Since 2018, New Jersey has been imposing sales taxes on restaurants at the rate of 6.625%. Any business, including restaurants dealing in the sale of prepared food (in-dining or take-out) and beverages, is subject to sales tax. The state also extends its sales tax collection to more establishments such as cafes, cafeterias, catering halls, carry-out restaurants, diners, fast food operators, drive-in/drive-through restaurants, pizzerias, sushi bars, taverns, grills, bars, luncheonettes, hamburgers, and hot dog stands.
Restaurant owners need to keep up to date on all taxable items that pertain to their business. The following is a guide courtesy of the New Jersey Division of Tax for restaurants.
Meal Coupons and Discounts Included in Sales Tax on Restaurants
If the restaurant offers discounts on meals, the sales tax is computed depending on whether the discount amount is reimbursed to the seller. This rule also applies to other forms of discounts such as coupons, buy one get one free, kids eat free, etc. In addition, if the restaurant offers a discount on a meal without a coupon, sales tax is computed on the amount paid by the customer.
If a third party does not reimburse the seller for receiving a coupon from a customer, sales tax computes the amount paid by the customer. However, suppose a third party reimburses the seller for accepting a coupon from a purchaser. In that case, sales tax charges the full price, a combination of customer and manufacturer payments.
These are usually attached to a patron's bill, including cover or entertainment charges which are taxable. Sales tax also includes calculated minimum charges.
Gratuities and tips are exempt depending on three factors:
- When stated separately on the bill or guest check handed to the customer.
- The charge is classified as a gratuity or tip.
- Total monies received by management pay staff members.
Any restaurant earning from retail sales of alcoholic beverages to customers is liable for sales tax. The beverage list includes liquors, beer, wines, sparkling wines, mixed drinks, and cordials. It also separates charges to the customer.
The state imposes a tax amount for every gallon of wine at $0.88, beer is $0.12 plus liquor, which is $5.50. The Alcohol and Tobacco Tax Bureau is in charge of tax collection from distillers. On the same note, the state is also keen to promote fair taxing rules after passing a bill to level the tax rate on spirits-based and malt/beer-based ready-to-drink (RTD) products containing the same alcohol volume to 9.9% ABV.
Restaurant Purchases Included in Sales Tax on Restaurants
Purchases for business purposes usually attract sales tax. However, the law provides some exemptions. These include:
New Jersey Resale Certificate
The restaurant issues a complete New Jersey Resale Certificate (Form ST-3) or Streamlined Sales and Use Tax Certificate of Exemption (Form ST-SST) to a supplier when purchasing taxable food and beverage items for resale and doesn't pay sales tax. However, the restaurant will charge sales tax when it makes sales. This is also when purchasing non-returnable containers or wrapping supplies for customer delivery. The restaurant similarly provides the supplier with a completed New Jersey Exempt Use Certificate (Form ST-4) or the Streamlined Sales and Use Tax Certificate of Exemption (Form ST-SST) and does not pay sales tax.
Disposable items for delivery are also part of the list, such as aluminum foil, aluminum plates, paper cups, baking cups, plastic cups, cellophane paper, wrapping paper, cup carriers, cup lids, take-out boxes, and sandwich plastic wrap. However, the purchase of taxable items not for resale requires sales tax remission. These are items like plastic forks, plastic knives, plastic trays, plastic spoons, cake boxes, paper napkins, towels, ashtrays, plastic can liners, flatware, plastic stirrers, placemats, straws, dispensers, and toothpicks. Other taxable purchased items which are not resold or not exempt include detergents, paper towels, floor wax, and soaps.
Food Preparation Equipment
Food preparation equipment is also chargeable to sales tax on restaurants and includes blenders, food processors, and coffee and soda machines. However, the restaurant owner is not entitled to an exemption for machinery and equipment, unlike a manufacturer. Please check out S & U-6, Sales Tax Exemption Administration, and S & U-9, Business Purchases for more details on the subject.
Services Provided to the Property
In general, both indoor and outdoor cleaning and janitorial services offered on a contract or normal terms are taxable. Other services are snow plowing, lawn maintenance, and parking lot sweeping. This is in addition to cleaning upholstered fabrics such as draperies. Rug and carpet cleaning as well as pick-up and return of rugs are subject to tax. However, waste removal of garbage, trash, recyclables, and rubbish is not charged taxes provided they are serviced under a contract.
Sales tax is applied to laundering and/or renting items such as mats, mops, towels, tablecloths, carpets, drapes, curtains, rugs, upholstered furniture, and linens. Therefore, the invoice amount adds the rental charges to the laundering services.
If the rental and laundering fees are separate, then the rental charge is subject to sales tax while the laundering services are exempted.
Organizations Exempted From Sales Tax on Restaurants
- Organization representatives remain tax-exempt under the New Jersey Division of Taxation if:
- Meals settle using organization funds.
- The representative provides a copy of the organization's New Jersey Exempt Organization Certificate (Form ST-5). However, the representative cannot use the exemption certificate if they pay for their own meal.
- State agencies such as the state's political subdivision, the United Nations, a federal agency, including other international organizations in which the United States has a membership. To claim exemption, it will require a copy of the official contract or government purchase.
- Federal employees paying for meals with a GSA SmartPay 2 credit card whose sixth digit of the account number is a 0, 6, 7, 8, or 9.
How to Minimize Chances of Sales Tax Audit
One of the key areas an auditor looks at is whether a business has filed its returns and if the sales amounts on the sales tax returns match with records such as customer receipts and supplier invoices. As New Jersey sales tax audit experts, we highly recommend that you avoid audit triggers before the tax department comes knocking on your door.
Some of the common tips to implement are:
- Always maintain consistent and accurate records such as POS reports, sales tax returns, and federal income returns. You want to ensure you're proactive in this to avoid the auditor from giving you a costly assessment.
- Proper records help avoid late filing and payment of taxes. In addition, for an easy time, establish clarity on the taxability of your goods and services to avoid filing incorrect tax amounts.
- Always keep a record of correct exemption certificates to claim sales tax exemption.
What to Do During a Sales Tax Audit
Even if you've managed to hold off the auditors, there is a high chance you'll get the dreadful notification. However, you can still salvage the situation by displaying professionalism and necessary cooperation with the auditor.
Put your best foot forward by thoroughly evaluating your records for any errors. Hopefully, you've been keeping clean records and we suggest that you do a pre-audit. However, you should not provide every document the auditor requests as this exposes you to higher tax liability. You can seek a professional who can offer New Jersey sales tax help. It's also important to note that the New Jersey Division of Tax offers a relief measure to avoid audits through its voluntary disclosure program.
Learn More About Sales Tax on Restaurants
New Jersey has been reporting an almost 10% increase in tax revenue yearly through to September 2021 from the state sales taxes. The state will likely keep the same momentum to promote sales tax collection through third-party reporting, such as how it updated the audit procedures manual in 2019. What's key for restaurants is to maintain accurate, detailed records should the business become a target for an audit.
At Sales Tax Helper, we have a solid track record in helping businesses successfully overcome any hurdles. Please feel free to contact us today.