With the takeout and delivery market estimated at $70 billion, according to TechCrunch, it’s no wonder restaurants of all types—from QSR to full service—are joining the delivery bandwagon. But for those companies debating whether to get into the game, there are some important state and local tax implications you must first consider:
Crossing City, County or State Lines
If your restaurant delivers to customers in an adjacent city or ships to customers in another county or state, you may trigger sales tax nexus. This creates reporting and filing responsibilities for multiple jurisdictions.
Taxability of Food and Beverages
If your restaurant delivers or ships across state lines, you should be aware that the definition of “food” varies by state, impacting taxation. In the “Streamlined States” such as Michigan, New Jersey, Kentucky, Nevada and Ohio, the definition of food does not include alcoholic beverages, dietary supplements, soft drinks or tobacco. Also, beverages delivered with food may have different taxability. For example, if you’re a pizzeria in a state like Ohio where most food items are not subject to sales tax unless they are consumed on the premises where they are purchased, and you deliver an order of pizza and beverages to a local customer, the pizza is tax-exempt but the beer is taxable. In addition, hot and cold food may have different taxability.
Taxability of Delivery Services
Different states may also define and tax services differently. Some states, such as Connecticut and New Mexico, tax nearly all services, including delivery. Other states, such as California, tax virtually no services, and yet other states tax only designated services. This variation makes it tricky to determine whether you are required to charge tax on delivery fees. In addition, what is considered “catering” or “delivery” in one jurisdiction may fall under another category elsewhere. For example, in New York, delivery charges follow the taxability of the food and drink being delivered. In Florida, depending on if the restaurant has a pick-up option, the delivery charges may or may not be taxable. If delivery charges cannot be avoided, they become part of the sales price of the meal and subject to sales tax. Optional delivery charges that are separately stated and not part of the taxable meal are not subject to sales tax.
This is further complicated by the use of third-party delivery providers. In some states, such as Missouri, transactions between a restaurant and a third-party delivery service are taxable; however, the transaction between the delivery service and the end customer is tax-exempt.
Sales Tax Rates May Vary
Once you determine if your delivery items are taxable, you need to determine the correct sales tax rate. The rate may vary between your location and your customer’s delivery address. Therefore, be sure you understand your state and local jurisdictions’ sourcing requirements (origin vs. destination). Rates for food and beverages can also vary between locations.
Take for example a transaction that occurs between an Indiana customer and an Ohio restaurant. In Ohio, the sale of food off the premises is exempt from Ohio sales tax, so the Ohio restaurant would not charge Ohio sales tax to the Indiana customer. However, because this is an interstate transaction and both states are destination sourcing states, we look to the taxability of the delivery items in the final destination. In Indiana, sales tax applies to restaurants’ sales of food regardless of whether sold to dine in or take out. If the Ohio restaurant is delivering the food via their own vehicles, they have established nexus in Indiana and should charge Indiana state sales tax and local food/beverage tax (if applicable in that jurisdiction) on the delivered food/beverages. The charges for delivery of prepared food in Indiana are subject to sales tax.
Launching delivery service for your restaurant can open doors to new customers and help you grow your business. However, it is a complex undertaking that could increase your exposure to unanticipated tax liabilities—meaning it’s in your best interest to plan carefully, understand your responsibilities, and identify the impact to your bottom line before forging ahead.
Mike Feiszli, CPA, is a senior manager in the State and Local Tax department at BDO’s Akron office. He has more than 18 years of experience specializing in multistate sales and use tax consulting, audit defense, and compliance in the public accounting and private consulting sectors, as well as with the Ohio Department of Taxation.
Dana Zukofsky, CPA, serves as a director in BDO’s national Restaurant Practice. She has more than 15 years of industry experience and specializes in providing tax, assurance, and financial consulting services to clients in the restaurant and hospitality industries.
For more on accounting and taxation for restaurant delivery service, contact Dana Zukofsky and Mike Feiszli at email@example.com and firstname.lastname@example.org, respectively. For more information visit BDO and follow on Twitter @BDORestaurant.