Texas Sales Tax Audit on Restaurants
If you are a restaurant owner in Texas and are undergoing a
sales tax audit, or simply want to get your ducks in a row on what needs to be charged sales tax and what does not, then, read this note on sales tax and restaurants. Many of our clients find themselves in wonder as to when and how they need to be paying and collecting sales tax for various items at their business.
Tax Exempt Supplies, Equipment and Services
There is no tax on non-reusable items (paper napkins, plastic eating utensils, soda straws, and french fry bags, for example) given to customers as part of their meals. Restaurant owners can purchase these items tax free by issuing a resale certificate.
Kitchen processing equipment, excluding hand tools, used to prepare food or beverages for sale is not taxable. Qualifying equipment includes:
- bread machines
- breading machines
- charbroilers
- coffee mills and makers
- deep fat fryers
- drink machines that mix or freeze ingredients
- electric ice cream machines
- electric slicers/peelers
- electric kettles
- griddles
- grills
- hot dog cookers
- juicers
- microwave ovens
- milkshake machines
- ovens
- smokers
- steam cookers
- toasters
Repair labor and replacement parts for exempt processing equipment are also exempt, provided the equipment has not been incorporated into realty. If the equipment has been incorporated into realty, charges for labor are taxable, but charges for parts will be exempt provided they are separately stated on the invoice. If the parts charges are not separately stated, however, the restaurant owner can still provide documentation (purchase invoices, bid sheets, or schedules of values) supporting the exemption.
Rentals and leases of qualifying processing equipment are exempt if the contractual rental or lease term is for at least one year. Equipment rentals and leases for less than one year are taxable.
An exemption applies to items necessary to comply with regulatory requirements for public health or pollution control. Hairnets, gloves, and other work clothing required by law and worn during food preparation, for example, qualify for exemption, as do disinfectants applied in processing areas. There is no exemption, however, for employee uniforms or for work apparel sold to employees.
To claim an exemption, a purchaser must issue an exemption certificate to the seller.
Taxable Equipment and Services
Tax is due on most equipment and services used to operate the restaurant: tables, chairs, trays, glasses, dishes, serving utensils, reusable menus and placemats, silverware, tablecloths, and cloth napkins.
Also taxable are items such as office equipment, trash compactors, waste disposal systems and dishwashers, as well as equipment used to store or maintain ingredients or completed food. Examples include soup warmers, steam tables, heat lamps, and salad bars. Hand tools such as manual egg beaters, ladles, knives, garlic presses, and other similar utensils are taxable.
Tax is due on natural gas and electricity used to prepare food and operate the restaurant, and on services for pest control, security, janitorial cleaning, waste removal, landscaping, and real property repair and remodeling.
Use tax is due on taxable goods or services bought from an out-of-state seller. If the seller does not collect the use tax, the buyer should report and pay the tax on the next sales tax return.
Facing a sales tax audit in Texas? Contact our attorney for a consultation.
