Sales and Use Tax Refresher for MN Restaurateurs
When you're in the weeds of running a restaurant, it's easy to forget about sales and use tax. Here's a quick refresher to help you prevent costly penalties.
When you’re busy making sure that customers are happy and employees are doing their jobs, it can be easy to forget about an important piece of every transaction: sales tax and use tax.
In Minnesota, state auditors may pull you aside every three years for a sales and use audit. They’ll audit your sales and what you reported back to the state, as well as your general ledger and purchases. They’ll also look at your invoices to make sure you were charged sales tax on items you purchased. Needless to say, it’s wise to give these taxes regular attention.
Here’s a quick refresher to help you keep both top of mind:
What to remember about sales taxAll food sales, including take-out and catering, are subject to Minnesota’s general sales tax. It may seem fairly straightforward, but there are a few areas where you can trip up if you’re not careful:
Auto gratuities are often a must to ensure servers tasked with large parties are fairly compensated. But if you don’t record and track these correctly, you could be left with the short end of the stick. The IRS deems auto gratuities cash wages, so these must be included on your payroll and are ineligible for the employer tip credit. The State of Minnesota sees auto gratuities as sales taxable transactions—ones that must reflect the overall bill’s percentage of liquor and food. Yes, recording and tracking both federal and state regulations can be complicated, but your point-of-sale system should capture automatically handle this…as long as it’s set up correctly.
Free meals for employees may seem like a reasonable perk, but Minnesota’s sales tax may make you think again. If you give an employee a free meal, you must pay use tax (i.e., self-imposed sales tax) on the cost of the food as well as on all taxable items that are part of the meal. Yes, we’re talking about disposable plates and cutlery, napkins, and even fountain drinks. Alternatively, if you charge the employee for the meal—even if it’s at substantially discounted price—you simply charge sales tax on what the employee pays.
In addition to Minnesota’s general sales tax, local municipalities typically impose their own taxes. Because these can vary depending on zip code, they can be very confusing. Local sales taxes may take the form of a local transit tax or county tax, and amount to as little as a quarter percent. Still, because you have to physically input each applicable local tax into your point-of-sale system, you must be aware of the ones that apply to your zip code. (Hint: They can change each year.)
What to remember about use tax
In Minnesota, use tax is meant to complement sales tax—the rates are identical. Use tax, however, applies when you buy, lease or rent taxable items or services for which the vendor doesn’t charge sales tax. Items that are subject to tax and are commonly purchased from retailers outside of Minnesota include the following:
- Computer hardware/software
- Office supplies and equipment
- Business furniture, fixtures and accessories
This can be easy to miss, but if you do, the penalties can quickly add up. For instance, say you bought a $50,000 sign from an out-of-state or Internet vendor, and the state auditor discovered you didn’t pay sales tax on it. You would have to fork over the general sales tax, and you’d also have to pay penalties and interest. Moral of the story: Always, always, always check your invoices to make sure out-of-state and Internet vendors applied sales tax to your purchase.
Make sure you’re up to speed on sales and use tax
It doesn’t pay to put sales and use tax on the back burner. These two taxes, especially when you factor in local sales tax, can be confusing and complicated. Talk to your accountant to make sure you’re complying with all applicable taxes, and look ahead to your next sales and use audit with ease.