The last post answered some questions in regard to sales tax issues in general. This post will discuss tax issues related to the food and beverage industry. Please note that these rules are from the CA State Board of Equalization and apply only to CA locations (although most states have similar rules.) Because most of my restaurant clients are CA businesses, I’m focusing on the rules CA has established.
When it comes to the taxability of food sales, the first question to ask is if the food is to be consumed on site or taken to go. All food eaten in the restaurant is subject to tax. If taken to go, there are a few factors which determine the taxability. If the item is cold, it is generally not subject to tax (unless it is a carbonated or alcoholic beverage). If hot food, it is taxable. However, it starts to get more complicated with the 80/80 rule.
The 80/80 rule applies to your business if:
- More than 80 percent of your business’s gross receipts come from the sale of food products (note: alcoholic and carbonated beverages, while taxable, are not considered food products); and
- More than 80 percent of your retail food product sales are taxable because they constitute:
- Sales of food products that you furnish, prepare, or serve for consumption at your place of business; or
- Sales of meals or hot prepared food products; or
- Sales of food products by a “drive-in.” “Drive-ins” generally offer food products ordinarily sold for immediate consumption at or near a location at which parking facilities are provided primarily for the use of patrons in consuming the products, even though they may be sold to go.
It is especially important to test for the 80/80 rule if you have just acquired a food service business or started a new food service business. It is important to also test for the 80/80 rule if you have recently changed the product mix in an ongoing business or if there has been a change in how you serve food.
Evaluation for the 80/80 rule is done on a location-by-location basis. Thus, if you own multiple locations, one location may fall under the 80/80 rule and another location may not. Each location must be considered separately.
To-go sales that come under the 80/80 rule
Although both criteria of the 80/80 rule may be met, you may elect to separately account for the sale of to-go orders of cold food products. You must report and pay tax on all food and beverages sold to go unless:
- The sale is nontaxable, or.
- You make a special election not to report tax on to-go sales even though your sales may meet both criteria of the 80-80 rule. Such sales include:
- Cold food products, and
- Hot bakery goods and hot beverages that are sold for a separate priceSales of those products must be separately accounted for and substantiated by supporting documents, such as guest checks and cash register tapes. The cash register should have a separate key for cold food sold to go or some other way of denoting such sales. Without adequate documentation, you are liable for tax on such sales. If your sales meet both criteria under the 80/80 rule and you make this special election, you will report to-go sales in the same manner as those who do not meet both criteria under the 80/80 rule
The next post will discuss the taxability of to-go orders if you are not subject to the 80/80 Rule.
We recently squired a bakery/kitchen which has no seating and only sells to go meals ie.,pizza, sandwiches. Do we collect taxes?
Hi Al,
Are you located in CA? If so the rules are as follows:
1. If the food is served hot (even if to go), it is taxable
2. If it is cold and sold to go, it is not taxable
3. Soda is always taxable
4. There is a 80%/80% rule. If 80% of what you sell is food and 80% is taxable, everything is taxable.
For more detailed info on the CA taxability of food items, you can see https://www.boe.ca.gov/industry/restaurant.html#Topics or http://www.boe.ca.gov/pdf/pub22.pdf
I hope this answers your question.
Candy
Hi,
I purchase oysters and sell them and offer the service of shucking through my traveling oyster bar. I track the sales of the oysters and invoice for them as a separate line item. So you think the oyster should be taxed?
Hi Aluxa, Thank you for your comment. I don’t know enough about your business to answer this question. For a better answer, can you please send an e-mail to [email protected] with the following information:
In what state(s) do you sell?
Is the food served a la carte or part of a meal?
Is any of the food served warm?
What percentage of your sales is specifically food? Is 80% of your food taxable?
Once I know more about your business, I can give you better advice about if the food is taxable.
Candy Messer
I have a Smoothie Event Booth in a California Farmers Market. I track the count of sales of Smoothies, and the occasional Hot Dog, or Bowl of Chili I sell. The mix of cold & hot products on my busiest day was 168 & 70. I sell a drink mixed with carbonated water, and charge sales tax separately for that. Since my hot foods are only 29% of the 238 food products, I don’t charge sales tax for my hot foods. Is this the correct interpretation of the 80/80 rule?
Hi John,
No, the 80/80 rule is that if 80% of what you sell is food and 80% of your food is taxable, everything you sell is now taxable. However, if your food is less than 80% doesn’t mean you don’t charge tax. What is means is that anything that would be subject to tax (and food heated to be able to eat such as the hot dog or chili) must be taxed appropriately. But smoothies generally wouldn’t be taxed since it’s cold food and you aren’t serving it in your location where they can enjoy it at a table at your location. Carbonated beverages are taxable, however.
If you are not sure how to tax your items, you can ask the CDTFA to give you a written statement regarding your specific instance. But they do have a publication you can review that gives the taxability rules of foods.
I hope this information helps you!
Candy
HI Candy,
I own a coffee shop. I don’t think I fall under the 80/80 rule. 90% of my sales are “drinks”; does that constitute “food”? 60% of my drinks are hot, 40% cold, 20% of drink sales are to dine in, 80% to go. If coffee is “food” do I tax 20% (dine in) of 60% (hot drinks)?
Thank you for your help.
Hi Ron,
I assume since you are posting a comment on this particular blog, you are located in CA. If not, you’ll have to check the rules in your state. But based on your statement, it doesn’t appear you would fall under the 80/80 rule. Drinks aren’t considered food, so you only have 10% food sales. Coffee is not considered food, and in CA, although it’s hot, it isn’t taxable if not under the 80/80 rule. It’s also important to know the rules of “a la carte” vs “package” sales. So my following comments are for a la carte. Hot beverages (tea, coffee, cocoa) and non-carbonated fruit drinks are not taxable. Hot soups, etc are considered food, even if only broth. To-go foods served hot are taxable.
So based on what you’ve said in your summary, you wouldn’t tax the beverages unless carbonated or alcoholic. The hot/cold drinks, whether dine-in or to go would not be taxable. I always suggest if you have questions to ask for a specification sheet in writing from the tax organization to make sure you have an answer to your specific situation.
I hope this helps answer your questions.
Candy
Yes, this rule can be confusing for some, especially when items as you noted are taxable but not considered food (alcohol and soda).