If you own or are just starting a restaurant in the US, you’re in good company. The restaurant industry in this country is a $799 billion industry as of 2017. There are over 1 million restaurant locations in the US. It’s a fast-paced industry that changes constantly.
From gluten-free menus to plant-based meat, the industry has and will continue to see its share of trends. Meanwhile, one thing that’s always good for business and never goes out of style is staying tax compliant.
A restaurant must comply with a complex set of laws when it comes to sales tax, which early on can seem like a bit of a mystery. It’s best to take both wonder and worry out of the equation and know exactly what’s required of you as a restaurant business owner.
We’re here to help. In this smart guide we’ll simplify sales tax for you, ensure you’re meeting your tax obligations, and help keep your business compliant.
Pro Tip: for more info on other tax issues specific to restaurants, check out the IRS’s Restaurant Tax Center.
Denver, CO, is one of the states that has a 4% meal tax in addition to state sales tax.
What is it?
Sales tax is a trust tax. You as a business owner are obligated to collect the tax from customers on all taxable sales on behalf of any states and the local towns or cities where you do business. You must collect the tax, hold the funds in trust until the end of the tax period, and then file and pay them to the proper authority when it’s time.
At this time, 45 states have a sales tax, and, of those, 38 also have additional local taxes that combine with the state tax rate to make up the total sales tax in a given location.
You often hear the term “sales and use tax” used as if they’re interchangeable, but they’re not. There is a difference between the two. Also, sales tax and use tax are mutually exclusive, meaning they’ll never both be charged on the same sale. In general, sales tax is the responsibility of you, the seller, while use tax is the responsibility of the buyer.
Taxable goods and services are defined at the state level, and sales normally have to meet two basic criteria to be considered taxable:
- The goods (TPP or Tangible Personal Property) or services sold qualify as taxable.
- The state where the sale was made is a state where your business has a tax relationship.
Many states and localities have a different rate for alcoholic beverages.
As a restaurant, your business meets the second criteria by having a physical location in a certain tax jurisdiction. In terms of what qualifies as taxable in the restaurant business, some states or local areas complicate this quite a bit in several ways:
- They impose additional taxes or a separate rate under the umbrella term “meal tax.” For example, Denver, CO, has a 4% meal tax in addition to state sales tax, while Jacksonville, FL, adds an extra 2% meal tax.
- They charge a different tax rate on certain items, such as those purchased as take-out, bakery items, and alcoholic beverages. For example, Washington state exempts sweet bakery items sold without eating utensils from the state sales tax unless you meet their 75% rule (75% or more of your total food sales meet their “prepared foods” definition).
It’s critical to know how your state and local area tax food. Many states exempt the sale of grocery food items but tax prepared foods. In that case, knowing which of the items that cross your counter daily are considered “prepared foods” is critical, so knowing your state’s unique definition of the term is a must. Our state guides are a good place to start. See the section there on “How food is taxed” for each state, as well as the contact information for your state’s Department of Revenue.
When It Comes to Sales Tax, What Not to Do
To keep things simple, let’s begin with our short list of the big mistakes that cause the most headaches. If you avoid these from the outset, you’ll be ahead of the game.
Fail to treat separate locations separately. If you have more than one business location, or in the case of a mobile truck, move from one location to another, there is a good chance the tax rates are not the same in each location. It’s even possible that one location may fall under a jurisdiction that imposes a separate “meal tax,” while another does not. Often, the local rate which you add to the state’s rate to arrive at the total rate will be different. Be sure to know the rate for each location and set up your POS to charge correctly.
Fail to keep accurate records. When it comes to taxes, record keeping matters. You’ll be asked to report taxable sales, sale categories, and in some cases purchases when you file your sales tax return. For instance, you may be asked for both alcoholic-beverages sales totals as well as alcoholic-beverages purchase totals. If you made sales in more than one location, you’ll need to break down sales by location. Taking a look at the tax return for your state, and knowing what records are expected will save time and trouble later on.
If you have more than one business location, the tax rates are likely not the same in each location.
Fail to file and pay on time. Most of the time, you’re required to pay and file taxes monthly, though in certain circumstances quarterly or annual tax periods apply. It’s important to know both your filing frequency and your deadlines to avoid paying the penalties and interest that all states charge on late filings. A common deadline for many states is the 20th of the month for the previous month’s sales.
Fail to set the money aside. You absolutely must maintain a separate account for sales-tax funds. The danger of mixing the funds into one revenue pool is that when the tax deadline arrives, you don’t have the money to cover your liability. Avoid this disaster by funneling the money straight into a separate account from your first day of business.
Fail to Know the Law or Follow Changes to the Law. Not knowing the law is never an acceptable excuse for not following the law in the eyes of the IRS, and sales-tax law is no exception. This despite the fact that it’s not uniform from one state to the next or even one town to the next, and rules often change frequently. In 2015, for instance, the IRS ruled that gratuities automatically added on to a customer’s bill were taxable, and many restaurants had to change their practices accordingly or face fines.
In 2015, the IRS ruled that gratuities automatically added on to a customer’s bill were taxable
What to Do
Despite the complexity of the tax code, it’s possible to break down your complete sales-tax responsibility as a restaurant owner into these 5 steps.
Register to Collect for Your State and Municipality
It’s illegal to collect sales tax from customers without a permit or certificate of registration from your state. Most of the time, you can quickly and easily register with your state’s department of revenue online and receive the necessary documents quickly. Often, you’ll be required to display some sort of certificate in a location that’s visible to customers to show that you’re legally registered with the proper tax authority. Registration is often, though not always, free, and in some cases you’ll need to register at least 14 days before making sales in that state.
Collect on Taxable Sales and Set Money Aside
Set up your POS system to collect sales tax and, as we discussed earlier, set those funds aside so they’ll be available when taxes are due. POS systems, such as Square, will integrate with your accounting software when set up correctly so that sales tax is automatically applied to each sale and accounts are updated. When rates change, however, as they do often, it’s usually up to you to change the rates that you have previously set up in your POS.
Know the Correct Rate
As you know, the rate will be determined by your state as well as the city or county where your restaurant is located. Check our state guides to sales tax for information on the rates for each state as well as links that will guide you in keeping up with updates and changes to the rates in your area.
You can file and pay your sales tax online and sometimes by phone or mail.
File and Pay
No matter what state you’re in, you can conveniently file your sales tax return and pay the tax online. Other options many states provide include mailing in a paper return or filing by phone. In every state that collects sales tax, once you register with the state, you’re required to file a return even for a period in which you have no sales and owe no tax. As we mentioned, the deadline for filing is usually around the 20th of the month following the tax period. However, consult your state for the exact deadline for your situation.
Stay Organized and Keep Your Software Up to Date
Staying compliant is all about keeping accurate records and accounts and meeting your deadlines. Regularly updating any tax, accounting, and point-of-sale software is a must, but also know that some when tax rates change, you’ll often need to manually adjust the rate to keep software up to date and stay compliant.
- 45 states have a sales tax, and, of those, 38 also have additional local taxes.
- Not all items sold in restaurants are taxable in all cases. In terms of what qualifies as taxable in the restaurant business, that all depends on the state and city where you do business.
- Some locations impose an additional “meal tax” on top of the general sales tax rate.
- You must keep POS software updated in order to stay compliant.
- Once you register to collect tax for your state online, you should be able to file your monthly returns and pay the tax online as well.
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