Sales taxes are imposed not only on the purchase of retail goods but also on the purchase of services. This explains why after a restaurant meal purchase, a sales tax is included on one’s receipt. Sales tax rates vary by location. Different states administer different tax rates. But then there are also specified amounts added on by the local county, city and municipality.
What’s the rationale behind a restaurant sales tax?
Think of the sales tax as the fee that the state and local government require payment of for the sale of restaurant food and services. The purchaser pays the sales tax, which the restaurant owner then pays to the government. In other words, sales tax “passes through” from customer to the government. The general rule of thumb is that if a restaurant has a physical presence, or “nexus,” in a given area – such as a brick-and-mortar restaurant address or even as a food truck – then the sales tax will be imposed. Online food businesses, meanwhile, sometimes do not have a sales tax associated with their purchases.
Why do restaurant sales tax rates differ from retail purchase sales tax rates?
Sales tax rates ultimately depend on the location of a business. Each state, county, city and municipality makes its own sales tax laws and regulations that. Hence, there may be taxes on different items based on different statutes. Sometimes a state or local government might have special tax rules that apply to restaurants. This is why sales tax rates might differ, even between a restaurant and a retail store in the same location. For instance, in the city of Chicago, there’s an added meal tax on all food and beverage purchases for “immediate consumption” as well as an added tax imposed on businesses that are located in a particular zone of the downtown area. Consequently, Chicago restaurants within the McPier Tax zone administer an 11.25 percent sales tax, while those outside the zone administer a 10.25 percent sales tax. In another scenario, a sales tax for any restaurant can include food stands and cafeterias, but in some states, universities are exempt from imposing sales tax. Hence, a privately owned vendor who has a coffee stand on university grounds will still have to administer a sales tax to customers that purchase from the coffee stand. But there would not be any sales tax administered in a university-owned cafeteria, further demonstrating why receipts from the same location might reflect different sales tax rates.
How can one determine the sales tax for a restaurant?
Sales tax rates and their associated legislation can be rather convoluted. One surefire way, therefore, of determining the sales tax rate that a restaurant will charge is to consult a professional local tax expert. Restaurant owners often have their taxes prepared and filed through a professional tax expert, who is well-versed in the amounts of state, city, municipal, and local tax rates. A tax expert therefore might have a sales tax calculator or software to provide the exact rate for the current sales tax. Another resource to contact would be the state taxing authority, such as the state’s department of revenue. Professional experts there can answer your questions or direct you to the specific page on their website to assist you in finding the sales tax rate for a restaurant at a particular zip code.
What’s the formula for calculating sales tax?
The sales tax is calculated by multiplying the sale price by the current combined state and local sales tax rate. Say a restaurant outing produced a before-tax price of $205 in the Chicago area outside of the McPier Tax Zone, so that the sales tax rate is 10.25 percent. How can that be calculated? First, convert the percent into a decimal value of 0.1025. Then the amount of the sales tax is calculated as follows:
$205 x 0.1025 = $21.0125
That value will then be added to the before-tax price to arrive at the after-tax price as follows:
$205 + $ 21.0125 = $226.0125, which is rounded to $226.01.
The $226.01 becomes the final price that has to be paid (before adding the gratuity) by the purchaser to the restaurant owner. Interestingly enough, the restaurant owner only keeps the $205 but has to pay the $21.01 to the government as the tax for operating the restaurant business.
References
- National Conference of State Legislatures. "Remote Sales Tax Collection." Accessed March 22, 2020.
- Mass.gov. "830 CMR 64H.6.7: Out-of-State Sales and Deliveries." Accessed March 22, 2020.
- California Department of Tax and Fee Administration. "Sales & Use Tax in California." Accessed March 22, 2020.
- California Department of Tax and Fee Administration. "Regulation 1620. Interstate and Foreign Commerce." Accessed March 22, 2020.
- Washington State Department of Revenue. "Destination-Based Sales Tax." Accessed March 22, 2020.
- Michigan Department of Treasury. "FAQs for Sales and Use Tax." Accessed March 22, 2020.
- IRS. "Publication 334 (2019), Tax Guide for Small Business (For Individuals Who Use Schedule C): For Use in Preparing 2019 Returns," Page 25. Accessed March 22, 2020.
- Illinois Revenue. "Collections Process." Accessed March 22, 2020.
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Writer Bio
Kaye Morris has over four years of technical writing experience as a curriculum design specialist and is a published fiction author. She has over 20 years of real estate development experience and received her Bachelor of Science in accounting from McNeese State University along with minors in programming and English.