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 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.