What restaurant items are taxable in California?

In California, hot prepared food is generally taxable whether sold for dine-in or to-go. Cold food is usually taxable when sold for on-site consumption, but cold food sold to-go is generally not taxable unless a special rule applies. Soda and alcoholic beverages are taxable, while hot beverages sold to-go may be exempt in some cases. Taxability can also change when items are sold as part of a combination package.

What is the 80/80 rule for restaurants?

The 80/80 rule applies when more than 80% of a restaurant's gross receipts come from food products, and more than 80% of those food products are taxable. If this rule applies, all food and beverage sales may be treated as taxable, including many to-go sales, unless the restaurant separately accounts for exempt cold food to-go sales with proper documentation, such as guest checks or POS records.

Are delivery charges taxable on restaurant orders?

Delivery charges usually follow the taxability of the food being sold. If the order includes taxable hot prepared food, the delivery charge is generally taxable. If the order is for nontaxable cold food sold to-go, the delivery charge is generally not taxable. For mixed orders containing both taxable and nontaxable items, the delivery charge may need to be prorated.

Are tips, service charges, and restaurant surcharges taxable?

Optional tips left by customers are generally not taxable. However, mandatory service charges, automatic gratuities, and restaurant surcharges added to help cover operating costs are generally taxable. Other charges such as corkage fees and cake-cutting fees are also typically taxable.

How should restaurants track taxable and nontaxable sales?

Restaurants should use their POS system and sales records to clearly distinguish between dine-in and to-go sales, as well as between hot taxable items and potentially exempt cold to-go items. This is especially important for businesses affected by the 80/80 rule, since inadequate documentation can result in 100% of sales being treated as taxable.

Brian Smith, Author at Back Office

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