Industry Topics for Restaurant Owners
Español 한국어 Tiếng Việt 中文

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 CDTFA 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 CDTFA 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 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 sponsor and maintain a parklet; 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 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 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.

There may be times where you sell non-food items, such as alcohol or household items, and deliver them along with your food sales. Generally, the sale of these non-food items are taxable. Therefore, when you deliver them to customers, your delivery charges must be prorated between taxable non-food items and sales of nontaxable food, such as, cold sandwiches.

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 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 (see section All Your Sales May be Taxable 80/80 Rule above), 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 publication 22, Dining and Beverage Industry.

Surcharges

If your restaurant adds a separate surcharge to your customers' bills to defray the increased costs of doing business, sales tax applies to the surcharge amount.

Instead of increasing menu prices, many restaurants are adding a surcharge to their receipts to cover required employer costs, such as increases to minimum wage, healthcare contributions, and paid sick leave.

Whether the surcharge is a flat fee or a percentage of the selling price, whenever a surcharge is separately added to any taxable sale, the surcharge is also subject to tax (Revenue and Taxation Code section 6012). The law does not allow a specific sales and use tax exemption for a surcharge added by a restaurant; therefore; you may not claim the cost of the surcharge as a deduction on your sales and use tax return.

Example

Below is an example of the computation of sales tax on a taxable sale that includes a restaurant surcharge. Tax is applied to the total selling price, including the surcharge. The example assumes an 8.5% sales tax rate (your actual tax rate may differ):

Online Ordering Service

If you contract with an online ordering service provider that takes orders from customers for meals you will provide, you are liable for the tax on those meal sales when an agency relationship exists.

When you contract with online ordering service providers to take a customer's order, receive payment, and deliver the meal, it is important to prepare a written agreement between you and the online ordering service provider, which adequately describes the responsibilities of each party involved. It should be made clear whether the online ordering service provider is acting as your agent in the advertising, ordering, and delivery of the meal, or whether the online ordering service provider is purchasing the meals for resale.

When an online ordering service provider acts as your agent, you are considered the retailer of the meals sold through the online ordering service and are liable for the tax measured by the full selling price of those sales, without any deduction of the commission retained by the service provider. However, if the agreement between you and the online ordering service provider does not establish an agency relationship, such service providers would be considered a retailer that is required to hold a seller's permit and is liable for the tax on the sales of meals through the online ordering service. When an agency relationship does not exist, you must obtain a resale certificate from the online service provider(s) that purchase the meals for resale.

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 (see section All Your Sales May be Taxable 80/80 Rule above) 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 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 in Indian Country, 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 of meals, food, and beverages made in Native American Country by non-Native American retailers to a Native American who resides on a reservation are exempt from tax. Additionally, sales of meals, food and beverages for consumption on the Native American reservation by a non-Native American or a Native American that does not reside on a reservation are also not taxable when all of the following conditions apply:

• The non-Native American retailer's business is an eating or drinking establishment, such as a restaurant or bar,
• The non-Native American retailer's business is operated on a Native American reservation under a federally authorized lease or sublease,
• A tax is imposed by a Native American tribe on the sales or purchases of meals, food, and beverages, and
• The meals, food, and beverages are purchased for consumption on a Native American reservation.

For more information, see Regulation 1616.

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 publication 22, Dining and Beverage Industry.

Taxable Sales in Indian Country

Sales and use tax may apply to the sale of meals, food, and beverages by non-Indian retailers in certain circumstances.

If you are a non-Indian retailer that is located on an Indian reservation, some of your sales of meals, food, and beverages may be taxable. For sales that you make at a drive through counter or window, it is presumed that the sales are for consumption off the reservation and therefore subject to tax.

Additionally, if you are a retailer that makes sales for delivery, all your delivered sales are subject to tax when delivered to a location off the Indian reservation. You may report the tax using a percentage developed from a test period. For additional information on how to report using alternative reporting methods for taxable food sales, please see section 0809.12 of the Audit Manual Chapter 8.

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 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 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 publication 22, Dining and Beverage Industry.

Tips and Gratuities

Businesses such as restaurants often receive payments designated as tips, gratuities, and service charges from their customers. An optional payment designated as a tip, gratuity, or service charge is not subject to tax. A mandatory payment designated as a tip, gratuity, or service charge is included in taxable gross receipts, even if the amount is later paid by the retailer to employees.

For specific information on how tax specifically applies to optional payments and mandatory payments, see our Publication 115, Tips, Gratuities, and Service Charges. Also see Regulation 1603, Taxable Sales of Food Products.

When using a Point-of-Sale (POS) system, please make sure tax is correctly applied for mandatory charges. If your POS system is not programmed correctly, please contact your POS vendor.

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 publication 113, Coupons, Discounts and Rebates.

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 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 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 publication 22, Dining and Beverage Industry.

Sales Made on State-Designated Fairgrounds

Effective July 1, 2018, if you are a retailer who makes sales of tangible personal property that take place on the real property of a California state-designated fair (“state-designated fairground”), you must separately state the amount of those sales on your Sales and Use Tax return.

Sales that take place on state-designated fairgrounds include over-the-counter sales on the fairgrounds and also may include sales in which the property is shipped or delivered to or from the fairground. The separately reported amount will be used for funding allocation purposes only. There is no additional tax or fee due on these sales.

For more information on the new reporting requirement, please see Tax Guide for Reporting Requirements on State-Designated Fairgrounds.

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 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 CDTFA.

If you refund excess tax collected to your customer, and have already paid it to the CDTFA, 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.