Food and beverage sales are subject to complex tax rules in New York. Failing to pay sales tax can lead to severe consequences. Some of the key rules businesses need to know include the following:
- When are food and food products taxable.
Generally, food and food products are exempt from sales tax under New York tax law (NY Tax Law §1115). However, the sales of food and food products made by restaurants and other similar establishments are subject to sales tax in certain circumstances such as the following:
- Food and beverages prepared by the establishment;
- Products that are sold in a different form than that in which they were manufactured;
- Products consumed on the establishment premises; and
- Items that are not subject to tax, but are resold, may also be subject to sales tax depending on the situation.
For example, if a customer went to a drive-thru fast-food chain and separately ordered a sandwich and a bag of chips (which was not a “value meal”), the sandwich would be a taxable item because it was prepared on the establishment’s premises, but the bag of chips would not be subject to tax because it is sold in the same condition as it was manufactured. If the same order was considered a “value meal” then this entire purchase would be subject to tax.
For additional guidance, the New York State Department of Taxation and Finance provides many examples of when sales by Restaurants, Taverns, and Similar Establishments are taxable.
2. Use tax may apply if sales tax doesn’t.
Another confusing area of sales tax involves determining if complimentary food and beverages offered by the establishment are subject to tax. Sometimes restaurants may offer patrons or employees free food or drinks. Even when consumers/employees are not charged for taxable food items, the “purchase” is still subject to a “use tax.” Use tax is “a tax imposed on the use of taxable items and services in New York when sales tax has not been paid.” Since the consumer/employee is not purchasing the taxable items, but they are consuming these items within the New York establishment, a use tax is required and the establishment is the responsible party for paying the tax to New York State.
3. Keeping accurate and detailed records of sales is a must!
New York State tax law provides that business records should be sequentially numbered and dated; checks and cash register tapes must be kept for at least three years from the due date of the return to which those records relate, or the date the return is filed, if later; and records must have sufficient details describing the taxability (or non-taxability) nature of each item sold. It is also important to keep any and all records proving that the business has collected and paid the correct taxes due. In addition to possible sales tax liability, the State may impose harsh civil penalties for inadequate recordkeeping as well.
4. Consequences for failing to collect and/or remit sales tax are severe.
Penalties and interest as high as 14.5 percent may be imposed for failing to pay sales tax. The business could also have its Certificate of Authority revoked or face criminal prosecution. In some cases, certain owners, officers, directors, employees, partners, or members (responsible persons) of a business can be held personally liable for the sales tax owed by the business. The State may pursue collection and use any combination of enforcement methods such as warrants, levies, income execution, and seizures to collect what is owed.
If you haven’t collected or paid sales tax, New York State does offer a silver lining in the form of the Voluntary Disclosure and Compliance Program. The State will not impose penalties or bring criminal charges against eligible taxpayers with a history of noncompliance who come forward and pay their outstanding tax liabilities. As an added incentive, qualified taxpayers are also eligible for a limited look-back period.