Tax Guide for Grocery Stores

Helping your business succeed is important to the Board of Equalization. Taxes you collect and pay to the state help fund state and local services and programs important to you and your community. We recognize that understanding tax issues related to your industry can be time-consuming and complicated, and want to help you get the information you need so you can focus on starting and growing your business

To help you better understand the tax obligations specific to grocery stores, we have created this guide detailing the tax issues and information important to your business.


How to Use This Guide

grocery store

Each section of this guide contains information relevant to your business. The Getting Started section provides key resources related to registration, filing returns, account maintenance, other required licenses, and other important information you need.

The Industry Topics section covers common industry topics in an at-a-glance format that can be expanded to provide more extensive information if you need it.

The Reporting Methods section covers the more prevalent reporting methods used in today’s business environments.

Lastly, the Resources section provides links to a wealth of information, including forms and publications, statutory and regulatory information, web-based seminars, and access to live help from our customer service representatives.

Please note that the information included is general in nature and is not intended to replace any law or regulation.



grocery store

If You Need Help

If at any time you need assistance with topics included in this guide – or with others we may have not included – feel free to contact us by telephone or email. Contact information and hours of operation are available in the Resources section.

If you have suggestions for improving this guide, please contact us by email.

Getting Started

If you own a business in California, and you expect to be making taxable sales, you must register with us for a seller's permit and file regular sales and use tax returns. You may be required to register for other licenses or accounts using our online registration service and file other returns. Listed below are other tax and fee programs that may be applicable to grocery stores.

Cigarette and Tobacco Products Licensing Act

You must register with us for a Cigarette and Tobacco Products Retailer License if you intend to sell cigarettes or tobacco products at retail. All new applications must be submitted with a one-time license fee of $100 for each retail location selling cigarettes or tobacco products. A license is valid for a 12-month period, is not assignable or transferable, and must be renewed annually at no additional cost, as long as it is renewed timely.

Cigarettes must have the California cigarette and tobacco products tax stamp affixed to each package.

For more information, download Publication 78, Sales of Cigarettes and Tobacco Products in California.

Registration

Online Registration — Register with us for your seller's permit and apply for any of the licenses, permits, or accounts listed above, or add a business location to an existing account.

If you have already registered with us, you'll find these tools helpful in maintaining your account.

Filing and Payments

Notice of Business Change — Keep your information current by using the links below and notifying us of any business changes.

Industry Topics

A grocery store is an establishment whose principal line of business is the sale of food products and related items. This term includes separate grocery departments, but does not include delicatessens, country or general stores, or businesses that only handle groceries as a sideline.

Sales of food products for human consumption are generally nontaxable. You should keep accurate and complete records of all purchases and sales to verify all exemptions claimed as exempt sales of food products.

For detailed lists of common taxable and nontaxable food products please consult publication 31, Grocery Stores, or you may call our Customer Service Center at 1-800-400-7115.

The Basics

Sales and Use Taxes in General

In California, all sales are taxable unless the law provides a specific exemption. In most cases, taxable sales are of tangible personal property, which the law defines as an item that can be seen, weighed, measured, felt, or touched.

Use tax is a companion to California's sales tax, and is due whenever you purchase taxable items without payment of California sales tax from an out-of-state vendor for use in California. You also owe use tax on items that you remove from your inventory and use in California when you did not pay tax when you purchased the items. To pay use tax, report the purchase price of the taxable items 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 such as soda or alcoholic beverages that you purchased without paying sales tax, you owe an equivalent use tax based on the cost of those items to you. The use tax rate is the same as the sales tax rate in effect at the location of use.

For more information on use tax, see Publication 110, California Use Tax Basics.

Seller's Permit

Most people who sell taxable items in California, even temporarily, must register with the BOE for a seller's permit. Registering for a seller's permit is free, although in some cases a security deposit may be required. If you have multiple locations, you must register each location with us. You can register with the Board of Equalization for a seller's permit or consolidated seller's permit using our online registration service.

Be sure to let us know about any changes to your business, or to your mailing or email address so that we can keep your records up-to-date and inform you of important changes in law, tax rates, or procedure. 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.

Cigarettes and Tobacco Products

Cigarettes and Tobacco Products

Retail sellers of cigarettes and tobacco products must have a California Cigarette and Tobacco Products Retailer's License before purchasing or selling cigarettes or tobacco products. You must obtain this license in addition to your seller's permit.

  • You are required to have a license for each location from which cigarettes or tobacco products are sold.
  • If you purchase cigarettes or tobacco products from an out-of-state supplier who does not have a California Cigarette and Tobacco Products License, you must obtain a distributor's license.
  • If you purchase tax-paid cigarettes or tobacco products for resale, you must obtain a wholesaler's license.

You can apply online for a cigarette and tobacco products license using our online registration service or at any of the BOE's field offices.

Transferring Product Between Stores

If you own more than one store and hold the necessary licenses for each location, you may be allowed to transfer cigarettes and tobacco products between stores. When transferring cigarettes and tobacco products, legible transfer records and copies of the original purchase invoice must be kept at each location involved in the transfer.

The transfer records must be prepared at the time of transfer and must include the address and tobacco license number of each store, the purchase invoice date, the purchase invoice number, the supplier's name on the invoice, the brand, type of packaging, flavor, and or style, and the amount of items transferred.

You must provide such documentation upon request by BOE staff or law enforcement.

For more information about licensing requirements for sellers of cigarettes and tobacco products, see BOE publication 78, Sales of Cigarettes and Tobacco Products in California. You may also attend a tobacco class for retailers or view our online tobacco seminar.

Cigarette Buy-Downs

If a cigarette manufacturer or distributor offers a "buy-down" promotion, where you agree to sell certain cigarettes at a reduced price and receive compensation from the manufacturer or distributor, sales tax applies to the total received from the customer plus any amount received from the manufacturer or distributor.

For more information, please see BOE publication 113, Coupons, Discounts, and Rebates, or Regulation 1671.1, Discounts, Coupons, Rebates, and other Incentives.

Pharmacy and Drug Store Sales

Prescription Drugs

In general, you are not required to report and remit tax on sales of prescribed drugs and other preparations used to treat, diagnose, cure, mitigate, or prevent disease.

To qualify for the exemption, the drug or preparation must be prescribed by a person authorized to prescribe the medicines such as a licensed physician, dentist, or podiatrist, and the prescription must be filled by a registered pharmacist.

A registered pharmacist is a person to whom a certificate has been issued by the Board of Pharmacy.

Over-the-Counter Medicines

Sales of over-the-counter medicines are generally taxable.

Examples of over-the-counter medicines include aspirin, cough syrups, cough drops, throat lozenges, etc. If an over-the-counter is prescribed by a physician and purchased from a pharmacist, the sales may not be taxable.

Diabetic Supplies

Tax does not apply to the sales or use of insulin and syringes, glucose test strips, or skin puncture lancets that are furnished by a pharmacist as directed by a physician to a diabetic patient for treating diabetes.

The items must be furnished by a pharmacist for testing the patient’s own blood sugar levels. Sales to anyone other than a diabetic patient or furnished by other than a pharmacist are taxable.

For more information on what qualifies as a medicine, see Regulation 1591, Medicines and Medical Devices.

Sales

Nontaxable Sales

Sales tax generally does not apply to sales of:

  • Baby formulas (including Isomil)
  • Cooking wine
  • Edge Bars, Energy Bars, Power Bars
  • Food products
  • Granola Bars
  • Martinelli's Sparkling Cider
  • Noncarbonated sports drinks ( Gatorade, Powerade, All-Sport)
  • Pedialyte
  • Water—Bottled noncarbonated, noneffervescent drinking water

Taxable sales

    Sales tax generally applies to sales of:

  • Alcoholic beverages
  • Books and publications
  • Cameras and film
  • Carbonated and effervescent water
  • Carbonated soft drinks and mixes
  • Clothing
  • Cosmetics
  • Dietary supplements
  • Drug sundries, toys, hardware, and household goods
  • Fixtures and equipment used in an activity requiring the holding of a seller’s permit, if sold at retail
  • Food sold for consumption on your premises (see Food service operations)
  • Hot prepared food products (see Hot prepared food products)
  • Ice
  • Medicated gum (Nicorette, Aspergum)
  • Newspapers and periodicals
  • Nursery stock
  • Over-the-counter medicines, such as aspirin, cough syrups, cough drops, throat lozenges, and so forth
  • Pet food and supplies
  • Soaps or detergents
  • Sporting goods

Newspapers and Magazines

Newspapers, magazines, and other periodicals you sell to your customers are taxable.

Newspapers, magazines, and other periodicals you provide without charge are not taxable. If you request payment or suggest a donation for such items, but do not require a payment or donation, you are considered to be providing the items without charge.

Hot Prepared Foods

Heated food is usually taxable whether or not it is sold to-go or for consumption on your store premises.

A food product is hot when it is heated to above room temperature, and is still considered hot even after it has cooled, because it is intended to be sold in a heated condition.

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 store are taxable.

Combination Packages

When you sell two or more food items together in a package to-go for a single price, tax may apply depending on the components of the package.

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

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

Sales of food and beverages for your patrons to eat in your store are always taxable.

California Redemption Value (CRV)

Generally, if the beverage you sell is taxable, tax also applies to the separate charge for CRV. The amount subject to tax is the combined selling price of the beverage, the container, and the CRV.

If you are bottling, producing, importing or selling beverages in California, you may need to register with CalRecycle under the California Beverage Container Recycling and Litter Reduction Act. Contact the CalRecycle registration unit to register.

Note: The CRV program is administered by CalRecycle. Questions regarding the fee should be directed to them. This guide covers only how sales tax applies to CRV charges.

For more information about the CRV fee, visit the CalRecycle's Beverage Container Recycling page

Food Stamps

Items sold in exchange for food stamps are exempt from tax, even if the items are otherwise taxable. For example, carbonated beverages, ice, and food coloring are not taxable when purchased with food stamps.

You are allowed to take a sales and use tax deduction for your food stamp sales. You may report the deduction for food stamps on an actual basis if you separately account for those sales. Alternatively, there are two approved methods for computing the allowable deduction:

  • You may take a deduction on your sales and use tax return of two percent of the total amount of food stamps redeemed in the period for which the return is filed.
  • You may take a deduction greater than two percent if taxable items purchased with food stamps divided by total exempt food purchases plus taxable items purchased with food stamps. See example below:
Example:
Taxable items purchased with food stamps $ 5,000
Exempt food products $130,000
Total Sales $135,000

Allowable percentage for food stamp deduction: $5,000 ÷ $135,000 = 3.7%

Manufacturer's Coupons, Rebates, and Other Promotions

If you accept discount coupons that allow your customers to purchase merchandise at a reduced price, tax is due on the amount you receive for the sale, plus any amount you receive from a third party as payment.

In cases where you offer your customers a store discount on taxable merchandise but you are not being paid by any third party, you owe tax only on the amount received from your customer.

A manufacturer's discount is one where you receive money from a manufacturer or other party as reimbursement. The amount you receive from a manufacturer or other third party as reimbursement for a discount is considered part of your gross receipts and is taxable, along with the amount you receive from your customer.

For more information, please see BOE publication 113, Coupons, Discounts, and Rebates.

Lottery Sales

Sales of tickets for California Lottery games are not taxable, and you should not include them on your sales and use tax return as part of your gross receipts.

Remember, it is important to keep your receipts for nontaxable sales – such as lottery tickets – separate from receipts for taxable sales.

Service Charges

Service charges you make to your customers for money orders and returned checks are not taxable.

You should not include service charges for money orders or returned checks on your sales and use tax return as part of your gross receipts.

Bad Debt Deductions

If a check or credit card transaction is returned unpaid and you find it to be uncollectible and write it off for income tax purposes, you may claim a bed debt deduction for the amount of the taxable sale.

You must claim the deduction on your sales and use tax return for the reporting period in which you wrote it off. If you find it uncollectible at a later time, you must submit a claim for refund and amend your return for the appropriate period. You may only take the bad debt deduction if you previously reported the sale as taxable.

Generally, a single sale can include both taxable and nontaxable items. The bad debt deduction can only be claimed for the taxable items in which you reported tax at the time of the sale. For example, you receive a $100 check for $75 of nontaxable items and $25 of taxable items. If the check is returned, you may only take a bad debt deduction for the $25 of taxable items you originally reported. When checks are cashed for an amount over the sale for cash back, that excess amount is not deductible as bad debt.

If you later collect the debt, any amount claimed as a deduction must be reported as a taxable sale in the period collected. You cannot deduct fees paid to collect the debt. For more information see Regulation 1642, Bad Debts.

Sales of Fixtures and Equipment

If you sell any fixtures or equipment used in your business, you should pay taxes on the selling price. Sales of fixtures and equipment you use are taxable even if they occur as part of the sale, reorganization, or closure of your business.

For more information, please see Regulation 1595, Sale of a Business – Business Reorganization.

Purchases

Items Purchased for Resale

When you issue a resale certificate to purchase taxable items for resale, you don't pay sales tax at the time of purchase. Instead, sales tax applies when you sell the items at retail.

If you purchase an item with a resale certificate and use it, you owe a use tax on the cost of the item – at the same rate as the sales tax at the location of use – to the BOE.

Supplies, Equipment, and other Business Expenses

Items you purchase for use in your business (displays, advertising materials, bookkeeping and maintenance supplies, storage equipment, and refrigeration units, among others) are subject to tax at the time of purchase.

Normally such items are purchased from local suppliers who add and report sales tax. However, if you purchase equipment or supplies from an out-of-state seller, the sale is subject to use tax (see use tax below).

If the out-of-state seller does not charge California use tax, you should report the purchase price on your tax return (under "Purchases Subject to Use Tax").

Note: Wrapping and packaging supplies used to wrap merchandise or bags in which you place items sold to your customers may be purchased for resale. All other purchases of supplies, however, are generally subject to tax.

Use tax

If you purchase taxable property without paying California tax and use the property for a purpose other than for resale, you owe a use tax. For example, if you issue a resale certificate to purchase soda but give it away or consume it, you owe use tax based on its purchase price.

The use tax rate is the same as the sales tax rate in effect at the location of use.

To pay use tax, report the purchase price of the taxable items 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.

Inventory

Inventory Controls

Keeping good books and records will help you detect any losses early. We strongly recommend that you:

  • Keep records of all merchandise removed from inventory.
  • Keep accurate and complete records of sales and purchases.
  • Take a physical inventory at least once a year.
  • In the period between inventories, compute the cost of merchandise sold, add the expected percentage of mark-up, and deduct discounts for the period of time involved. Your computed figure should be very close to the sales made for the same period the prior year.
  • Ensure that your records of purchases for resale are accurate and complete and do not include supplies or other items not for resale.

Common Inventory Losses

Keep your eye out for the following types of losses:

  • Money pocketed by employees and covered up by not ringing up the sale or ringing it up at a lesser amount.
  • Merchandise stolen by employees, clean-up crews, or other persons with access to the store.
  • Short deliveries or theft by delivery persons.
  • Shoplifting by customers.

Note: thefts of cash are not deductible for sales tax purposes because tax is measured by sales.

Reporting Methods

Total Sales

Your total sales reported on your sales and use tax return should include all sales made in the reporting period. Gross sales include sales of exempt items and taxable items, charge sales, and credit card sales. You may not reduce total sales by service charges charged by credit processing companies.

Sales Suppression Software Programs and Devices

Beginning January 1, 2014, it will be a crime for anyone to knowingly, sell, purchase, install, transfer or possess software programs or devices that are 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.

Reporting Methods

You may use any method to determine sales of exempt food items and taxable items as long as it accurately reports the amount of tax due. Regardless of the method chosen, you must be prepared to demonstrate that the method accurately discloses the correct amount of tax due and is verifiable in an audit.

Listed below are some of the more common reporting methods. For detailed information on reporting methods, see Regulation 1602.5, Reporting Methods for Grocers.

Electronic Scanning Systems

Electronic scanning systems record taxable sales, nontaxable sales, sales tax, and related data based upon an item’s Universal Product Code (UPC).

You should ensure that proper controls are in place to monitor and verify the accuracy of the scanning results and tax returns. You may contact us for assistance with the types of documentation you should develop and retain. Records should be kept for four years form the date of the sales.

Suggested documents include but are not limited to:

  • Normal books of account.
  • Master List of Products.
  • Product Coding Reports.
  • Product Movement Reports.

If you choose this reporting method, you are required to keep a general outline of your reporting methods which should include the following:

  • The type and form of records and reports generated.
  • The person responsible for testing, maintaining, and correcting the scanning system.
  • How the system accounts for items such as food stamps, manufacturer’s coupons, bottle deposits, over rings, etc.

Retail Inventory Method

This method is generally only appropriate for use by large grocers. When you use this method, you segregate your inventory into groups of exempt food products and taxable merchandise.

Beginning inventory, purchases, and ending inventory are priced and recorded at their retail values for each group. Beginning inventory plus purchases less ending inventory represents your anticipated sales for each group. Adjustments are made for markons, markdowns and shrinkage to determine realized sales. An adjustment of up to one percent is allowable for shrinkage under this method.

Cost Plus Markup-Taxable Merchandise

With this method, you add markups to your cost of taxable merchandise; make adjustments for inventory for markdowns, markons, quantity discounts, case sales, and up to one percent shrinkage adjustment if losses are incurred, to determine your taxable sales each reporting period.

Markups are determined by conducting shelf tests of representative purchases using a minimum of a one month purchase cycle within a three year period. Items are separated by product type (for example, beer, wine, paper products, pet foods, etc.). For a detailed illustration of how to make these calculations please see publication 31, Grocery Stores.

Other Reporting Issues

Deductions

Deductions should be taken from total sales for the sales of exempt merchandise. Generally, your exempt merchandise will be nontaxable sales of food products. You should segregate nontaxable and taxable items in your records to support any deductions taken.

Bad Debts

If you have payments that are returned unpaid by the bank, are found to be uncollectible, and are charged off for income tax purposes, you may take a bad debt deduction on the portion of the sale related to taxable items. If the money is later recovered, you will have to include the recovery in your gross receipts. For more information on bad debts see Regulation 1642, Bad Debts.

Losses

You may experience losses from spoilage, breakage, theft, and so forth. Depending on the reporting method you choose, you may be allowed a deduction between 1% and 3% of the cost of taxable items. Adjustments for losses are not allowed if you sales of nongrocery taxable items are based on actual sales.

Resources

Need to know more? Follow the links below for more information about the topics covered in this guide, as well as other information you might find helpful.

Top Resources

Related Publications and Regulations

Related Websites

Other Helpful Resources

  • Sign Up for BOE Updates — Subscribe to our email lists and receive the latest news, newsletters, tax and fee updates, public meeting agendas, and other announcements.
  • Videos and How-To Guides — These resources will help you avoid common mistakes, file your tax returns online, and more.
  • City and County Tax Rates — A listing of current and historical tax rates.
  • Special Notices — BOE special notices are issued whenever there is a change in law, tax rates, or BOE procedures.
  • BOE Online Services — Learn about the online services BOE offers.
  • Verify a Permit or License — You can use this application to verify a seller's permit, Cigarette and Tobacco product retailer license, eWaste account, or Underground Storage Tank Maintenance Fee Account.
  • BOE Field Offices — A comprehensive listing of all BOE field offices and contact information.
  • Find Your Board Member — You can use this application to quickly identify your elected BOE representative.
  • Get It In Writing! — The Sales and Use Tax Law can be complex, and you are encouraged to put your tax questions in writing.
  • Contact Us — A listing of BOE contacts for your questions and concerns.