Do you know your sales tax?
The state will typically audit a business every four to seven years, and many operators are blindsided by the results! Sales tax is one of the most common areas restaurants may incur huge liabilities. They often owe significant dollars to the state in unpaid tax. Unfortunately, state laws are complex and sometimes ambiguous. How prepared are you for an audit? Here are some common areas where operators suffer unsuspected tax bills, as well as some areas where you may save significantly in taxes:
Yikes watch out!
Generally when you purchase taxable goods or services in Washington the seller will collect retail sales tax. In cases where the retailer does not collect sales tax, the purchaser must remit use tax to the state unless it qualifies for a state exception.. If you buy goods out of state, you are required to remit use tax. Note: The rental of tangible property (plates, flatware, tables and such) is also subject to use tax. This is the case even if the property rented is re-rented to customers where tax has been charged by the restaurant. Yes, a double tax here…OUCH!
Employee and Manager Meals
Meals provided to employees are subject to retail sales tax and retailing B&O tax. The tax applies whether the employee is charged for the meal or not. The amount of the tax due is either the actual sale or if there is no charge to the employee, the cost of the ingredients.
Retail sales tax does not apply to tips or gratuities received under circumstances that are clearly voluntary. However, if the gratuity is added to the bill as a mandatory charge, the charge becomes a part of the selling price subject to retail sales tax and retailing B&O tax. For example, a mandatory tip added to a bill for parties of 6 or more is subject to sales and B&O tax on the amount of the tip. The state takes the position that if it is mandatory to add it to the bill, then it is mandatory to pay sales & B&O tax on it! Hopefully your POS system is programmed to collect this tax. The state does not care if the restaurant collected the tax. The state will collect the tax with interest and penalties.
Trading for services is taxable. Restaurants issuing trade certificates for services should be sure to remit the sales tax to the state once the trade certificate is redeemed at the restaurant.
Whew, what a break!
Coupons and Discounts
When selling at a discount (not fully given away) the retail sales tax and B&O tax apply to the amount that is actually received by the restaurant. The tax does not apply to the full retail value of the meal.
If a restaurant provides a free meal to a person other than an employee, the meal is not subject to retail sales or use tax. But take heed! If carbonated or alcoholic beverages are given away, use tax applies to the value given away (not the cost, but the value).
Banquet Room Fees
Banquet room charges (if charged separately) are not subject to retail sales tax. These charges are subject to B&O tax under the service and other activities classification.
With all of these nuances, it is often difficult to insure proper tax collection and remittance to the state. Properly coding items in your POS system is one way to help ensure this is done. If your Combined Excise Taxes are audited, it is important to have a process in place to reconcile sales, and reconcile collected taxes. If an auditor can understand what the restaurant has done, it will be a much more pleasant experience for everyone.