The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise individuals and businesses on state and federal tax issues, including those involving the Ohio Department of Taxation. When faced with a sales tax audit, appeal or other litigation, many owners of quick service restaurants (“QSR”) find themselves in unfamiliar territory. Strict compliance with sales tax laws can be challenging for restaurant owners because understanding the distinction between what is taxable and nontaxable is sometimes difficult. In addition to this confusion, the restaurant staff at the cash registers may not be adequately trained to differentiate between taxable and non-taxable sales, or they may apply the law on an inconsistent basis. Despite this difficulty, if the restaurant owner fails to collect the tax on taxable transactions, he or she is personally liable for the amount of tax owed. For this reason it is important for owners of QSR to understand the applicable laws regarding the sale of food and beverages and how to avoid non-compliance.
Applicable Laws for QSR Owners
Under Ohio law, sales tax is imposed on each retail sale made in this state. R.C. § 5739.02. Therefore, all retail sales of food are presumed to be taxable, unless the vendor establishes that the sale is exempt. In Ohio vendors have a duty to collect and remit the applicable state and local sales tax. R.C. § 5739.03. Sales tax is a “trust” tax, meaning that the vendor is collecting and holding the sales tax in trust for the taxpayer (i.e., the customer that pays the tax). Because sales tax is a trust tax, the individual owners, officers and those responsible for tax filings are held personally responsible for non-collection or non-remittance. R.C. § 5739.13. The taxability of sales made in QSR is largely dependent on where the food or beverage is to be consumed.
- On Premises v. Off Premises Consumption
Food consumed on premises (dine-in) in Ohio is always taxable. R.C. § 5739.01. But, food sold for consumption off the premises (take-out) is not taxable. R.C. § 5739.02(B)(2). Ohio law defines premises as, “ . . . any real property or portion thereof upon which any person engages in selling tangible personal property at retail or making retail sales and also includes any real property or portion thereof designated for, or devoted to, use in conjunction with the business engaged in by such persons.” R.C.§ 5739.01(K). “On premises” includes food court seating, regardless of whether the restaurant owner owns the chairs and tables where the customers sit.
- Which Foods and Beverages are Taxable?
What constitutes food is important because food consumed off the premises is not subject to Ohio sales tax. “Food” means substances, whether in liquid, concentrated, solid, frozen, dried, or dehydrated form, that are sold for ingestion or chewing by humans and are consumed for their taste or nutritional value. Food however, does not include alcoholic beverages, dietary supplements, soft drinks, or tobacco. R.C. § 5739.01(EEE)(1).
Soft drinks are not considered food and are always taxable regardless of where they are consumed. Soft drinks are nonalcoholic beverages that contain natural or artificial sweeteners or contain fifty percent or less of pure fruit or vegetable juice. R.C. § 5739.01(EEE)(2)(c). Beverages that are unsweetened (e.g. black coffee or tea), contain dairy, dairy substitutes, or contain more than fifty percent of fruit or vegetable juice are considered “food.”
How to Stay Compliant
When the Ohio Department of Taxation conducts a sales tax audit on a QSR, the legal presumption is that all food will be consumed on premises and is therefore subject to sales tax, unless the vendor establishes that the sale is exempt. A QSR may be selected for audit for a variety of reasons including: (i) filing history; (ii) observed or reported non-compliance; and (iii) data analytics. Factors include: (i) unusually low ratio of taxable to gross sales; (ii) a test buy or witnessed event indicating non-compliance with sales tax law; or (iii) anomalies when compared with peer group sales reported for that type of business structure.
There are, however, preemptive measures QSR owners can take to achieve sales tax compliance and avoid owing the Ohio Department of Taxation for sales that should have been taxed. This includes:
- Providing adequate training and monitoring of employees;
- Asking the question, “for here or to go” to determine if the sale is exempt;
- Verifying that your point-of-sale system (POS) is programed to charge tax on all taxable items;
- Considering programing the POS to make “taxable” the default for every item purchased at the counter, with an override for take-out food; and
- Ensuring that sales at the drive-through window can be segregated.
In addition to these preemptive measures, vendors may enter into a prearranged agreement with the Ohio Department of Taxation. R.C. § 5739.05. This arrangement allows sales tax to be remitted to the State of Ohio based on a set percentage of taxable gross sales. The taxable percentage is based on a test check agreed to by the tax commission and the vendor or any other method agreed upon by the tax commissioner and the vendor.
Contact Nardone Law Group
If you are the owner of a QSR and you are facing a sales tax audit by the Ohio Department of Taxation, or you would like further advice on how to stay compliant regarding your sales tax, you should contact Nardone Law Group. We have experience representing owners of restaurants in sales tax audits, examination, and litigation with the Ohio Department of Taxation. Contact us today for a consultation.