Complexity breeds opportunity in the area of tax. Since we, at SLD, do not hold any legislative powers, we spend our effort finding silver linings in the form of tax saving strategies for our clients. Here are the top three strategies most likely to yield savings:
- The 80/80 Rule. Unfortunately, you are subject to sales tax on 100% of your sales as long as: a) at least 80% of your sales are food; and b) more than 80% of that food is taxable. You can avoid this 80/80 rule and save on taxes if either a) or b) are not true. Some restaurants record all sales as “food” or record all food sales as “taxable”. You should check to see if perhaps your non-food items actually represent more than 20% of your sales. Or you can check to see if perhaps the non-taxable portion of food sales (see “Cold Food” below) is 20% or greater of total food sales. If you have multiple locations, note that this rule applies on a location-by-location basis.
- Cold Food. Cold food is not subject to sales tax if it is sold to-go. This includes cold food heated up by customers in a microwave on-site. Combination packages, where multiple items are bundled together and sold for a single price, are subject to sales tax if any hot food or hot beverages are included. While there is a lot of merit to advertising and selling combinations, you may be able to avoid sales tax on the cold food items when ordered to-go if you sell them separately. Be aware, soda and alcohol are always subject to sales tax.
- Collecting and Reporting Properly. Currently, the state of California has a 7.5% state-level sales tax and most counties charge an additional 1%, which makes the total sales tax rate 8.5%. In addition, some local governments charge additional amounts, pushing the total to 9.5% or more. On the sales tax return, the districts in which you had taxable sales are reported and then sales tax due is calculated according to the rate in those jurisdictions. This should equal the amount collected from customers. However, the sales tax rates change with some frequency and you, or your software, may not be charging the correct rate when providing customers with their bills. To the extent the actual sales tax rate is higher, you are paying the difference. For example, if you are charging customers 8.5% in a location with a 10% rate, you end up paying the additional 1.5%. This starts to add up quickly, so it is vital that you have the current rates and remain on top of any changes.
Be sure you are calculating your sales tax liability on your sales net of both the sales tax itself and any tips. It is not uncommon to find restaurants that record the total check, including tax or both tax and tip, as revenue. In turn, when the sales data is pulled to prepare and pay sales tax, the total is reported as taxable sales. As an example, let’s assume a customer has a $100 bill which is subject to sales tax at a rate of 10%, bringing the total to $110. When the customer adds a $20 tip, a total of $130 in sales is recorded by the restaurant. Neither the $10 sales tax, nor the $20 tip is subject to sales tax. When it comes time to prepare the sales tax return, the total sales for the period are obtained. If $130 gets reported on the return, the extra $30 (the sales tax and tip) is needlessly subjected to sales tax. The resulting sales tax calculated and paid is $13 — 30% over the actual tax owed — and since only $10 of sales tax was collected from the customer, the incorrectly calculated additional tax is paid for by the restaurant. Note that mandatory gratuities (i.e. for large groups) are typically subject to sales tax.
As you can see, sales tax is not as black and white as it appears on the surface. Looking deeper, you will find such tax-saving strategies can improve both your bottom line and your cash flow.