is often perceived in absolute terms. The rates are set and it either applies or it does not apply. The surprising reality is that for some industries it is much more nuanced. Restaurants, breweries, and similar businesses operate in this reality. However, within that nuance are potential tax savings applicable to your establishment. Perhaps the most substantial of these potential tax savings is the manufacturing exemption.
As this article will discuss, in many states, such as Ohio and Texas, restaurants and brewers are considered manufacturers, and such states generally provide exemptions on certain processing equipment used to prepare food or beverages for sale. In addition to the manufacturing exemption, there are foodservice-specific exemptions available (i.e. cleaning of food processing equipment and items used to preserve food) and restaurants can benefit from the purchase of a variety of items exempt from tax under the resale exemption.
Responsibility for Claiming Exemption
Restaurants and breweries often make significant purchases of various equipment, tools, and supplies used to operate the business. Many of these purchases vary from small dollar amounts to extremely large expenditures of equipment used in multiple facilities. These purchases are made without the realization that there are potential sales tax savings for such equipment and supplies.
As the purchaser, it is the restaurant’s responsibility to understand whether or not an exemption applies, and to properly provide the appropriate exemption certificate to vendors upon purchase. Most vendors will charge sales tax until an exemption certificate is provided in order to protect their own interests. Taking proactive steps to research and apply exemptions prior to purchase is a far easier process than pursuing a refund claim with the state.
Understanding the Extent of the Exemption
The manufacturing (and food preparation) exemption in Ohio is broad by design and provides for sales tax exemptions on certain processing equipment used to prepare food or beverages that are for sale. The exemption extends to various kitchen processing equipment like ovens, deep fat fryers, electric kettles, grills, as well as certain brewing equipment such as malt mills and similar items. The exemption applies to the original purchase of such equipment as well as subsequent repair parts and labor.
Beyond manufacturing, Ohio restaurants can also take advantage of items that are used to preserve food (refrigeration, certain warmers and containers) as well as items used to clean items used to prepare food for human consumption (detergents, cleaners and dishwashers). These exemptions are unique to the restaurant industry and are often missed by taxpayers since they do not fall squarely within the traditional manufacturing exemption.
Bars and restaurants operating in many states can claim a sales tax exemption on non-reusable items given to customers as part of their meals. Foodservice vendors currently paying sales tax on non-reusable items (such as plastic eating utensils, soda straws, and paper napkins) are hurting their bottom line, and there are simple steps that can be taken to take advantage of the available exemptions. Restaurants can purchase these items tax-free by issuing a resale certificate to their vendor. Similarly, the resale exemption applies to a variety of reusable items that may not initially strike restaurant owners as being “resold.” Items such as plates, cups, silverware, patron tables and furniture may qualify for the resale exemption when used by dine-in patrons.
While there are many similarities between the manufacturing and food processing exemptions, it is important to understand the rules in each state to make sure that all available exemptions are being claimed and maximized. Doing so will directly keep much-needed cash in the pockets of the foodservice operators.
Bar/Restaurant Sales Tax Exemptions at Work – Ohio Supreme Court Rejects Taxes on Draft Beer Tap Maintenance and Cleaning
Although this case is a few years old, the decision issued by the Ohio Supreme Court in Great Lakes Bar Control, Inc v. Testa, is a perfect example of applying sales tax laws favorably for the bar and restaurant industry. In short, the Ohio Department of Taxation assessed Toledo-based Great Lakes Bar Control more than $102,000 in sales tax, finding that its service of maintaining draft beer lines was taxable as a janitorial service. Great Lakes, on the other hand, argued it was providing neither building maintenance nor janitorial services and therefore there was no provision in the Ohio Revised Code subjecting its services to sales tax.
The Ohio Supreme Court agreed with Great Lakes and held that cleaning and maintaining draft beer lines is not taxable as a “building maintenance and janitorial service.” The Court interpreted the definition of these taxable services in the context of what would commonly be considered a janitorial cleaning (i.e. dusting, vacuuming, mopping, etc.) and determined that maintenance of beer lines did not fall under that classification.
The holding in Great Lakes serves as a reminder to taxpayers that in order for a service to be subject to sales tax, there must be a provision specifically subjecting that service to tax. Exemptions from sales tax can exist in certain situations simply by legislation remaining silent. The risk, of course, is the Department of Taxation’s interpretation of service statutes which may create a tax assessment that is only resolved through appeals and court intervention.
Simply put, failing to take advantage of available exemptions can impact a restaurant’s bottom line and undermine its competitive advantage with fellow restaurant operators taking advantage of such savings. For in-depth information on available exemptions and avoiding potential pitfalls, contact your GBQ restaurant professional.
Article written by:
Judd Ballard, CPA
Senior Manager, State & Local Tax Services