Tax Guide for Grocery Stores
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 mark-ons, 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, mark-ons, 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 non-grocery taxable items are based on actual sales.