Tax Guide for Restaurant Owners
Industry Topics

The Basics

Sales and Use Taxes in General

In California, all sales are taxable unless the law specifically exempts them. In most cases, taxable sales are of tangible personal property (legally defined as an item that can be seen, weighed, measured, felt, or touched).

For restaurants, most taxable sales are sales of food and beverages. However, you may also need to report and pay sales tax on other things, like mandatory tips, corkage fees, and cover charges.

Use tax is a companion to California's sales tax. It is generally due whenever you purchase taxable items from an out-of-state vendor for use in California without paying of California sales tax. You also owe use tax on items that you remove from your inventory and use in California if you did not pay tax when purchasing the items. To pay use tax, report the taxable items' purchase price under Purchases Subject to Use Tax on your sales and use tax return. Those purchases become part of the total amount that is subject to tax.

If you consume or give away taxable non-food items (like soda or alcoholic beverages) that you purchased without paying sales tax, you owe an equivalent use tax (usually equal to the sales tax) based on those items' cost to you.

Seller's Permit

Most people who sell food or other taxable items in California, even temporarily, must register with us for a seller's permit.

Registering for a seller's permit is free, although in some cases you may need to pay a security deposit.

If your restaurant has more than one location, you must register each location with us.

You can register with us for a seller's permit or consolidated seller's permit using our Online Service.

Let us know about any changes to your business, or to your mailing or email address, so we can inform you of important changes in law, tax rates, or filing procedures. You can easily update your account information by contacting our Customer Service Center or any one of our field offices throughout the state. Contact information is available in the Resources section of this guide.

Key Industry Topics

All Your Sales May Be Taxable (80-80 Rule)

The “80-80 rule” applies when more than 80 percent of your gross receipts are from sales of food products and more than 80 percent of the food products you sell are taxable.

If the 80-80 rule applies to your business, you may choose to separately account for sales of cold food products to go.

You must report and pay tax on all to-go sales of food and beverages sold unless:

• The sale is nontaxable or
• You choose to not report tax on to-go sales even though your sales 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 price.

Sales of those products must be separately accounted for and supported by 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, 100 percent of your sales are taxable.

If you are starting a new restaurant, changing your menu, or changing the way you serve food at your existing restaurant, you may want to test for the 80-80 rule.

The 80-80 rule is applied on a location-by-location basis. If you have multiple locations, you must consider each separately.

For more information, see publication 22, Dining and Beverage Industry.

Food Sold for Consumption at Your Place of Business

When you sell food and beverages that are meant to be eaten or consumed at your place of business, the sales are usually taxable.

You have a place of business where customers may consume their purchases if:

• You provide tables and chairs or counters for dining, or
• You provide trays, glasses, dishes, or other tableware, or
• You sponsor and maintain a parklet, or
• Your business is in a shopping mall and is near dining facilities provided by the mall. For example, your business is in or near a food court or near an area where tables and chairs are provided for dining.

Food and beverages are considered served if they are intended to be eaten at your place of business or if they are provided on or in an individual returnable container from which they can be eaten.

For more information, see publication 22, Dining and Beverage Industry.

Food Sold To Go

Unless your sales are all taxable under the 80-80 rule, your sales of cold food products sold individually to go are usually not taxable.

• Cold food products include cold sandwiches, milkshakes, smoothies, ice cream, and cold salads. Cold food that is sold as part of a combination package may be taxable, depending on the package's other contents.
• To-go sales of hot prepared food products are taxable, unless they are considered hot baked goods.
• Hot beverages (such as coffee and tea) are not taxable if sold to go, but soda and alcoholic beverages are always taxable.

For more information, see publication 22, Dining and Beverage Industry.

Food Deliveries

If you make deliveries of food, your delivery charges may be taxable. Hot prepared food is taxable including any delivery fees you may charge.

However, if the sale of the food product is not taxable (like sales of cold sandwiches), then the delivery charge is also not taxable. If you charge a single price for a combination of hot and cold food, the entire price (including delivery fees) is taxable.

Sometimes you may sell non-food items, (like alcohol or paper towels), and deliver them with your food sales. Generally, the sale of these non-food items is taxable. Therefore, when you deliver them to customers, your delivery charges must be prorated between taxable non-food items and nontaxable food, such as, cold sandwiches.

You are not considered a caterer if you sell food to go or merely deliver food. However, you are considered a caterer if you serve meals, food, or drinks on premises owned or supplied by the customer. For more information, see our Tax Guide for Caterers.

Hot Prepared Food

The sales of hot food are usually taxable whether they are sold to go or for consumption at your restaurant.

A hot food product is food that has been heated to above room temperature. Food is still considered hot even after it has cooled because it was intended to be sold as hot food.

Notable Exception: Hot Baked Goods

Hot baked goods, such as hot baked pretzels or croissants, sold to go are exempt from sales tax. If sold in a combination package with hot prepared foods or with a hot beverage, however, the entire combination package is taxable. Hot baked goods purchased for consumption at your restaurant are taxable.

For more information, see publication 22, Dining and Beverage Industry.

Cold Food

Sales of cold food products to your customers for consumption at your restaurant are taxable.

Unless you meet the criteria of the 80-80 rule (see All Your Sales May be Taxable [80-80 Rule] above) and do not separately account for to-go sales of cold food, your sales of cold food products like sandwiches, milkshakes, smoothies, salads, and ice cream are usually not taxable if sold to go.

Cold food that your customers in a microwave you provide is considered cold food sold to go.

For more information, see publication 22, Dining and Beverage Industry.

Surcharges

If your restaurant adds a separate surcharge to your customers' bills to defray the increased costs of doing business, sales tax applies to the surcharge amount.

Instead of increasing menu prices, many restaurants add a surcharge to their receipts to cover required employer costs, such as minimum wage increases, healthcare contributions, and paid sick leave.

Whether the surcharge is a flat fee or a percentage of the selling price, whenever a surcharge is separately added to any taxable sale, the surcharge is also subject to tax (Revenue and Taxation Code section 6012). The law does not provide a specific sales and use tax exemption for restaurant surcharges. Therefore, you may not claim the surcharge cost as a deduction on your sales and use tax return.

Example

Below is an example of how to calculate sales tax on a taxable sale with a restaurant surcharge. Tax applies to the total selling price, including the surcharge. The example assumes an 8.5% sales tax rate. (Your actual tax rate may differ.)

Online Ordering Service

If you contract with an online ordering service provider that takes orders from customers for meals you will provide, you owe tax on those meal sales when an agency relationship exists.

When you contract with online ordering service providers (service providers) to take customers' orders, receive payments, and deliver meals, you should prepare a written agreement between you and the service provider which adequately describes each party's responsibilities. The agreement should be clear whether the service provider is acting as your agent in the advertising, ordering, and delivery of the meal, or whether the service provider is purchasing the meals for resale.

When the service provider acts as your agent,

• You are considered the retailer of the meals sold through the online ordering service and
• You owe tax on the meals' full selling price without a deduction for the service provider's commission retained by the service provider.

However, if the agreement does not establish an agency relationship, such service providers would be considered retailers. As such, the service provider must hold a seller's permit and owes tax on the sales of meals through the online ordering service. When an agency relationship does not exist, you must obtain a resale certificate from the service provider that purchased the meals for resale.

When to Charge Sales Tax

Combination Packages

When you sell two or more food items in a to-go package for a single price, tax applies depending on the components of the package and whether the 80-80 rule applies to your business. For more information, see All Your Sales May be Taxable 80-80 Rule above.

Including hot food or hot beverages within combination package makes the entire package taxable.

If you sell a combination to-go package that includes cold food and a soda, the soda's selling price is taxable.

Sales of food and beverages for your customers to eat in your restaurant are always taxable.

For more information, see publication 22, Dining and Beverage Industry.

Nontaxable Sales

Certain sales you may make at your restaurant are not taxable, such as:

• Sales of cold food products sold in a form not suitable for consumption at your restaurant,
• Sales in Indian Country,
• Sales to the U.S. government, or
• Sales for resale.

When you sell a cold food product that is not suitable for consumption at your restaurant (either because it requires thawing or cooking, or because it is sold in a size not ordinarily consumed by a single person), you should not charge tax on the sale. For example, a frozen pizza requires your customer to cook it, and a customer would not typically eat a quart of salsa on the premises.

Sales of meals, food, and beverages made in Indian Country by non-Native American retailers to a Native American who resides on a reservation are exempt from tax. Additionally, sales of meals, food and beverages for consumption on the Native American reservation by a non-Native American or a Native American that does not reside on a reservation are also not taxable when all of the following conditions apply:

• The non-Native American retailer's business is an eating or drinking establishment, such as a restaurant or bar,
• The non-Native American retailer's business is operated on a Native American reservation under a federally authorized lease or sublease,
• A tax is imposed by a Native American tribe on the sales or purchases of meals, food, and beverages, and
• The meals, food, and beverages are purchased for consumption on a Native American reservation.

For more information, see Regulation 1616.

Sales you make to the U.S. government are not taxable. In addition, sales of items that will be resold are not taxable when you accept a resale certificate from the purchaser of those items.

For more information, see publication 22, Dining and Beverage Industry.

Taxable Sales in Indian Country

Sales and use tax may apply to the sale of meals, food, and beverages by non-Indian retailers in certain circumstances.

If you are a non-Indian retailer that is located on an Indian reservation, some of your sales of meals, food, and beverages may be taxable. For sales that you make at a drive through counter or window, it is presumed that the sales are for consumption off the reservation and therefore subject to tax.

Additionally, if you are a retailer that makes sales for delivery, all your delivered sales are subject to tax when delivered to a location off the Indian reservation. You may report the tax using a percentage developed from a test period. For more information on how to use alternative reporting methods for taxable food sales, see section 0809.12 of Audit Manual Chapter 8.

Charges for Serving Customer-Furnished Food

Charges to your customers for serving food or beverages they provide are taxable.

For example, when a customer provides a fish that you prepare and serve for a separate charge, that charge should be included in the total taxable amount of the sale. Similarly, corkage fees and cake-cutting fees are taxable.

For more information, see publication 22, Dining and Beverage Industry.

Employee Meals

Generally, charges to your employees for meals are taxable. If you provide meals to your employees and make a specific charge for those meals, the meal charges are taxable and must be reported on your sales and use tax return. The following examples are considered taxable charges:

• Employees pay you cash for meals they consume.
• You reduce employees' paychecks to repay you for meals they consume.
• Your employees receive meals instead of cash to bring their compensation up to legal minimum wage.
• Your employees have the option to receive cash for meals they do not consume.

For more information, see publication 22, Dining and Beverage Industry.

Discounts, Tips, and Non-Food Charges

Cover Charges and Ticket Sales

Cover charges that customers may recover in food and beverages are taxable, whether or not the customer actually recovers those charges. Separate charges solely for admission or for a ticket to a place with entertainment (such as concerts) are not subject to tax.

For more information, see publication 22, Dining and Beverage Industry.

Tips and Gratuities

Businesses such as restaurants often receive payments designated as tips, gratuities, and service charges from their customers. An optional payment designated as a tip, gratuity, or service charge is not subject to tax. A mandatory payment designated as a tip, gratuity, or service charge is included in taxable gross receipts, even if the amount is later paid by the retailer to its employees.

For specific information on how tax specifically applies to optional payments and mandatory payments, see publication 115, Tips, Gratuities, and Service Charges, and Regulation 1603, Taxable Sales of Food Products.

When using a Point-of-Sale (POS) system, please make sure tax is correctly applied for mandatory charges. If your POS system is not programmed correctly, please contact your POS vendor.

Discount Coupons

If you accept discount coupons that allow your customers to purchase food and beverages at a reduced price, tax is due on the amount you receive for the sale.

For example, if you have a “buy-one-get-one-free” promotion, tax is due on your total charge to the customer, not including any optional tip.

If a third party reimburses you for any discount program, that amount is considered part of your gross receipts and is taxable.

For example, a promoter pays you two dollars for each two-for-one redeemed coupon, sales tax applies to the total received from the customer plus the two dollars from the promoter.

Some third-party companies offer “Deal-of-the-Day” promotions in which a customer pays for a coupon that can be redeemed for items at a discounted price. When the coupon is redeemed for taxable items, you owe sales tax on the amount the customer paid for the coupon plus amount paid to you by your customer at the time of sale.

For more information about how sales tax applies to “deal of the day” promotions, see publication 113, Coupons, Discounts, and Rebates.

Complimentary Food and Beverages

If you consume or give away food, noncarbonated beverages, or nonalcoholic drinks, you don't owe tax on them.

If you consume or give away non-food items such as soda or alcoholic beverages that you purchased without paying tax, you must pay a use tax (usually equal to the sales tax) based on the cost of those items to you.

We strongly recommend that you keep accurate records of any items that you consume, give away, or discard.

For more information, see publication 22, Dining and Beverage Industry.

Other Helpful Information

Sign Posting Requirements

If you sell food or drinks at a price that includes tax and you want to claim a deduction for sales tax included on your return, you must post a sign on your premises that says “All prices of taxable items include sales tax reimbursement computed to the nearest mill.”

If you sell food or beverages at a price that includes tax in some areas of your restaurant (such as a bar) but not at others (such as in a general seating area), you should post the sign prominently in all areas where tax-included food and beverages are served.

For more information, see publication 22, Dining and Beverage Industry.

Recordkeeping

These are some basic guidelines that can help prevent unanticipated tax problems:

• If your restaurant includes a bar, keep your restaurant purchases and sales separate from your bar purchases and sales.
• Keep a written record of your policy regarding free food and beverages served to customers and employees as well as a record of free food and beverages you provide.
• Keep evidence of price changes or other variables in your usual pricing practices.

If you make pricing changes to your menu, note the price changes and the date of the change in your records. You should keep any documents (such as cash register tapes or invoices) showing the price changes and effective dates of those changes.

If your restaurant has a happy hour, you should keep records of menus and signs showing the happy hour dates and times and cash register tapes showing happy hour sales.

For more information, see publication 22, Dining and Beverage Industry.

Sales Made on State-Designated Fairgrounds

If you are a retailer who sells tangible personal property on the real property of a California state-designated fair (“state-designated fairground”), you must separately state those sales' amount on your Sales and Use Tax return.

Sales that take place on state-designated fairgrounds include over-the-counter sales on the fairgrounds and may include sales in which the merchandise is shipped or delivered to or from the fairground. The separately reported amount will be used for funding allocation purposes only. There is no additional tax or fee due on these sales.

For more information on the reporting requirement, see our Tax Guide for Reporting Requirements on State-Designated Fairgrounds.

Sales Suppression Software Programs and Devices

It is a crime for anyone to knowingly, sell, purchase, install, transfer, or possess software programs or devices used to hide or remove sales and to falsify records.

Using these devices gives an unfair competitive advantage over business owners who comply with the law and pay their fair share of taxes and fees. Violators could face up to three years in county jail, fines of up to $10,000, and will be required to pay all illegally withheld taxes, including penalties and interest.

Inventory Controls

We strongly recommend that you carefully track your inventory (for example, keeping records of deliveries, keeping liquor stocks in a locked storeroom, and keeping records of products stocked or removed). Good recordkeeping minimizes the chances of additional tax owed.

You should keep your records of purchases for resale separate from your records of supplies and items not for resale. Your records should also accurately track your inventory of goods from the time they are purchased to the time they are sold or used.

Having strict inventory controls can help you save money and stay competitive.

For more information, see publication 22, Dining and Beverage Industry.

If You Collect Too Much Tax

If you collect more than the required amount of tax for a sale, the excess amount must be either returned to the customer or paid directly to us.

If you refund excess tax collected to your customer and have already paid it to us, you can submit a claim for refund. To do so, you should provide us with evidence of your refund to the customer.

This evidence may be in the form of a receipt, a cancelled check, or proof that the customer chose to take a credit with you for the amount.