Washington state businesses must collect and remit sales tax at a rate of 6.5% on retail sales. It's important to note that there could be additional local sales taxes imposed by the cities, counties, towns, and transit districts in the state. In general, the law imposes sales tax on restaurant food categorized as prepared food, including soft drinks and dietary supplements. However, it largely exempts grocery food items. The Washington Department of Revenue (DOR) is mainly responsible for administering all types of taxes in the state, including sales tax.
Here is a guideline of what the DOR considers taxable or nontaxable for restaurants.
Taxable Restaurant Items for Washington Sales Tax
According to the Department of Revenue, prepared foods are taxable under the following definitions:
- When the seller sells a single item containing two or more ingredients
- When the seller sells heated food or heats the food
- Or when the seller sells the food accompanied with eating utensils such as spoons, knife, plate, fork, or glass. This excludes containers and packaging for transporting the food.
Washington law charges sales tax on beverages defined as "soft drinks". A soft drink like soda must be sealed and ready for consumption with natural or artificial sweeteners. However, if the drink contains milk as an ingredient or more than 50 percent fruit or vegetable juice, it's tax-exempt.
Allocation of Sales Tax on Prepared Food
If the retailer mainly sells prepared foods accounting for more than 75% of their sales of food items, they are required to collect retail sales tax on sales of food and food ingredients as per the tax changes enacted in 2008. There's an exemption for food items sold as 4 or more servings.
As a whole, restaurants are not allowed to segregate their sales and not collect sales tax on food and food ingredients. This is given that prepared food sales by restaurants usually make up 75% of their total sales. Sellers must correctly separate taxable sales from their nontaxable sales.
Tax-Exempt Items for Washington Sales Tax
Retailers can be exempted from collecting sales tax if the sales of prepared foods are less than 75%. In addition, they need to have properly segregated taxable and nontaxable sales.
Tax-exempt food items not sold with eating utensils:
- Bakery items
- Raw food such as eggs, fish, meat, or poultry
- Food sold as a single item but unheated
- Pasteurized food cut or repackaged by the seller
- Additional sales tax exemptions:
- Sales to specific diplomats provided the buyer submits an exemption card at the time of purchase
- Out of state sales of prepared food
- Sales to nonprofit organizations purposely doing fundraising with a reseller permit
- Bad debt or dishonored checks
Effective Steps to Prevent an Assessment or Audit
While the Department of Revenue regularly conducts audits on businesses to ensure their compliance with sales tax rules, a restaurant owner in Washington State can take some steps to avoid a Washington sales tax audit.
First off, make a comparison of your Washington sales tax return against other relevant data. Keep in mind that the auditor will look into data that connects to the audit, so ensure you have your federal income tax return and 1099-k. After you've confirmed the accuracy of the data, analyze it against your sales tax return. Our sales tax experts can help you if you find it technical. We will also help you have your records in good order if there are any irregularities by amending returns or through voluntary disclosure.
DOR Voluntary Disclosure Program
You can go forward with the DOR voluntary disclosure program if there are significant errors or the records are unreliable. With the voluntary disclosure program, the business avoids penalties or audits raised from a normal investigation for Washington sales tax. Provided you don't have any tax obligations, tax issues such as tax evasion, or you have never been contacted by DOR, you're eligible for full voluntary disclosure.
Prepare well before the audit and when you receive the audit notice from the DOR. At most, the auditor will analyze your federal income tax returns, your 1099-k, and your POS reports, against your sales tax returns. Do not submit any documentation that will overstate the sales amounts. If you do, prepare to answer any questions.
Ensure you have accurate records of nontaxable sales. The 1099-k will likely record tips which are the number one nontaxable items. The 1099-k records the total dollars received via credit card from a particular bank. Without the breakdown of tips as part of the total dollars received, the auditor will consider the entire report as taxable. Your IRS W-3 report shows tips paid to employees if it's difficult to account for them.
Practice enough discretion with any documentation provided to the auditor. Generally, in sales tax audits, professionals discourage full documentation. Just work cooperatively with the auditor but only provide documents that show reasonable sales amounts. Avoid over-providing documentation to the DOR as we've witnessed with restaurants daily, which can be very costly. If the DOR assesses more documentation than is necessary, it will generate an unreasonably high sales tax assessment. It's ideal to hire a sales tax professional to offer guidance on the right documentation to issue.
Make sure you consult with a professional with experience in Washington sales tax audit before starting or paying for an assessment. The moment you sign an audit report or make any payment, you will forfeit your right to an audit review.
Staying in Compliance With Washington Sales Tax
It's expected that the Washington State Department of Revenue will continue to increase its reliance on third-party reporting. As a result, more businesses, including restaurants, will be recipients of more sales tax audits. For this reason, businesses need to remain constantly updated on the DOR audit process.
If the business obtains a high sales tax liability, a professional assists in amending the returns or filing for voluntary disclosure. In addition, a professional can offer effective Washington sales tax help if the business receives an audit notice. We are here to help you through the entire process. Feel free to contact us today.