Article written by:
Anthony Ott, CPA
Director, State & Local Tax Services
Sales tax is complicated enough for B2C businesses selling only tangible personal property like clothing, computer hardware, etc. Bars and restaurants experience several added layers of complexity. Without the proper setup, planning and diligence, sales taxes can cause significant exposure that quickly eats into your earnings. A few of these issues, and some opportunities, are listed below:
What Tax Should I Collect, What’s Taxable and What’s the Right Rate?
So many questions to answer before you’ve even made a sale. The bar/restaurant industry faces many more tax types and rates than other retailers. In addition to sales/use taxes, there are food & beverage, meals, liquor and hospitality taxes, to name a few. These taxes are levied and filed at various state and local levels. Restaurants and bars must also understand what is subject to tax with consideration given to prepared meals versus grocery type items, food for consumption off premises, etc. POS systems may also need to handle different tax rates applied to sales of different items.
In order to be competitive in today’s environment, many of our restaurant clients are utilizing delivery services such as Uber Eats, Postmates, or DoorDash. As you enter into these agreements, sales taxes should be a key consideration. Many states view these companies as “marketplace facilitators” and require them to collect and remit tax on behalf of the restaurant. In other states, the restaurant is still considered the taxpayer of record and must, therefore, receive “pass-through” tax collections from the delivery vendor and remit them. In addition, in states where special local taxes apply to the sale of prepared food, certain delivery vendors may not collect each and every tax type, leaving the restaurant on the hook to remit the local tax.
Protect Your Margin
Whether you utilize Aloha, Toast or any other POS system at your locations, the tax setup is crucial to ensure collection of the correct amount of tax, and in turn, protection of your margins. In certain states, taxes may be either “inclusive” or “exclusive”. Inclusive tax is “baked” into the price of the food/beverage and exclusive tax is stated separately at the bottom of the guest’s check. The problem occurs when taxes are set up incorrectly or not set up at all. Any tax later assessed by the taxing jurisdiction comes straight out of the business’s operating earnings.
Don’t Forget the Use Tax
Many bar/restaurant clients get so tied up in making sure their sales tax collections are correct, they forget about tax on their purchases. With some notable exceptions (like Ohio), items not permanently transferred to the guest are subject to tax when purchased by the restaurant. When tax is not collected by the vendor, the purchase is subject to a “use tax” that must be reported by the bar/restaurant directly to the state. In light of the recent Wayfair v. South Dakota decision, more remote sellers are collecting tax than ever before. However, this does not extinguish your liability to accrue and remit tax when it’s not charged by a vendor.
Many states, like Ohio, offer generous sales/use tax exemptions to the bar/restaurant industry. Exempt items may include food preparation and storage equipment, tables, chairs and even certain utilities, just to name a few. Your accounts payable process should include a review of the tax charged by vendors. For any purchases of exempt items, sales tax charged by vendors should be short paid and an exemption certificate supplied to the vendor. If tax is inadvertently overpaid, refund claims may be filed to obtain refunds.
The Audit “Nightmare”
Sales and use tax audits are painful for any organization. However, for bars and restaurants, they can be especially problematic. Because state taxing authorities do not have trust in the books and records for bars/restaurants, they often employ what’s called a “liquor markup audit”. This method of auditing uses liquor purchase data secured by the state from suppliers through regulatory reporting. An assumed “mark-up” is applied to the reported quantities and wholesale prices to arrive at a taxable sales amount for the audit. As you might imagine, this amount is almost always significantly higher than the taxable sales amount reported by the taxpayer. These audits result in large assessments and are not for the faint of heart.
Why are We Filing All These Returns?
Some states offer what’s called a cumulative filing authority. This allows each location under a given legal entity to file under one sales tax return rather than making a separate return for each individual location. This is a good way to reduce the company’s sales tax filing burden and the resulting cost. Many software vendors or outsourced compliance providers don’t make this recommendation because it reduces their per return revenues.
Contact a member of GBQ’s Restaurant team today for assistance with these, or any other, sales/use tax issues.