Understanding Sales Tax on Cover Charges in Georgia
One might be thinking that a cover charge, door-fee, entrance-fee, is not the sale of a tangible product so that there is no sales and use tax implication. However, there are some exemptions to services (non-tangibles) which call for taxation.
Amusement Activities and Sales Tax
Amusement activities recapture otherwise non-taxable service transactions into sales tax transactions.
- All of the cover charges that have been collected fall under the purview of amusement activities.
- Although there is no definitive activity, such as jet skiing or wall climbing, the mere fact that money was taken as a prerequisite to engaging in an activity, which in this case could be as simple as socializing, will implicate the activity as amusement requiring sales tax to be paid.
Businesses Typically Affected
Most notably:
- Hookah lounges on busy nights
- Clubs
- Bars
- Restaurants
These types of establishments will have to collect and remit sales tax.
How Sales Tax Audits Work
Remember: A sales tax audit will not start by an auditor asking you for proof of sales tax being paid on cover charges.
The sales tax audit will start with the collection of books and records. When they can see that there is an amount of gross income that has been excluded from sales tax, they will look to see all of the activities that are being carried out. If cover charges are among those activities, you can rest assured that they are looking for sales tax.
Impact of Cover Charges on Audits
The audit factor will likely be overstated. The cover charges are usually de minimis compared to the true line of sales and business.
Frequently Asked Questions
Are cover charges subject to sales tax in Georgia?
Yes, cover charges in Georgia are considered part of “amusement activities,” which are taxable under state sales tax law, even if no tangible goods are exchanged. Simply charging for entry can trigger a sales tax obligation.
What businesses are most affected by sales tax on cover charges?
Businesses such as hookah lounges, clubs, bars, and restaurants are most commonly impacted. These venues often charge for entry during busy nights, making them liable to collect and remit sales tax on those fees.
How does the state define amusement for tax purposes?
In Georgia, amusement is broadly defined. Even activities as simple as socializing in a venue with a cover charge may qualify. If payment is required for entry or participation, the activity may be classified as taxable amusement.
Will sales tax auditors specifically ask about cover charges?
No, auditors typically begin by examining a business’s financial records. If gross receipts do not align with reported taxable sales, they will investigate further, including whether cover charges were collected without proper tax reporting.
Can cover charges significantly impact a sales tax audit?
Yes, even if cover charges make up a small part of revenue, they can increase the audit factor. If these charges were excluded from taxable sales, the auditor may adjust the liability upward, potentially leading to additional taxes, penalties, and interest.