How your NYC Restaurant may be overpaying its sales tax
In our last several years of business, our firm has repeatedly encountered and corrected incorrectly filed sales tax returns. This issue has spanned all industries but can hit restaurants particularly hard. Profit margins of restaurants, particularly those in NYC, can be very slim. The ever-increasing cost of labor, rent, and food cost are all surely to take its toll on any restaurant. To survive, most eateries depend on volume. However, no matter what volume of sales a restaurant is able to produce, overpaying sales tax in NYC could be the difference between a profitable or unprofitable business. Here are 3 specific ways in which you may be overpaying your sales taxes.
1) Calculating sales tax on Gross sales
We have witnessed DIY business owners and unknowledgeable accountants overpay sales taxes simply because they calculated sales incorrectly. One surefire way to overpay your sales tax is by adding up all the Total Deposits made to your business bank account and considering them taxable sales. If this is the method you use to calculate taxable sales - stop doing so immediately. Take for example a restaurant that accepts credit cards and allows customers to leave a tip using the card. In actuality your “Total Deposits” into your bank account actually represent 3 figures added together:
Food Sales + Sales Tax + Tip = Total Deposits
*Remember tips and sales tax are not sales and therefore are not subject to sales tax.
Let’s put some numbers to this. Assume for a particular month your restaurant had the following sales:
Food Sales: $30,000.00
Sales Tax (8.875% of sales): $2,662.50
Tip (15% of sales): $4,500.00
Now let’s add these figures up and see to what extent Calculating sales tax on “Total Deposits” instead of food/beverage sales causes you to overpay your sales taxes.
2) Calculating sales tax on money you (or your partners) added into the business
The second most common issue we encounter regarding sales tax overpayment is when DIY business owners count the money that they invested into their businesses as sales subject to tax. Not only is this absolutely wrong but it is also an indication that the owner (or their accountants) do not understand the difference between Income and Equity. Restaurants may see a decline in sales during certain times of the year. This may result in the business not having enough profit to cover expenses. To ease the cash crunch, owners may add their own money (equity) into the business to cover this slow period. Remember, not all deposits are income. However, if you (or your accountant) record this deposit as income it would cause you to pay sales tax (and potentially income tax) on money that had nothing to do with sales! For illustrative purposes, if just $10,000 in owner’s money is wrongly categorized as sales, then the owner would overpay their sales tax (8.875% in NYC) by $887.50.
3) Paying sales tax on tax exempt sales
Some restaurants maintain contracts with non-profit organizations. These include schools, libraries, and places of worship. The sales to these organizations are strictly tax exempt provided you have the proper tax-exempt certificate on file. More than likely, these customers will remind you of their status and therefore no sales tax will be paid on their purchases. Therefore, it is imperative that restaurants keep track of sales to tax exempt organizations. These are sales for which the restaurant never collected the tax to begin with.
In addition, many restaurants also have contracts with regular (for-profit) venues. Examples include, bowling alleys, arcades, paintball arenas, etc. If these venues purchase food from your restaurant for resale then you are in effect “wholesaling” your food to them for them to resell at retail. Due to this relationship, these sales are also not considered taxable. The venue will be responsible for collecting and paying the sales tax when they resell the food to the final consumer. Therefore, since no tax is collected on these sales, it is imperative that your restaurant keep track of the sales it makes to customers for resale.