Most food and beverages sold by New York State restaurants are subject to sales tax, but there are exceptions depending on whether the food or drink is ready for immediate consumption, its temperature when served, and where the customer consumes the food or drink.
Restaurant owners must understand when to apply sales tax and train their employees how to ring up sales correctly. Beyond that, they also must file accurate returns, pay sales tax liabilities in full, and respond to audit requests from the state. Failure to stay compliant can put your business at risk.
This blog covers common mistakes restaurant owners make with NY sales tax, their consequences, and how to avoid them. If you have questions, a restaurant sales tax attorney from the Law Offices of Stephen B. Kass can help.
Key Takeaways
- Restaurants must collect sales tax – As a general rule, business establishments that sell prepared food for immediate consumption must collect and remit sales tax to the New York State (NYS) Department of Taxation and Finance (DTF).
- Sales tax responsibilities – In addition to collecting and paying sales tax, restaurants must also keep sufficient records so that sales tax can be calculated from each transaction.
- Sales taxes are trust fund taxes – Due to their trust fund nature, the DTF is especially aggressive with collecting unpaid sales taxes, and their nonpayment could result in personal liability, including criminal charges.
- Common sales tax mistakes – Mixing sales taxes with regular business funds and not filing sales tax returns are frequent errors.
- Consequences for sales tax violations – In addition to civil and criminal liability, restaurants may face tax warrants, levies, padlocking (closures), and license suspension or revocations.
Overview of How NY Sales Tax Works for Restaurants
Under New York tax law, business establishments that make and sell “restaurant-type” food must collect sales tax on those transactions. These include establishments such as:
- Cafeterias
- Concession stands
- Delicatessens
- Diners
- Drive-ins
- Food courts
- Pizzerias
- Street cards
- Taverns
“Restaurant-type” food refers to food or drink (alcoholic and non-alcoholic) that the restaurant sells for immediate consumption. Whether they’re subject to sales tax will depend on whether the food or drink is:
- Sold for on-premises or off-premises consumption;
- Sold in heated or unheated form;
- Sold in the same form, condition, quantities, and packaging as they’re ordinarily sold in grocery stores; and/or
- Being sold by the restaurant for resale.
Generally speaking, food or drink sold by a restaurant for on-premises consumption is subject to sales tax. This is true whether the food is heated or unheated. Food sold “to-go” (for off-premises consumption) is also subject to sales tax, unless it’s sold for resale, or:
- It’s sold unheated, and
- It’s sold in the same form, condition, quantity, and packaging as normally found at a grocery store.
These very specific rules can lead to confusion and sales tax problems for restauranters.
Who’s Responsible for Collecting Restaurant Sales Tax?
The restaurant is responsible for collecting and remitting sales tax to the NY DTF. Restaurants are also responsible for keeping sufficient records so the restaurant can determine the taxability of the items it sells.
If you’re selected for an audit, the auditor will also need to check the records to ensure you’ve been reporting and paying sales tax correctly. Failing to keep proper records could result in an auditor overestimating the sales taxes.
Why New York Sales Tax Problems Are Different
Unlike many other New York tax problems, sales tax issues are particularly cumbersome, and there are at least two reasons for this:
- Sales taxes are trust fund taxes.
- There’s the potential for severe penalties.
Trust Fund Taxes
Trust fund taxes the taxpayer collects (and holds) in trust until they can be paid to the taxing authority. So if a restaurant collects sales tax from its customers but doesn’t turn the tax over to the NYS DTF, the restaurant is taking money directly from the customer, withholding it from the state, and (likely) spending the money on the restaurant.
As a result, the Department of Taxation and Finance prioritizes sales tax enforcement. The State has the right to hold owners personally liable for these trust fund taxes, regardless of the business’s structure. Also, the DTF applies severe penalties for unfiled or unpaid sales tax.
Penalties for Unpaid Sales Taxes
The DTF charges penalties of up to 30% for unpaid sales tax. The penalty is typically 10% of the sales tax due the first month it’s late and then 1% per month until it’s paid or the penalty caps out.
If the DTF discovers that you didn’t report sales tax through an audit, they’ll assess penalties for not reporting. The penalty is 10% of the unreported tax if you failed to report 25% or more of your balance. If the state believes the underreporting is due to fraud, the penalty jumps to 200% of the unreported tax.
And if the sales tax payment failure is willful, then criminal fines and jail time are also possible.
Common Sales Tax Mistakes Restaurant Owners Make
Ideally, a restaurant would handle sales taxes using the following steps:
- Registering as a Sales Tax Vendor: The restaurant (or the business running the restaurant) should register with the DTF as a sales tax vendor and obtain a Certificate of Authority.
- Collecting Sales Tax: This typically occurs at the point of sale.
- Filing Sales Tax Returns: Depending on the amount of sales tax due or the amount of taxable sales, restaurants must file these monthly, quarterly, or annually.
- Making Sales Tax Payments: These are usually paid when filing sales tax returns.
Sales tax errors can occur during any stage of the sales tax process. That said, they often occur because the business:
- Made sales without a certificate of authority. This is illegal. Even if you get a certificate but don’t display it, you can face penalties.
- Used sales tax funds for business expenses. This is sometimes done on purpose, but can also be by accident if sales tax proceeds are mixed with other business cash.
- Didn’t file the required sales tax returns. This could be because the business didn’t realize a return was required, or the business purposely skipped the filing because they didn’t have the money to pay the sales taxes.
- Failed to file electronically. The DTF requires some businesses to file and pay electronically, and if so, you can be penalized for mailing in a return.
- Didn’t keep adequate records. This makes it difficult to calculate accurate sales tax amounts.
What Happens When a Restaurant Falls Behind on Sales Tax Requirements?
Penalties (civil or criminal) are possible if the restaurant fails to:
- Register to collect sales tax
- File sales tax returns
- File sales tax returns on time
- Collect sales tax
- Send the proper amount of collected sales tax to the Department of Taxation and Finance
- Maintain adequate sales tax records
You’ll also face penalties if an auditor discovers that you didn’t report all of the sales tax you collected.
Sales Tax Penalties
Civil penalties are possible for infractions ranging from failing to file a sales tax return on time (even if no sales tax was due) to fraudulently failing to pay over any tax due. This can result in monetary penalties that range from $50 to an amount that’s double the total unpaid tax, plus interest. As bad as these civil sanctions can be, jail time isn’t a possibility.
However, criminal fines and jail time are possible for violations such as willfully failing to collect sales taxes, purposely not maintaining required records, and intentionally evading sales tax payments.
The majority of sales tax violations (as long as they weren’t intentional) will only result in civil penalties. Yet because a sales tax mistake can easily snowball due to interest and the recurring nature of many NY sales tax transactions, it’s easy for a simple oversight to result in large tax bills.
If a restaurant can’t afford to pay these civil penalties (and underlying taxes) when due, the New York State Department of Taxation and Finance has plenty of tax enforcement and collection tools at its disposal.
Sales Tax Enforcement Tools of the NYS Department of Taxation and Finance
If you have unpaid sales taxes and you don’t make arrangements with the New York State DTF, then you can expect one or more of the following collection actions:
- Tax warrants.
- Tax levies.
- Property seizure.
- Restaurant closure (padlocking).
- Revocation or suspension of your Certificate of Authority.
- Offsets.
- Personal liability of those responsible for the nonpayment of sales taxes.
- Requirement to set up a separate bank account for sales tax deposits.
One thing to keep in mind is that the NYS DTF can be more aggressive with its tax collection efforts than the IRS. For example, the DTF has more time to collect tax debts and is sometimes quicker to use tax levies than the IRS.
Avoiding Sales Tax Issues with the NYS DTF
The best way to avoid sales tax problems is to be proactive about your restaurant’s sales tax responsibilities. This includes:
- Filing all required sales tax returns, even if you can’t afford to pay the sales tax.
- Reviewing the restaurant’s sales tax records and collection policies.
- Creating a separate bank account for sales tax collections.
- Never using sales tax money for business or personal expenses.
Consulting with an experienced NY sales tax professional can help you confirm sales tax compliance and address problems before they become unmanageable.
A Tax Lawyer Can Help Avoid Restaurant Sales Tax Problems
Sales tax problems are especially confusing, annoying, and expensive, but luckily, a restaurant sales tax attorney from the Law Offices of Stephen B. Kass, P.C. is ready to assist. Don’t wait until you’re receiving various tax notices from the Department of Taxation and Finance.
It’s a lot easier to prevent sales tax issues than fix them. For proactive representation and guidance, contact us today.
Restaurant Sales Tax FAQs
Is food and drink given away for free subject to sales tax?
No, if a restaurant gives away free food, there’s no sales tax. However, the restaurant must collect and remit a use tax for the food and drink given away to customers.
Should I still file a sales tax return even if I can’t pay the sales tax due?
Yes, you should absolutely file your sales tax returns, even if you can’t pay. Otherwise, once you finally file, the NYS DTF will apply late filing penalties, and if you don’t file, they can estimate what your sales tax payments should be. These estimates will often be much higher than they’re supposed to be, and they’re challenging to dispute, making an experienced attorney critical.
What if I didn’t pay sales taxes because of an honest mistake?
The NYS DTF has discretion to reduce or eliminate civil penalties if the compliance failure was due to “reasonable cause” and not willful neglect.
Am I required to set up a separate bank account for the sales tax I collect at my restaurant?
As long as your restaurant is meeting its sales tax obligations, it won’t be required to set up a separate bank account. However, the NYS DTF can require this if your restaurant has continuous issues with sales tax compliance. Even if your restaurant isn’t required to create a separate bank account, it’s recommended that you do so.
Sources
– https://www.tax.ny.gov/pdf/publications/sales/pub750.pdf
– https://www.tax.ny.gov/bus/st/stidx.htm
– https://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/st/sales_by_restaurants.htm
– https://www.tax.ny.gov/bus/st/penalties.htm
– https://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/st/sales_and_use_tax_penalties.htm
– https://www.tax.ny.gov/pdf/current_forms/st/dtf8.pdf
– https://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/st/do_i_need_to_register_for_sales_tax.htm
– https://www.tax.ny.gov/pdf/publications/general/pub131.pdf
