Understanding NY Restaurant Sales Tax Compliance

June 9, 2024 | Sales Tax | Tax Audits

Restaurant Sales Tax New York State — Rules and Failed Compliance

Complex tax rules govern when, how, and for which products New York restaurants and bars can collect sales tax. It is crucial that restaurant owners understand these intricate requirements and their own obligations before going into business. Mistakes can lead to heavy penalties. Learn more about sales tax on food in New York, what that means for you as a restaurant owner, and what to do if you fall out of compliance.

Sales Taxes in Restaurants

Products sold in NY restaurants are subject to a variety of different taxation laws and requirements. While food is generally exempt from sales tax in New York, that isn’t the case for food prepared by restaurants and other establishments. Understanding the nuance of what is and is not taxable can help you avoid errors that have put New York restaurateurs, into significant tax debt.

Taxable and Non-Taxable Items

Food is usually not taxable at the state level in New York. For example, ingredients sold at grocery stores are exempt from sales tax. However, restaurants are subject to different rules since they sell prepared food. Food and beverages sold in restaurants are taxable if they meet any of the following requirements:
  • The establishment prepares them, and they are ready to be eaten.
  • They are sold heated.
  • The form they are sold in is different than the form they were manufactured in.
  • They are sold for consumption at the establishment.
So if you sell a sandwich at a restaurant, it is taxable because the ingredients are sold in a different form than they are manufactured. But if a grocery store were selling a loaf of bread and a package of sandwich meat, it would not be taxable. This gets complicated if a restaurant sells a mixture of prepared and prepackaged items. Consider a fast-service chain restaurant that sells custom sandwiches, chips, and soda. The sandwiches would be taxable because they are prepared by the establishment. The chips would not be taxable because they are sold in the same form in which they were manufactured. A fountain soda would also be taxable. It gets more complex—while the chips may not be taxable on their own, many restaurants bundle items together into value meals. Prepackaged items sold as part of value meals are taxed; the entire value of the meal is subject to sales tax. Other items that are taxed similarly include trail mix that contains chocolate candy and children’s prepackaged meals. The chocolate candy is taxable, and thus, all of the trail mix becomes taxable. Similarly, if one item in the prepackaged meal is taxable, the entire meal becomes taxable. Some prepackaged items are an exception to sales tax laws. In New York State, snacks that are sugar-, chocolate-, or candy-coated are taxable. Other items that fall into this category include carbonated beverages, candy, and pet food. The New York State Department of Taxation and Finance further explains items that are non-taxable. Examples include:
  • Canned goods
  • Dairy
  • Fruits and vegetables
  • Meat, fish, and poultry
  • Bakery products
  • Frozen foods
  • Baking ingredients
  • Nuts
  • Baby food

How Service Charges Are Taxed

When customers voluntarily tip restaurant workers, those tips are not taxable if they are distributed to the employees. Mandatory tips are also non-taxable if the charge is identified on the bill as a gratuity or tip and the money is given to the employees. If these conditions are not met—for example, the additional charge is not itemized on the bill or part of the service charge goes to management or restaurant expenses—the charge is taxed.

Ensuring Compliance for Restaurants

Setting yourself up for compliance can help you avoid the anxiety that comes with an unanticipated audit. Here’s an overview of the basics.

Sales Tax Permit

Start off on the right foot by applying for your sales tax permit on time. The Department of Taxation and Finance requires that you register and get your Certificate of Authority at least 20 days before you go into business. The Certificate of Authority must be displayed at your place of business.

Paying Sales Tax

The state of New York makes it fairly easy to pay sales tax. Sales tax is payable four times per year, and for each quarter, you must submit your sales tax return. On your Business Online Services account, you can file your return and pay directly from your bank account.

Accurate Documentation

New York State tax law has high standards for merchants who collect sales tax. Business records must be sequentially numbered and dated. You must keep checks and cash register tapes for at least three years from the due date of the sales tax return. Your records must also include information on the taxable or non-taxable nature of the items sold. Keeping these records organized is essential—if you are audited, you will be able to pull up records for the relevant time period instead of digging through years of documentation.

Common Sales Tax Mistakes

These common sales tax mistakes can result in hefty penalties. Auditors know where business owners are likely to make mistakes, and they look for compliance in these areas. Start by ensuring that you’re avoiding these errors:
  • Unreported sales: Assuming you collect payment via cards and cash, it’s crucial to keep thorough documentation of cash sales. Failure to document everything could lead to cash register tapes not matching up with reported sales, and catching these missed transactions can take an enormous amount of work.
  • Charging incorrect rates: In addition to being compliant with state taxation rates, you have to keep up with tax rates in your specific geographic area. New York State has dozens of rates, and charging the wrong one could lead to you collecting far too much or far too little in one tax period.
  • Running afoul of specific regulations: With so many food items subject to specific taxation laws, you have to know exactly which products are and are not taxable.
  • Not ensuring that your records match up: Compare your third-party data against your sales tax return and any other records you keep. An auditor will catch any mismatches immediately.

Non-Compliance Penalties

Penalties add up quickly for non-compliant businesses. They include:
  • Failure to make records available: Up to $1,000 for each quarter
  • Failure to make or maintain records or failure to make records available to the Tax Department: Up to $1,000 for the first quarter plus up to $5,000 for each subsequent failure
  • Did not provide electronic records upon request: Up to $5,000 for each quarter
  • Issued false or fraudulent resale or other exemption certificate: $50 for each misused document and 100% of the tax that would have been due had there been no misuse
  • Submitting false or fraudulent documents to the Tax Department: $100 for each false or fraudulent document; $500 for each false or fraudulent return
Penalties may go beyond fines if you willfully fail to keep records or submit records with the intent of defrauding the government. In these situations, wrongdoers may be charged fines and have to serve jail time.

New York’s Voluntary Disclosure Program

The state of New York has a voluntary disclosure and compliance program that is available for all types of taxes administered by the Tax Department, which includes sales tax. Something that sets apart New York’s program is that anyone who meets the qualifications can participate, even if their activity was fraudulent or criminal. The process is fairly straightforward. You simply report the taxes you owe, make an agreement to pay them, and agree to pay your taxes in the future. In your paperwork, you may be asked about fraudulent conduct. However, state tax law protects taxpayers from having that information used against them by federal, state, and local agencies.

Get Help With New York Sales Tax Issues

New York sales and use tax can be incredibly complex, particularly in the restaurant industry. If you’re struggling to stay compliant or you know you’ve fallen short of state requirements, we can help. Call Timothy S. Hart Law Group at 800-714-7592 or reach out online to set up a time to meet with one of our tax professionals.  

Attorney Timothy Hart

Timothy S Hart, the founding partner of the tax law firm of Timothy S. Hart Law Group, P.C. is both a New York Tax Lawyer & Certified Public Accountant. His area of expertise includes innovative solutions to solve your Internal Revenue Service and New York State tax problems, including tax settlements through the Federal and New York State offer in compromise programs, filing unfiled tax returns, voluntary disclosures, tax audits, and criminal investigations. [ Attorney Bio ]