Navigating Sales & Use Tax for Your Restaurant or Cafe (And Avoiding a Bitter Aftertaste)

Running a restaurant or cafe is a labor of love. From crafting the perfect menu and creating an inviting ambiance to delighting customers with delicious food and memorable experiences, your passion is poured into every detail. However, amidst the daily hustle, there’s a critical financial responsibility that, if overlooked, can lead to severe consequences: sales and use tax compliance. At TJD Accounting and Tax, we understand that navigating these complex tax rules can be daunting, but getting it wrong can unfortunately leave a very bitter taste, jeopardizing the business you’ve worked so hard to build.

We're a Chicago-based accounting firm that focusses helping small businesses with payroll, bookkeeping, tax returns, and providing tax strategy.

Sales Tax vs. Use Tax: What Restaurant & Cafe Owners MUST Know

• Sales Tax: This is the tax you’re likely most familiar with. It’s charged to your customers on taxable sales of food, beverages, and other items. The specific items that are taxable, and the exact rates, can vary significantly based on your state and local jurisdiction. Common complexities include different rates for dine-in versus takeout, heated versus cold food, or specific types of beverages. You collect this tax from your customers.
• Use Tax: This is where many restaurants and cafes unknowingly fall into non-compliance. Use tax is a complementary tax to sales tax. It’s due when your business purchases taxable goods or services for its own use without paying sales tax at the point of purchase. Think about that new espresso machine ordered from an out-of-state supplier who didn’t charge your local sales tax, or the stylish furniture for your dining area bought online from a vendor outside your state. If sales tax wasn't collected by the seller, your business is generally responsible for remitting the equivalent use tax directly to the state.

Common Sales & Use Tax Pitfalls for Restaurants & Cafes:

• Incorrect Tax Rates: Applying outdated or incorrect local tax rates to sales.
• Taxing Non-Taxable Items (or Vice-Versa): Misunderstanding which specific food items, beverages (e.g., bottled water vs. fountain soda), or service charges are subject to tax.
• Handling of Comps, Discounts, and Coupons: Incorrectly calculating sales tax when promotional offers are used.
• Tax on Mandatory Gratuities/Service Charges: Rules for these can vary and are often misunderstood.
• Failing to Remit Collected Sales Tax: Not filing returns or not paying over the full amount of sales tax collected by the due dates.
• Ignoring Use Tax on Purchases: This is a major audit trigger. Failing to identify and remit use tax on:
  
  • Equipment (kitchen appliances, POS systems)
  • Furniture and fixtures
  • Decorations and artwork
  • Supplies (specialty ingredients, high-end disposables) purchased from out-of-state or online sellers who don't collect your state's sales tax.
  • Software subscriptions or digital services from out-of-state providers.
• Poor Record-Keeping: Inadequate records to support sales tax collected and sales tax paid on purchases.

The Severe Consequences of Non-Compliance: More Than Just a Slap on the Wrist

State tax authorities take sales and use tax very seriously.

After all, sales tax collected from customers is considered to be held "in trust" for the state. Failing to comply can lead to:

1. Substantial Back Taxes: Auditors can typically go back 3-7 years (or even further if fraud is suspected). Imagine owing several years' worth of uncollected or unremitted sales and use tax.
2. Hefty Penalties: Penalties for failure to file, failure to pay, negligence, or accuracy-related issues can be severe, often a significant percentage of the unpaid tax, sometimes effectively doubling the original amount owed.
3. Compounding Interest: Interest accrues daily on both the unpaid tax and the penalties, causing the total debt to balloon rapidly.
4. Aggressive Collection Actions: This can include liens on your business assets (and potentially personal assets if you are deemed a "responsible person" for trust fund taxes), bank account levies, and seizures of property.
5. Business Disruption: Your sales tax permit or business license could be suspended or revoked, effectively forcing you to cease operations until the issues are resolved.
6. Personal Liability: For "trust fund" taxes like sales tax, owners, officers, or other responsible individuals can often be held personally liable for the unremitted amounts, even if the business is an LLC or corporation. This means personal assets are at risk.
7. Criminal Charges: While less common for unintentional errors, deliberate tax evasion or fraud can lead to criminal prosecution.

A Recipe for Compliance: How TJD Accounting and Tax Can Help

Navigating the sales and use tax maze doesn't have to be a solo journey fraught with peril. At TJD Accounting and Tax, we help restaurant and cafe owners stay compliant and avoid these costly pitfalls by:

• Ensuring Proper POS System Setup: Advising on correct tax rates and taxability rules for items in your Point of Sale system.
• Educating Your Team: Providing clarity on what’s taxable in your specific locality.
• Regular Reconciliation: Helping you reconcile sales tax collected with sales reported and tax owed.
• Accurate & Timely Filings: Preparing and filing your sales and use tax returns correctly and on time.
• Use Tax Assessment: Proactively identifying purchases where use tax may be due and helping you calculate and remit it.
• Audit Support: Providing expert representation and support if your business faces a sales tax audit.
• Voluntary Disclosure: If past non-compliance is discovered, we can advise on and assist with voluntary disclosure agreements to potentially mitigate penalties.

Imagine a cafe owner who, with TJD’s guidance from the start, correctly accounts for use tax on that imported Italian espresso machine and the custom decor sourced online. They avoid the stress of an audit finding, the shock of a large assessment, and can continue to focus on brewing great coffee and serving their customers.

Don't Let Sales and Use Tax Errors Derail Your Dream.

The complexities of sales and use tax are a significant operational challenge for restaurants and cafes, but non-compliance can have devastating financial and legal consequences. Protecting your hard-earned success means getting this right.

Are you confident in your restaurant or cafe's sales and use tax compliance?‍

If you're looking for a great tax accountant Contact TJD Accounting and Tax today for a compliance review. Let us provide the expertise and peace of mind you need, so you can focus on the art of hospitality.