Fundamental Concepts of the Meals Tax
The primary fundamental concept to understand is how each state defines what a meal means. Some states define it is an all-inclusive function such as the food and beverage while others exclude the beverage. Here are some variations of this definition:
Prepared Foods – In some cases, the meals tax is only applied to food that is prepared on site AND served to a customer in a sit down establishment. The definition may be broader and include prepared and served only which includes drive-through sales. The state’s department of revenue or taxation may define the term ‘prepared’ as meaning combining two or more ingredients and/or heating or keeping cool one or more ingredients for a meal.
Excludes Pre-Packaged Foods – The definition may be all-inclusive and/or exclude food that is already pre-packaged such as sodas, deserts and/or salads.
Venue Driven – The definition may be based on the eating establishment such as restaurants, caterers, mobile vending and bars. At the same time it may exclude certain venues such as convenience stores, grocery markets, farmer stands and vending machines.
The food service sector includes multiple industries and it is the job of a bookkeeper to understand how the state’s definition of a meal and terms used to define a meal impact the tracking of information.
The secondary fundamental of the meals tax to understand is the tax formula used. Some states use a complex formula involving taxation for alcohol when served with the meal or the formula may be tiered whereby food is taxed at one rate and beverages a different rate. If the state’s tax website doesn’t explain the process well, contact the local auditor for an explanation. They are usually happy to help educate the public on how to calculate the tax.
The final fundamental concept is gaining an understanding of the exceptions to the rule. Most state governments provide for exceptions to the meals tax for certain reasons including:
- Religious Facilities
- Charitable Events
- Private Clubs
- Education Facilities
I’ve even read that in one state, the purchase of more than six dozen doughnuts or pastries qualify for tax exclusion (I believe the government deduces that the purchase is for a charity, whereby they are purchasing doughnuts for an event or for fundraising). Even then I didn’t understand if this meant the first six dozen are taxed and the remaining amounts are not; or if it meant all the doughnuts are exempt.
If in doubt, contact your state department of revenue, local auditor or your Certified Public Accountant.
Accounting for Meals Tax
Similar to sales tax, the business collects the tax from the consumer as a trustee (agent) of the government. The tax is not a function of the income statement but a liability to the government, i.e. a balance sheet item.
When the entry is made it is part of a complex transaction. The following is a simple entry posted by a restaurant in the sales journal.
Date ID Ledger Description DR CR
03/07/16 030716047 Sales 2 Specials w/Drinks 27.40
030716047 Cash 2 Specials w/Drinks 30.55
030716047 Sales Tax 6% 1.64
030716047 Meals Tax 5.5% ____ 1.51
In the above case, the entire meal and refreshments are taxed for both sales and meals tax. What would be the entry if only the food portion were taxed? Take a look.
Date ID Ledger Description DR CR
03/07/16 030716047 Sales 2 Specials Entrees 22.60
030716047 Sales 2 Drinks 4.80
030716047 Cash 2 Specials w/Drinks 30.28
030716047 Sales Tax 6% on Total 1.64
030716047 Meals Tax 5.5% on Food ____ 1.24
Notice there is a 27 cents difference between the two entries? This illustrates why the bookkeeper must understand the formula used by the state or local government to calculate food tax. I have encountered a case whereby the state audited the restaurant and the owner failed to tax the drinks as required. The accounting firm forewarned him several times over a few years that he needed to tax both food and drinks as required by the regulations. The auditor calculated a underpayment of $2,070 for one year. Since the look back is three years, he ended up owing the local government $6,210 plus interest.
A second item to note is the sales tax. In this case the sales tax is on the entire amount excluding meals tax. Both sales and meals tax are calculated independently of each other (as if the other did not exist).
There are multiple restaurant retail software programs on the market. The restaurant must program the respective function keys (entrée, appetizer, dessert, beverage, alcohol and other) for taxability related to both meals and sales tax. Pay close attention to exempting the tip from taxation.
The meals tax account is structured in a similar fashion as the sales tax account. It is typically one of the sub-accounts of accrued taxes. Remember, the accrued taxes account under current liabilities is set up as a parent-child configuration. In general, there are multiple credits posted into the meals tax account each month with one debit reflecting the payment to the government.
Nuances of the Meals Tax
There are several important nuances or insights related to the meals tax. The following are some of the more common ones.
Mobile Vending – Most states allow the mobile vendor to charge a flat rate for the meal and the tax is an element of the flat fee. There is a mathematical algorithm used. It is simple algebra and works as follows:
The Meal’s Value Plus Meal’s Tax Plus Sales Tax = Total Flat Price
An example is appropriate.
Jimbo sells hot dogs in combo meals. $6 gets the customer one foot-long dog, a bag of chips and a can of soda. What is the meal’s value, meals tax at 5.7% and sales tax at 7%? Go back to the formula:
Meal’s Value + Meals Tax + Sales Tax = $6.00
Unknown + (Unknown *.057) + (Unknown *.07) = $6.00
Therefore, X + .057X + .07X = $6.00
Therefore, 1.127X = $6.00
Divide both sides by 1.127
Therefore, X = $5.32 (Main Meal Combo Price)
Therefore, .07X = .38 (Sales Tax)
Therefore, .057X = .30 (Meals Tax)
Combined, the reconciliation is as follows:
Meal Combo = $5.32
Sales Tax = .38
Meals Tax = .30
Total = $6.00
Catering – Catering is a very competitive industry. Many caterers charge a single price for each guest at the event. Based on this approach, the caterer accounts for the meal in a similar fashion as the mobile vendor. However, customers do expect to pay the corresponding taxes. A better approach, which increases margin, is to separate the fee structure as follows:
Reservation Fee $100.00
*Meal Per Guest 18.50
*Coffee/Tea/Refreshments 3.75/per guest
*Dessert 2.25/per guest
Decorations Package 200.00
*Excludes Taxes; Meals and Sales Taxes are Separate
By excluding the tax and notifying the customer via the tax clause, the customer can not claim inclusion in the cost per meal. The caterer’s price structure can match competition on a per meal price but generates greater margins equal to the tax. In many states, the fees are considered labor and therefore not taxable for meals or sales tax.
Vending Machines – A common tool used by many governments is the issuance of a tax certificate for meals tax. It is a flat fee instead of a percentage tax on sales. A certificate is issued per machine on site. This negates the need to calculate the meals tax independently as illustrated above.
Alcohol – This subject is a bit trickier as there may or may not be a meals tax on alcoholic beverages. Some localities add a meals tax to spirits but exclude wine and beer. Read the regulations for your state and ask questions of the auditor and the company’s CPA.
Summary – Meals Tax
Meals tax is an additional fee owed to the government for the sale of prepared food. Business owners are agents of the government and must collect this tax and pay it over to the local or state government on a regular basis (usually monthly). The meals tax is defined differently in each state and the terms used are also interpreted individually per state. Bookkeepers and accountants must read the regulations to fully grasp the meaning and tax formula.
The tax is a liability and is accounted for using a separate sub-account to the accrued taxes account under current liabilities.
Vendors are often allowed to charge a flat rate fee for meals and the tax is an element of the price. Consult with your local auditor or CPA for assistance. ACT ON KNOWLEDGE.