Tax Guide For Restaurant Owners

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 that you can focus on starting and growing your business.

To help you better understand the tax obligations specific to the dining and beverage industry, we have created this guide.



How to Use This Guide

Inside the Restaurant

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

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

Lastly, the Resources section provides links to a wealth of information, including web-based seminars, forms and publications, statutory and regulatory information, 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.



Restaurant setting

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 for assistance. 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.

BOE staff is developing proposed amendments to Regulation 1603 for consideration by elected Board members to clarify the application of tax to tips, gratuities, and service charges. To receive copies of future discussion papers, including drafts of the proposed regulation, ask to be added to the list of interested parties at: btcinformationrequests@boe.ca.gov.

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. Whether you are new to operating a restaurant or growing your existing business, you'll find these tools helpful in maintaining your account with us.

Registration

Online Registration — Register with us for your seller's permit, or add a business location to an existing account.

Filing and Payments

Industry Topics

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.

For the restaurant industry, most taxable sales are going to be of food and beverages. However, you may also be required to collect sales tax on mandatory tips, corkage fees, and cover charges, among other things.

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 – usually equal to the sales tax – based on the cost of those items to you.

Seller's Permit

Most people who sell food or other 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 your restaurant has more than one location, 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 updated 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.

Key Industry Topics

All Your Sales May be Taxable (80/80 Rule)

The "80/80 rule" applies when more than 80 percent of your sales are food and more than 80 percent of the food you sell is taxable. If the 80/80 rule applies and you do not separately track sales of cold food products sold to-go, you are responsible for tax on 100 percent of your sales.

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 food and beverages sold to-go 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 subject to tax under the 80/80 rule.

If you are starting a new restaurant, changing your menu or 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, each must be considered separately.

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

Food Sold for Consumption at Your Place of Business

Sales of food and beverages for consumption at your place of business 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 provide trays, glasses, dishes, or other tableware; or
  • You are located in a shopping mall and are near dining facilities provided by the mall. In this example, you are located 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 BOE 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, among others. Cold food that is sold as part of a combination package, depending on the other contents of the package, may be taxable.

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 BOE publication 22, Dining and Beverage Industry.

Food Deliveries

If you make deliveries of food, it is considered food sold "to-go". Hot prepared food is taxable including any delivery fees you may charge.

However, if the food product is not taxable, such as cold sandwiches, then the delivery charge is also not taxable. If you charge a single price for a combination of food items that are both hot and cold, the entire price is taxable including any delivery fees charged.

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 the premises of a customer, or on premises supplied by the customer. For more information on the tax application for catering, see our Tax Guide for Caterers.

Hot Prepared Food

Heated food is usually taxable whether or not it is sold to-go or for consumption at your restaurant.

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 restaurant are taxable.

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

Cold Food

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

Unless your sales are all taxable under the 80/80 rule, 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 is heated by your customers in a microwave you provide is considered cold food sold to-go.

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

When to Charge Sales Tax

Combination Packages

When you sell two or more food items together in a package to-go for a single price, tax applies depending on the components of the package and whether the 80/80 rule applies to your business.

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 restaurant are always taxable.

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

Nontaxable Sales

Certain sales you may make at your restaurant are not taxable, such as cold food products that are not for consumption at your restaurant, 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 quart of salsa is not typically something a customer would eat on the premises.

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 BOE publication 22, Dining and Beverage Industry.

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 are taxable.

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

Employee Meals

In most cases, 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 compensate you for meals they consume.
  • Your employees receive meals instead of cash to bring their compensation to legal minimum wage.
  • Your employees have the option to receive cash for meals they do not consume.

For more information, see BOE 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 furnishing entertainment are not subject to tax.

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

Tips

Optional tips and gratuities are not taxable if they are distributed to your employees. Mandatory tips and gratuities are taxable. Suggested tips and gratuities that your customers agree to prior to service are regarded as mandatory.

If you have a statement on your menu indicating a gratuity will be added for groups exceeding a certain size, those gratuities are mandatory and taxable. Likewise, if you have a standard agreement for the use of a banquet room that recommends a certain gratuity, and your customer accepts that agreement prior to using the banquet room, the gratuity is mandatory.

Keeping old menus is a great way to document your tip policies.

For more information, see BOE publication 115, Tips, Gratuities, and Service Charges.

BOE staff is developing proposed amendments to Regulation 1603 for consideration by elected Board members to clarify the application of tax to tips, gratuities, and service charges. To receive copies of future discussion papers, including drafts of the proposed regulation, ask to be added to the list of interested parties at: btcinformationrequests@boe.ca.gov.

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 you receive money from a third party as reimbursement for any discount program, that amount is considered part of your gross receipts and is taxable.

For example, if you have a promotion in which a customer presenting a coupon is entitled to two meals for the price of one, and a promoter is paying you two dollars for each redeemed coupon, sales tax applies to the total received from the customer plus the two dollars received from the promoter.

Some third-party companies, such as Groupon or LivingSocial, offer "deal of the day" promotions in which a customer pays for a coupon that can be redeemed for items at a discounted price. In these cases, sales tax is due on your selling price to the customer plus the amount the customer paid for the coupon.

For more information about how sales tax applies to "deal of the day" promotions, see the BOE's November 2011 Special Notice, Application of Sales Tax to Deal-of-the-Day Instruments.

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.

It is strongly recommended that you keep accurate records of any items that you consume, give away, or discard.

For more information, see BOE 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 want to claim a deduction for sales tax included on your return, you must post a sign on the 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 food and beverages are served.

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

Recordkeeping

Following are some basic guidelines that can help prevent unanticipated tax problems.

  • If your restaurant includes a bar, make sure to keep records that show restaurant purchases and sales separately from bar purchases and sales.
  • You should 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.
  • You should keep evidence of price changes or other variables in your usual pricing practices.

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

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

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

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.

Inventory Controls

It is strongly recommended that restaurant owners carefully track their inventory (for example, keeping records of deliveries, keeping liquor stocks in a locked storeroom and keeping records of products stocked or removed) to minimize the possibility of additional tax assessments.

You should keep records of purchases for resale separate from 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 BOE 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 the BOE.

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

Evidence that you have refunded excess tax to a customer may be in the form of a receipt, a cancelled check, or proof that the customer has elected to take a credit with you for the amount in question.

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 Three Resources

Other Restaurant-Specific Resources

Publications

Special Notices and Articles

Regulations, Annotations, and Manuals

Other Helpful Resources

  • Contact Us — A listing of BOE contacts for your questions and concerns.
  • 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.
  • Taxpayers' Rights Advocate (TRA) — The TRA Office helps taxpayers when they are unable to resolve a matter through normal channels, when they want information regarding procedures relating to a particular set of circumstances, or when there are apparent rights violations.