Restaurant Sales Tax- General Introduction Including Various Examples

Lauren Christiansen10/14/2021

What is Restaurant Sales Tax?

When you go to your favorite restaurant, you may be surprised to see that there's a small amount added on for tax. What is restaurant sales tax? The word sales tax may bring to mind images of retail stores, but the term is used in many industries. It's a tax that's added to the price of certain goods and services. The sales tax amount is added on when you pay for your bill during the checkout process.

What is Restaurant Sales Tax?

You've just picked up your order of wonton soup and chow mien at your favorite Chinese restaurant. The total cost is $13. But when you get home, you realize that the receipt says that the restaurant charged you an additional 8.25% in sales tax. Sales tax is one of those unfortunate things that we have to pay for. We are usually so used to it that we don't even question it.

Travelers from other countries who have different tax laws are often surprised at how expensive the sales tax can be. Because we live under federalism, each state determines its own sales tax. The tax is most expensive in places like California and New York, while other states like Alaska have no sales tax at all. If you live in a state that requires businesses to charge a sales tax, it's important to know what it is and how it works. There's also a city or county tax on top of the sales tax. For example, California's restaurant tax rate is between 7.25% and 10.25%, depending on the county.

Sales tax money goes to different state and local funds. It is typically used to pay for education, criminal justice, medical programs, and more. The higher the sales tax, the more restaurants will have to reassess their pricing structure. If customers feel they are paying too much to eat out, restaurants risk losing customers. At the same time, restaurants can't undercharge and lose out on much needed revenue. It's a fine line that restaurant owners need to walk. How can you maintain profitability and not scare customers away? Read ahead for more insight.

Why is Restaurant Sales Tax Important?

Restaurants are required to pay taxes to both the state and federal governments. If they don't charge sales tax on each purchase, restaurant owners will have to eat those costs at the end of the year. In an industry with fairly small profit margins, this is very burdensome.

Luckily, there are expenses that owners can deduct from their overall taxes. This includes any marketing expenses, legal fees, types of insurance, staffing wages, and the cost of serving food. But none of these impacts the standard sales tax rate applicable to every restaurant, regardless of size or type.

Knowing your sales tax rate and how it works is critical to running operations and minimizing expenses. It impacts pricing, menu choices, inventory, and the budget. It must be factored in when forming a business model, as the expense will affect each facet of operations.

There's a simple rule to keep in mind when it comes to sales taxes. The higher the taxes, the less profit the restaurant receives for its products. The less money in profits a restaurant receives, the lower their total sales tax will be. It's a conundrum, but it's not a problem. It's simply important to know everything about local, federal, and county tax rates so you can make the best business decisions.

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Restaurant Sales Tax by State Examples

If you live in California or New York, you'll sigh at this list of sales tax rates from other locations. However, don't be too envious. While it is certainly easier to own and run a business in other states, there isn't always the potential to make the type of profits you can in larger states.

Each state handles their taxes a little bit differently. Typically, each state charges a base rate and the applicable city who charges another rate on top of that. This can get expensive if the state or county has high taxes, on top of the high state taxes.

There are only certain types of restaurants that will be profitable in smaller states due to demographics and consumer demands. That being said, if you want to be a restauranteur, California and New York are very competitive. And something as simple as a sales tax can make or break the bank.

For new entrepreneurs, it can help to see restaurant sales tax rates from various states. This can help you decide where to open your restaurant business, and whether there are any budgetary constraints. Calculating sales taxes can be complex, and may require the help of Pos Equipment or an accountant. This will minimize any potential errors and ensure compliance with state and federal laws. Still confused by the entire thing? Read ahead for sales tax examples for restaurants from four different states.

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1. Washington

In Washington, the base rate across the state is 6.5%. Restaurants in Seattle for example pay 10.1% percent on any menu items. On the other hand, King County charges a 3.5% tax rate, but Seattle charges an additional .1% tax. A little down the road in Olympia, the tax rate is 8.9% (total). The city there has a 2.4% sales tax rate beyond that base state rate. That being said in Thurston County, there's no additional charge on top of that.

As you can see, this can get very confusing. It's critical that restaurant owners in Washington research the various county and state laws so they don't make a mistake. The Washington sales tax is much different than other states that don't charge anything other than the base rate. Examples of states with only base rates include Indiana, Kentucky, New Jersey, Michigan, and Maryland.

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2. New York

The state sales tax has a 4% base rate. Certain localities rates vary and can tack on an additional 4.875%. This can add up to 8.52%, which is the average rate across the state. In the New York City area, there's another .375% sales tax which goes towards transportation expenses. Some items are exempt from sales tax, which impacts restaurants and groceries. The tax rate for processed food is 8.875% in New York City, which also impacts restaurants.

Food that is taxable includes food sold for on-premise consumption, sandwiches, and any hot food. Taxability will depend on the way the food is sold in the restaurant. If someone orders a bag of bagels to go, they won't be subject to sales tax. If they order the bagels to eat in the store, they will. These sales tax laws in New York are very confusing, particularly for new entrepreneurs. Using an optimized Pos System to collect accurate data and helps streamline the process and minimize errors.

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3. Ohio

Ohio's sales tax is somewhat different than a lot of other places. Any food that is consumed off site is not taxable. If someone has a restaurant where some customers dine-in and others go through a drive-thru, the food is not taxable. Restaurants have to determine this by asking if the customer wants to eat here or take the food to go.

The base sales tax rate is 5.75%, but counties charge additional rates on top of that. Ohio is considered one of the friendlier tax states, but compliance can still be confusing. This is particularly true if your restaurant has patrons who ask for food to go, along with some who dine-in. Restaurant owners must carefully train their employees so they know how to handle such situations. They should also invest in an effective Point Sale to gather all sales data in case there is an audit later on. It will also ensure that you pay the right taxes at the end of the year.

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4. California

Like New York, California has the highest sales tax rates in the nation. At 7.25%, it is twice as high as New York, especially if counties charge additional rates on top of the base. Sales tax is not just charged based on to go or delivery services. It's charged on whether the food is served hot or cold. All takeout services that offer cold menu items are not subject to sales tax, however.

California also operates by the 80/80 rule. If sales are 80% food and 80% of the menu items you sell are taxable, then 100% of what you sell is considered taxable. This is of course unless restaurants open a different account for sales that are nontaxable.

Tips are not taxable as long as they aren't mandated by the restaurant. Some fine-dining institutions require customers to pay a certain tip amount, and add it into the bill. This would be taxable. It gets even more complicated when third-parties are involved in the process. If there is a payment from a third-party app like Uber delivery or Groupon, that revenue is taxable. Use a Pos Solution to make sure employees are charging the right price for each item. It will be well worth it at the end of the year when it's time to pay taxes.

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