Restaurant Basics to Avoid Sales and Use Tax Audits

As there are so many moving parts to running a business, especially a restaurant, proper sales tax collection is oftentimes overlooked. When restaurant owners call us and tell us they need help with an audit, we typically know the cause: the point of sale system. It is imperative for restaurants to have an easy to use and accurate point of sale system. If a restaurant has the proper tools for tracking its sales, then when it comes time for an audit, the burden will not be as severe.

The golden rule for restaurants to abide by is to assume all food and drink sold by the restaurant is subject to sales tax. Obviously, most restaurant owners already know this, as a result, most restaurant owners stumble on the few narrow exemptions. Lets walk through several sales and use tax issues a restaurant can run into in order from opening a restaurant, to selling food and drink, to gratuities.

Purchasing Supplies

Every restaurant owner knows that before you can even open your restaurant and begin serving customers you have to buy décor, food, and supplies. However, not every restaurant owner knows when is the proper time to pay sales tax on the items they purchase. Oftentimes, restaurants buy the majority of their products sales tax exempt (with a proper sales tax exemption certificate) as most of the purchases they make will eventually be resold. Florida provides a specific exemption from sales tax when a purchaser is not the end user and is going to be reselling the item. However, this is with the end result in mind that the purchaser will collect sales tax once it sells the item or items. This is one of the main reasons restaurants run into trouble when it comes time for an audit. This is because if the restaurant purchases the item tax exempt and also does not collect sales tax if/when it sells the item, then the restaurant is on the hook for the tax.

This is where use tax really comes into play. Use tax applies to situations when a business uses the sale for resale exemption to purchase inventory, but then takes the item out of inventory for something other than resale. In this case, use tax is due when an item is pulled out of inventory to be given away for free. As a result, it is important for restaurants to track their sales and know when they need to go back and remit use tax.

Discounts

There are a few distinctions between free food and discounts. If the food is truly free then the restaurant does not need to collect and remit sales tax, whether it is a complimentary item or a full free meal. However, when a restaurant discounts food for one reason or another, then the restaurant should charge sales tax based on the price charged to the customer.

Cover Charges

Some restaurants choose to charge customers a cover charge, this oftentimes happens when there is some sort of live entertainment. If your restaurant charges some type of cover charge to get into the restaurant, then the charge is considered an admission and as a result, is subject to sales tax.

Tax-Exempt Customers

At one point or another most restaurants will serve tax-exempt customers. These tax-exempt entities all have the ability to purchase food tax-exempt. However, the restaurant needs to ensure that all of its bases are covered before not collecting sales tax, or the restaurant will be on the hook for the sales tax not collected. Most tax-exempt entities will be able to provide Department of Revenue issued exemption certificate (current year). Restaurants should collect the certificate and keep a copy on file for at least three years. If the customer does not have a Department of Revenue issued exemption certificate, then unfortunately the restaurant cannot just take the customers word for it and needs to collect the tax. The only exemption is that the US government does not have to have an exemption certificate, but you must document that the customer is a branch of the US government to exempt the sale. With that being said, you need to have proof that the funds came from the tax-exempt entity.

Gratuities

The general rule is that mandatory gratuities are subject to sales tax, but separately stated, optional gratuities that are given to the employees are not subject to sales tax.

Conclusion

In summary, most sales that restaurants make are subject to sales and/or use tax. However, there are a few exceptions when restaurants do not need to collect sales tax but still need to keep paper work tracking the paper trail of the tax-exempt sale. With these few exemptions in mind, restaurants can typically avoid getting hit with large assessments when it comes time for an audit. Further, if you are a restaurant owner and are just now realizing you have been collecting and remitting tax improperly contact us as we can help you voluntarily disclose the tax you believe you owe without any penalties or interest. However, if you are already in the unfortunate situation of already being audited by the Department of Revenue, contact us as we are here to help fight for you and your business.

About Moffa, Sutton, & Donnini, PA

At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is state and local taxes, with a very heavy emphasis in sales and use tax. We have defended Florida businesses against the state departments of revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.

AUTHORITY

Rule 12A-1.0115, Florida Administrative Code (Sales of Food Products Served, Prepared, or Sold in or by Restaurants, Lunch Counters, Cafeterias, Hotels, Taverns, or Other Like Places of Business and by Transportation Companies)

Florida Department of Revenue - Sales and Use Tax on Restaurants and Catering

ADDITIONAL ARTICLES TO READ

RESTAURANT FLORIDA SALES TAX HANDBOOK, published January 4, 2018, by Moffa, Sutton, Donnini, PA

FORT MYERS SALES TAX THEFT – RESTAURANT OWNERS ARRESTED, published August 20, 2014, by Matthew Parker, Esq.

FLORIDA USE TAX AUDIT LETTER?, published June 14, 2015, by James Sutton, CPA, Esq. and Jerry Donnini, Esq.

GOING TO JAIL FOR NOT PAYING FLORIDA SALES TAX?, published November 3, 2013, by James Sutton, CPA, Esq.

FL TAX – VOLUNTARY DISCLOSURE CAN BE THE PERFECT SOLUTION, published October 5, 2012, by Jerry Donnini, Esq.
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