Sales tax rules for Bars and Restaurants in California

wine-and-grapes-image-on-pixabay The following information can be considered a quick guide to sales taxation in the food and beverage industry. You can use it instead of, or to supplement information found in the Ca BOE sources listed below.

First, a little background information:

Recently I did consulting work for a company in the hospitality industry that owns restaurants and a nightclub in California. Part of my assignment was to help them reconcile the sales tax liabilities on their books to the liabilities on their sales tax returns, for the sales they made in California. The other part was to determine which items sold in their restaurants and nightclub are subject to sales tax, and which items are exempt from tax.

The company’s Operations Manager made me aware of the previous three accountants that were hired to account for taxable sales and prepare the returns. The first was a CPA with clients nationwide, the second a Controller and the third was placed by a well-known accounting staffing agency. The accountants treated sales of some food and drink items, including complimentary items, inconsistently or incorrectly during the past few years, or just didn’t know what they were doing. This lead to bookkeeping discrepancies and concern by management and the owner that the company would be audited by the California Board of Equalization, or BOE, which could prove costly for the company.

The company had good reason to be concerned. According to an online training seminar I attended in early April, 2017, the average cost of a sales tax audit  in California, for the organization being audited, is $114,000, which includes penalties, fees and the cost of professional counsel. The California Board of Equalization audits twice as many businesses as does any other State that levies sales and use taxes.

The following are the rules applicable to bars and restaurants that I obtained from a BOE representative, and during my follow-up research. The research sources, recommended by the representative, are:

  • Publication 22, Dining and Beverage Industry. See page 19 for information about taxation of complimentary items.
  • Regulation 1603, Taxable Sales of Food Products.
  • BOE Audit Manual, see chapter 8 re: Bars and Restaurants.

These publications can be found on the California BOE website at Ca Board of Equalization.

Much of the research I did was to determine whether complimentary items, aka “comps”, or discounts, are subject to tax or exempt from tax.

Certifying a Section 1603 Grant Program Application at a Moment’s Notice

solar-panelIn my accounting career, I’ve come across a few clients who truly put my skills to the test. I’m about to describe one for whom I performed a Section 1603 Grant Program certification for specified energy property. It’s safe to say that this client needed my services at least as much as I needed to provide services to his company.

In the Summer of 2011, the Director of a Solar Energy installer in Phoenix, AZ, sent me an e-mail expressing interest in my services concerning the preparation of an Agreed-Upon Procedures (AUP) report for a grant application. He had completed a 500kW Photovoltaic system (PV), involving the installation of solar panels, for a commercial client in New Jersey, and was applying for a U.S. Treasury grant for less than $1 million on the client’s behalf. The eligible cost basis was more than $500,000.

According to the Treasury Department’s 1603 program website, an Agreed-Upon Procedures report was required for that kind of project. It’s a type of attest engagement. For this project, my responsibility was to perform certain required procedures in order to determine whether the project’s eligible cost basis as entered in the accounting records was in accordance with the cost basis for Federal Income Tax purposes.

The alternative form of certification was an examination, which was required if an applicant requested a grant of $1 million or more. An examination involved more extensive
evidence-gathering procedures than an AUP engagement (see the brief list of AU procedures below), and could include testing of the client’s accounting system and receiving confirmations from third parties. The accountant’s opinion on compliance with the Federal income tax cost basis was required in the examination report.

Community Networking vs. Business Networking

What is “Community Networking” and why do we need it?

Unlike traditional networking, in which individuals market their products and services by entering into business relationships, in community networking members of a community work together for the good of everyone in the community. In this context, a community can be those living within a geographic area, like a neighborhood, or those with similar interests and backgrounds, like the gay community. Job seekers in a given area can be considered a community. Members can form business relationships, but they also provide each other with support, education and encouragement. Everyone wins. In hard times, survival for many means helping each other.

Community networking is suitable for anyone. Businesspeople may find worthwhile business contacts, job seekers may find potential employers or job referrals, and those having difficulty with their job or career situations may meet others in the same situation. All who participate will find other members willing to share information and help their fellow members in some way.

The “Three Musketeers” approach to networking

This is about all for one and one for all. It’s a concept that’s alien to the average American, who has been indoctrinated by “the system” to believe that to succeed or survive, they must fend for themselves. Our culture doesn’t encourage us to band together and support each other in times of difficulty. Rather, it does the opposite: it encourages us to compete with each other for what we need and want. It’s a culture of rugged individualism.

When a member of your community comes to your aid, it’s usually because they want to help a fellow member in need. An example of this is when a member of a LinkedIn© group gives you constructive advice for free after you post an inquiry on the group’s message board. Although you can form an alliance with someone in a position to help you, it’s less likely that your ally’s motive for doing so will be altruistic. For example, you may form an alliance with someone in a company you’d like to work for whom you met at a business networking event. However, if that person refers you for a position with the company, it may be because they’ll receive a bonus or positive recognition. And they’d still have to know you before they’ll feel comfortable recommending you.