Does my restaurant owe ‘use’ tax in addition to sales tax?

Does my restaurant owe ‘use’ tax in addition to sales tax?

Disclaimer: Each state has slightly different laws around sales & use tax. This post is intended to be general in nature. For state-specific advice, feel free to contact us. 

Everybody seems to understand sales tax. Your POS automatically adds it to your customer checks. You collect it with your daily credit card deposits. You inevitably forget its not yours when you look at your bank balances. And then, just when your cash flow starts looking great in the last week of the month, your bookkeeper sends it off to the state. Its always a sad day; but at least you know you’re in compliance. Or are you?

If you’re like most restaurant owners around the country, you are probably shortchanging your state and putting your business at risk for penalties by forgetting to report and pay your use tax. Why does this happen so frequently? Because your POS has no way of calculating use tax for you and your bookkeeper probably doesn’t know how to do it either.

What is use tax anyways? 

Use tax is a form of sales tax owed when taxable items are purchased tax-free and then used prior to becoming part of a taxable sale.

As a restaurateur, you likely buy most things tax-free. All of the ingredients for your food and beverages are untaxed. You don’t pay tax on those purchases because your customers eventually will. In fact, the state prefers it this way because your customers end up paying three to four times what you would have paid in taxes for the same items once you’ve marked them up to your sale price.

Ok. Then why would my restaurant owe use tax? 

To keep it simple, there are essentially two ways that restaurants end up owing use tax:

  1. You give previously untaxed inventory away without collecting sales tax on it (i.e. comps, employee perks)
  2. You purchase supplies from an out-of-state vendor that does not collect your state’s sales tax (i.e. NYC suppliers from New Jersey)

 

In either case, you would have purchased tax-free items that were used/consumed in your state without being taxed by your state. By definition, these items are subject to use tax.

So… I am liable for use tax on all of my comps? 

Here is the good news… not necessarily. Many states do not require restaurants to pay use tax on comped food. California, for example, offers a very specific use tax exemption on food meant for human consumption that is given away for free. That exemption does not include alcoholic beverages. As a rule of thumb, use tax is typically only due on alcoholic beverage comps; but that really depends on your state.

Got it. Now how do I calculate my use tax? 

Use tax is almost always calculated at the same rate as sales tax. The important distinction between the calculation methods is that the use tax rate should be multiplied by your purchase price of the taxable items, not by what you would otherwise sell those items for. As an example, if you were to give a bottle of wine away, the use tax owed on that wine would be calculated as the use tax rate multiplied by the purchase price of wine bottle.

Ugh. How can I make this easier on myself?

Contact us and sign up. We calculate and file use tax on a monthly basis for all of our bookkeeping clients.