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.
Qualifying Kitchen Processing Equipment
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
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.
- Charges for parts are exempt provided they are separately stated on the invoice.
- If the parts charges are not separately stated, the restaurant owner can still provide documentation (purchase invoices, bid sheets, or schedules of values) supporting the exemption.
Rentals and Leases
- 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.
Compliance with Regulatory Requirements
An exemption applies to items necessary to comply with regulatory requirements for public health or pollution control.
Examples of exempt items:
- Hairnets, gloves, and other work clothing required by law and worn during food preparation
- Disinfectants applied in processing areas
Note: There is no exemption for employee uniforms or for work apparel sold to employees.
Claiming the Exemption
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, including:
- 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
- dishwashers
- equipment used to store or maintain ingredients or completed food (e.g., soup warmers, steam tables, heat lamps, and salad bars)
- hand tools (manual egg beaters, ladles, knives, garlic presses, and other similar utensils)
Utilities and Services
- Tax is due on natural gas and electricity used to prepare food and operate the restaurant.
- Tax is also due on services such as:
- pest control
- security
- janitorial cleaning
- waste removal
- landscaping
- real property repair and remodeling
Out-of-State Purchases
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.
Need Help Facing a Sales Tax Audit?
Facing a sales tax audit in Texas?
Contact our attorney for a consultation.
Frequently Asked Questions
What restaurant items are exempt from Texas sales tax?
Non-reusable items provided with meals, like napkins, plastic utensils, and fry bags, are tax-exempt when purchased using a resale certificate. Similarly, qualifying food-processing equipment and repair parts may also be exempt under certain conditions.
Are utility bills for restaurants taxable in Texas?
Yes, utilities such as electricity and natural gas used to operate a restaurant are taxable in Texas. This includes the energy used for cooking and general operations.
How can a restaurant claim a sales tax exemption?
To claim an exemption, a restaurant must issue a valid exemption certificate to the seller. Proper documentation, like invoices or bid sheets, may also be needed for audit purposes.
Is leased restaurant equipment taxable?
Only if the lease term is less than one year. Equipment leased or rented for one year or more may qualify for a sales tax exemption under Texas law.
Are services like janitorial or pest control taxable for restaurants?
Yes, services such as janitorial cleaning, pest control, landscaping, and security are all taxable when purchased by a restaurant in Texas. These are considered operational expenses and do not qualify for exemptions.