Sales Tax Savings Tips for Restaurants

Today’s post comes to us from Mike Feiszli, Senior Director in BDO’s State & Local Tax Services & Consulting practice. Mike can be reached at [email protected].

In the competitive restaurant industry, it is crucial for managers and operators to recognize not only where savings can be utilized when opening new establishments, but also where pitfalls may lurk. Taxes and tax savings aren’t always top of mind for restaurant operators as they consider daily operations, but it’s important to note that many states offer sales tax exemptions for restaurants. With a little upfront due diligence and proper planning, sales tax savings can, in many jurisdictions, be the main course on a restaurant’s strategic tax menu.

For instance, many jurisdictions offer sales tax exemptions for general manufacturing and production, which can include several facets of restaurant production and operation. Specifically, just as the purchase of equipment and consumable items used in the manufacturing process may be exempt from sales tax when purchased or used, some states may view a restaurant as a manufacturer or producer of a product (food or beverages). Therefore, certain aspects of the manufacturing sales tax exemption can apply to the purchase of equipment used in the food preparation or storage process.

Another exemption restaurants might employ is the utility exemption. Although utilities are not taxable in every jurisdiction, being aware of this type of exemptions in states that do impose a tax on utilities could produce significant savings. In a recent Indiana Supreme Court Case, Aztec Partners, LLC v. Indiana Department of State Revenue, June 23, 2015, the Court reiterated that electricity used to power certain equipment in Aztec’s restaurant business was not subject to sales tax because the use of the electricity falls under the utility exemption offered to manufacturers in Indiana.

Many jurisdictions offer general sales and use tax exemptions that may apply to restaurants, such as resale, packaging, utility or production exemptions. However, to ensure proper taxability is applied, all available exemptions should be closely examined in the appropriate jurisdiction before making the significant capital expenditures associated with store openings. Furthermore, restaurants should carefully consider the ongoing taxable nature of purchases used for daily restaurant and food service operations.

Flipping the menu over, restaurants should engage in proper planning and due diligence to avoid potential pitfalls that could have an impact on sales/use tax compliance and, eventually, the bottom line. For example, treatment of promotional meals, employee meals and comps differs in various jurisdictions. Those that exempt some of these meals or allow for a sales tax deduction will likely impose a use tax on the cost of goods sold (COGS) or produced cost of the meals as a withdrawal from inventory. The COGS and produced cost calculations also differ among jurisdictions, so it’s important for restaurants to be aware of the different tax treatments in order to ensure their multi-jurisdictional operations are in compliance and are not producing hidden issues or costs.

Unpaid tax and associated interest and penalties can add up for those unfamiliar with the nuances of new taxing jurisdictions. Just as failing to take advantage of available exemptions can impact a restaurant’s bottom line, so too can these unexpected costs.

For in-depth information on available exemptions and avoiding potential pitfalls, contact your BDO restaurant professional, and be sure to keep up with the Practice’s latest thoughts by following us on Twitter at @BDORestaurant.