FLORIDA SALES TAX ON RESTAURANTS
Restaurant owners and managers know the challenges of daily operations. From the stresses of employees being unable to make a shift to ensuring you have enough product for customers. The burdens are never ending. And then there are sales and use taxes. Florida sales and use tax issues for restaurants is an ever-complicated and convoluted arena that must be managed daily. The key is to have the tools ahead of time for proper compliance. The last thing a restaurant owner or manager wants to do is receive the expensive lesson of a Florida sales and use tax audit of how things should have been done.
General Rule – Collect Tax!
The general rule is food or beverages sold by a restaurant are subject to Florida sales tax. It does not matter whether the food and beverages are consumed at the restaurant or are “to-go.” Only items that are specifically exempt, such as water, should be sold without tax. However, the general rule is common knowledge for most restaurant owners. The ways most business owners get in trouble are the less common exceptions. So, let’s explore the oddities of your industry.
Complimentary Items
Restaurants often offer loyal customers free food products. In these cases, you don’t have to collect sales tax from your customers on the free food products. Sometimes, restaurants will offer employees a free or discounted meal. If the meal is discounted, then the restaurant should charge sales tax based on the price charged to the employee. However, if the meal is truly free to the employee, Florida sales tax is not due on the meal. Along the lines of the employee meal, food products consumed by the owner and his family are not subject to sales tax either. Paper and plastic plates, napkins, utensils for use in connection with consuming the meal are considered as being sold with the meal and are not taxable.
However, every time a restaurant gives away a complementary item, the restaurant must face the question of whether Florida use tax is due on the item. Use tax is a complimentary tax to sales tax and it becomes due if an item is used or consumed in Florida without originally paying Florida sales tax to acquire the item. The use tax is primarily in place to cover items purchased outside of Florida, but the use tax also covers situations when a business uses the sale for resale exemption to purchase inventory, but then takes that items 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. This is where many business owners get caught on audit. There is a distinction between what is given away for free, versus a “two for one” sale or other type of combined discount. If the complimentary item is included with a meal, then Florida should consider the item as sold with the meal and no use tax is due. Common types of these items are free chips and salsa, bread, salads, etc that are posted as being free with the meal.
Use taxes may seem on the surface like an obvious issue, but you’d be surprised just how aggressive states can be. For example, whether an item is sold as part of a meal or whether the item is a separate free give away can determine whether the restaurant owes use tax on the item or whether sales tax was collected on the overall meal sale. Consider the toy given away by some fast food kids’ meals. Is that a giveaway for free or part of the meal? One of the national fast food restaurants actually had to litigate this issue with a state because the state wanted over $1,000,000 in use tax for all the toys given way. The fast food chain ultimately won the issue by convincing a judge that the toy is often the primary reason why a kid wants to buy the meal, so it must have been included in the sales price for the whole meal, i.e. no use tax due.
Gratuities Taxable? It Depends…
Is gratuity subject to sales tax? Maybe. 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. If any of the funds from customer tips goes to the restaurant instead of the employees, then the tips are taxable to the customer. Other charges that are subject to sales tax are service charges, minimum charges, corkage fees, setup fees, or other similar charges.
Catering = Taxable
The safest way to look at catering is to consider it just like providing food in the restaurant. Everything is taxable except a few separately itemized exempt items, such as bottled water. Charges for table rental, delivery fees, set up charges, etc are all subject to sales tax.
Cover Charges = Taxable Admission
If your restaurant charges some type of cover charge to get into the restaurant, e.g. a band is playing that night, then the charge is considered a taxable admission. Similar to paying sales tax on your admission ticket to Disney World, the admission charge to your customer is also subject to sales tax.
Tax Exempt Customers
Just about every restaurant has sales to customers that are exempt from sales tax. 501(c)(3)’s, governmental entities, etc all have the ability to purchase food tax exempt, if the rules are followed. If the rules are not followed, then it will be the restaurant that is on the hook for the sales tax not collected. Rule number one is that you should train your employees to collect sales tax unless all the rules are followed. The second rule is that you need to collect a Department of Revenue issued exemption certificate (current year) from the customer and keep the exemption certificate on file for at least three years. If the customer doesn’t have a Department of Revenue issued exemption certificate, then you need to collect sales tax. Just because the customer has ID from the local church or university is not enough. 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. Finally, you need to have proof that the funds came from the tax-exempt entity. So, an employee of your local church may not buy food tax exempt of they are paying cash or using a personal credit card. The payment must be documented as coming directly from the tax-exempt organization or your business will end up owing the sales tax on audit. This can be a paperwork nightmare for restaurants, but take this very seriously. You don’t want to owe sales tax on all your sales to tax exempt customers because you simply failed to follow the rules.
What about sales to a customer that will resell the food? For some restaurant, this can be a large part of their business. To make a sale for resale tax exempt, you need to collect a current year’s resale certificate issued by the Florida Department of Revenue. The resale certificate is your insurance policy against the FL DOR claiming you owe the sales tax. And for recurring resale customers, make sure you get a current one every year. See also the food delivery service discussion below.
What is the Bracket System?
If your county has a 1% surtax and the state has a 6% sales tax, then you would expect sales tax to be 7% of the sales price of the meal. Right? Wrong! Florida and Maryland have a very quirky way of calculating sales tax called the Bracket System. If the sales price comes out to an even dollar, then the tax would be an even 7 cents in a 7% county. That is easy. But if the sale price is anywhere between $1.10 and $1.16, then the tax is 8 cents according to a statutory bracket chart. You can download the whole bracket system chart HERE. The result is that the average tax is usually a little higher than the local sales tax rate. So a restaurant in a 7% county might experience a sales tax rate around 7.1%. If your POS system has Florida’s bracket system, then you have no worries. But if you bought a POS system that is more of a P.O.S., then it likely will not have the bracket system. If you are only collecting an even percentage sale tax rate, then your company will owe the difference. What is worse is that the DOR looks for companies reporting even sales tax amount and often sets up companies not using the bracket system for sales tax audits. So it is worth the time to get your POS system updated to handle the bracket system. Oh… on behalf of every business owner and tax professional in Florida, please complain about the bracket system to your state legislator.
What If Tax Wasn’t Collected?
Another thing about Florida sales tax law for restaurants (and all businesses) is that sales tax is actually a tax on the restaurant’s exercising of the privilege of selling food. While the restaurant is allowed to pass the tax on to the customer, the tax is really on the restaurant. So, if the restaurant fails to pass on the tax to the customer, then the restaurant still owes the tax. In other words, it is worth it to take the time to determine what is taxable to make sure your business doesn’t end up owing sales tax that could have easily been collected from your customers. Failure to collect tax can be a substantial sum when added up over a three-year sales tax audit.
Food Delivery Services Taxable?
The food delivery business has been around for many years. But, surprisingly, many people still do not understand how to handle the sales tax associated with separate food delivery services. To understand the food deliver side of the business, we have to separate out the deliver services into three categories as follows:
- Sales and delivery by restaurant employees: This is taxed exactly the same as sales within the restaurant. The only caveat is whether a delivery fee is charged. If the customer could pick up the item without the delivery fee, i.e. the delivery fee is optional, then the delivery fee is not subject to sales tax. This is the case for most restaurant employee based delivery services. All the sales tax collection and remittance is handled by the restaurant.
- Third party delivery service, but sale by restaurant: The usual business model here is that the delivery service provides customers to the restaurant. The end customer is charged the normal menu price on the food and the restaurant is technically selling the food to the end customer, but the delivery service gets a cut of the sales price. In such a case, the restaurant charges the sales tax to the end customer based on the price paid by the end customer and the fee paid to the delivery service is not subject to sales tax. The complicated factor here is that the delivery service might be the one collecting the tax if the customer pays by check or cash upon deliver. Most business models require credit card payments to the restaurant to avoid this problem. If not, then you need to make sure the restaurant is collecting and remitted the tax from the delivery service to avoid problems. Also, then receipt given to the end customer needs to be in the name of the restaurant, not the delivery service. Otherwise, you run into a quagmire where the delivery service is legally making the sale and collecting the tax, but it not the one filing sales tax returns. We’ve handled service Florida sales tax audits with this problem, and it is messy (to say the least).
- Third party delivery service buys the food from the restaurant: Another variation of the third-party delivery service model is that the delivery service actually buys the food from the restaurant and resells the food to the end customer. This model is probably the easiest on the restaurant because the restaurant only needs to collect a resale certificate from the delivery company to avoid sales tax collection/remittance responsibilities. With a resale certificate in hand, the restaurant is not responsible for whether the delivery service handles sales tax correctly.
We have run into other variations of the food deliver model and quite a few situations where the sales tax was not being handled correctly, unbeknownst to all parties involved. These situations are never pretty and battling six figure sales tax assessments after the fact is never a position any restaurant owner wants to face. So we hope this article will steer you in the right direction before the DOR comes knocking.
How to Correct Mistakes with Sales Tax
If after reading this you realize you have not handled sales tax correctly, then it usually not recommended to amend sales tax returns. Amended sales tax returns result in a 10% penalty, plus interest. We usually recommend correcting sales tax mistakes by entering the voluntary disclosure program. This program allows you to come clean on your taxes, as well as other benefits. The program can really be the perfect solution to ensuring you have the peace of mind you need. Best of all, can usually request a payment plan if you owe taxes. You can read more about the Voluntary Disclosure Program by following the link to an article on the topic at the end of this article.
What if I Have Collected But Not Remitted Taxes?
This is probably the scariest part of sales tax. Collected sales tax is considered a trust fund the moment your business collects the tax. You are legally holding the money in trust for the state of Florida. However, there is no requirement for you to separate the funds from the general funds of your business. So, most businesses simply deposit sales tax into the business checking account like all other revenue. The problem happens when the business is not earning a profit. If after all the rent, employees, vendors, and utilities are paid for the month and the balance in the account is not enough to cover sales tax, then the business has legally stolen the tax proceeds even if there was never an intent to use the funds. Sales tax criminal laws have very low thresholds in Florida with as little as $301 of collected but not remitted sales tax becoming a third-degree felony with up to five years in jail. So, if you have collected sales tax but not remitted all of the tax, then you may want to strongly consider entering the voluntary disclosure program, which happens to create a presumption you had no criminal intent.
Summary
Running a restaurant profitable is hard enough. You don’t want to get whipsawed with 3 years of sales tax liability because of a minor misunderstanding in the law. Take the time now to understand your obligations and do it right the first time. But if you are reading this article after the Florida Department of Revenue contacted your restaurant, then please take it very seriously. Florida sales and use tax controversy is the primary practice area of our law firm and we are here to help if you need us.
About the Authors:
David Brennan is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. While working for the Florida Department of Revenue as a Senior Attorney, David focused on sales and use tax issues. You can read his BIO HERE.
Mr. Sutton is a Florida licensed CPA and Attorney and a shareholder in the law firm Moffa, Sutton, & Donnini, PA. Mr. Sutton’s primary practice is Florida tax controversy, with an almost exclusive focus on Florida sales and use tax. Mr. Sutton worked for in the State and Local Tax department of Arthur Andersen for a number of years and has been an adjunct professor of law at Stetson University College of Law since 2002 teaching State and Local Tax and at Boston University College of Law in 2014 teaching Sales and Use Tax. Mr. Sutton is a frequent speaker on Florida sales and use taxes for the FICPA, Lorman Education, NBI, AAA-CPA, and the Florida Society of Accountants. Mr. Sutton is also co-author of CCH's Sales and Use Tax Treatise. Mr. Sutton is the President of the Florida Association of Attorney – CPAs and the State and Local Tax Chairman for the American Academy of Attorney – CPAs. You can learn more about Mr. Sutton in his Bio HERE.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended clients against Florida sales and use taxes for more than 25 years with over 100 years of cumulative experience working for 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. We represent taxpayers and business owners from the entire State of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
Need to learn more about Florida Sales Tax? Click HERE to see a list of up and coming speaking events!
AUTHORITY
ADDITIONAL ARTICLES TO READ
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.