Like most states, Texas heavily targets bars and restaurants for sales tax audits. Generally, the restaurant tax in Texas is at 8.25% with the breakdown comprising a base rate of 6.25% and an additional tax of over 2% as per the county location. The restaurant industry in Texas plays a big role in promoting economic growth. In 2018, the estimated restaurant sales were at $66 billion.
Restaurant and bar owners need to be aware of the state's relevant sales tax to ensure compliance to avoid being penalized. Beforehand, operators need to have registered and obtained a permit from the state before collecting sales taxes.
Texas Restaurant Sales Tax
The state mainly categorizes restaurant and bar services, equipment, and supplies as taxable and tax-exempt.
- Starting with the tax-exempt category, restaurant owners don't pay sales taxes on non-reusable items accompanied by customers' meals, such as french fry bags, paper towels, soda straws, and plastic eating utensils. No tax is imposed on the purchase of these items either provided restaurant owners present a resale certificate.
- In addition, kitchen equipment used for food or drink preparation is not taxable. These include bread machines, electric kettles, ovens, electric ice cream machines, deep fat fryers, electric slicers/peelers, steam cookers, milkshake machines, grills, drink machines ( for mixing or freezing ingredients), microwave ovens, coffee mills and makers, griddles, smokers, juicers, hotdog cookers, and charbroilers. There is also an exemption when repairing and replacing parts of the equipment only if they are not under realty. However, if the equipment constitutes realty, restaurant owners claim tax exemption on the cost of repair parts except for the cost of labor provided.
- When renting or leasing the listed items, no sales tax will be imposed if the contract is for one year. If it is less than a year, then one is liable for tax.
- By law, the Texas state enforces relevant laws and regulations targeting retail food establishments, including the health and safety code, which promotes public health. The law, however, exempts clothing worn by employees to promote food safety, including hairnets and gloves as well as disinfectants. But there is an exemption for uniforms or work clothing. In this regard, a person has to issue an exemption certificate when purchasing said items.
Taxable Food, Items, and Services
- There are items subject to tax, including restaurant furniture, utensils, silverware, reusable menus, placemats, tablecloths, and cloth napkins. More equipment added to this bracket includes waste disposal systems, dishwashers, office equipment, trash compactors, hand tools, and equipment such as soup warmers that retain prepared food or ingredients.
- Furthermore, there is tax imposition on natural gas, electricity, waste removal, janitorial cleaning, property repair and remodel, landscaping, pest control, and security.
- While the purchase of food items is tax-exempt, food prepared and ready to eat is taxable. This also includes "to-go" food orders. Bakery items exempted if not served on utensils or plates.
- As for beverages, restaurants and bars dealing with mixed beverages have to collect sales taxes on them. Non-alcoholic beverages and ice sold are also inclusive. The rate is 8.25 % and should be submitted by the 20th of next month.
- On the same note, any complimentary drinks and meals are tax-free except for taxable ingredients used, including served soft drinks.
- When restaurants offer two meals for the price of one, they will charge sales tax on the amount owed by customers and not the free meal.
- Restaurant staff meals are tax-free.
- The sale of gift cards or certificates is not tax charged but sales tax is calculated on the price of the meal and then collected when redeeming the gift certificate. Meal coupons are treated as discounts as long as there is no reimbursement on the discount amount to the restaurant owner.
- No tax is charged on tips and gratuities if they are clearly labeled on the customer's bill except for over 20 percent gratuities.
- Tax is non-permissible for food bought with a Lone Star card if it can be bought with coupons under the food stamp program as per the law.
How to Avoid an Assessment or Audit
There are some steps to take to avoid an audit process in the first place.
First, analyze your Texas Sales Tax Return against external relevant data. Have your federal income tax return and your 1099-k report available and assess before your auditor can obtain them. The recommendation would be to use the data to make a comparison against your sales tax return. You can also elect our sales tax experts to assist you. In case of irregularities, we can resolve them through voluntary disclosure or amending returns.
Then, in case your 1099-k's and your federal income tax return greatly exceed your sales tax returns, consider the TCPA voluntary disclosure program. Taking advantage of the voluntary disclosure program will save your business from penalties. More importantly, you can easily avoid audits by entering the program. Additionally, your eligibility extends if the state has not contacted you first.
Do your homework before the audit starts. Soon after you get an audit notice, start making preparations. Expect your auditor to compare your federal income tax returns, your 1099-k, and your POS reports, to your sales tax returns. Make sure not to hand in any documentation asked by the auditor as this could result in overstated sales amounts. If questioned for declining any submission of documents, be ready with a reasonable answer.
Carefully account for nontaxable sales. Your 1099-k will likely include tips which are the number one nontaxable item. The 1099-k provides a record of the total dollars you received via credit card from a specified bank. To avoid the entire report from being considered taxable by the auditor, have a breakdown of the tips. You can rely on your IRS W-3 report showing tips paid to employees if you do not have documentation.
Consider the documentation availed to the auditor. In a tax audit, it is wise to limit the full disclosure of company information. Show willful cooperation to your auditor, but you are not obligated to be completely open as this can cost you. Only offer documents reporting your sound sales figures. Our team frequently sees restaurants that over-provide documents to the TCPA, leading to serious consequences. The more the documentation, the more likely you will receive an extravagant sales tax assessment. Always practice caution and have answers ready before issuing documentation. Consider getting a sales tax professional to guide you on what to provide and what not to provide.
Do not proceed or pay for an assessment before consulting a professional who can support you in Texas sales audit tax. In Texas, making a payment or signing an audit report automatically waives your right to a review of your audit.
Learn More About Texas Sales Tax Basics for Restaurants and Bars
As the Texas Comptroller of Public Accounts widens its net for more third-party reporting, they will increasingly become more efficient in auditing, especially for restaurants. Stay on top of how the TCPA carries out audits.
It is, therefore, better to seek professional assistance should an audit conclude with a high sales tax liability against a business. An expert will help to amend sales tax returns with errors or file a voluntary disclosure program. Should you receive an audit notice, it is important to seek the help of sales tax professionals. Please do not hesitate to contact us.