Are You Required to Pay Sales Tax on Restaurant Food Purchased for Resale?
As a restaurant owner, you are not required to pay sales tax on ingredients that you purchase to use in items that you prepare and sell to customers. There are two separate reasons for this exemption: businesses are not required to pay sales tax on any items that they resell, and most states do not levy income tax on grocery food purchases, even at the retail level, whether they are made by businesses or individual consumers.
A sales tax is only levied once on a particular item, at the retail level when it is sold to the end user. Any item that a business purchases for inclusion in a physical product that it sells to its own customers is not subject to sales tax. For this reason, restaurants do not pay sales tax on food even in the handful of states that do tax grocery purchases. Restaurants are also exempt from paying tax on non-food items that are part of their finished products, such as packaging, napkins and disposable forks.
Most states do not levy sales tax on grocery items, or food intended to be taken home and prepared in a home kitchen. Although deli food--or food that is sold ready to eat in a grocery store--is usually taxed the same as restaurant food, prepared frozen meals are treated as grocery items. Food purchased for resale at restaurants usually takes the form of either raw ingredients such as vegetables, cheeses or meats, or convenience menu items such as premade soups, which are untaxed.
Most states require businesses that sell wholesale items to keep tax exemption certificates on file from their customers. Your state revenue department will send you a tax-exempt certificate when you file for your state business license. It is your obligation to copy this certificate and give copies to the businesses where you typically make wholesale purchases. In the event of an audit, this protects them and shows that they are not exempting customers who should legally be paying sales tax.
Although restaurants are not required to pay sales tax on food that they purchase for resale, they are required to collect sales tax on food that they sell to their own customers. Most states put restaurant food, or prepared food, in a different category from grocery food. Unlike grocery food, which is generally regarded as a necessity and is therefore not taxed, restaurant food is regarded as entertainment or a luxury, and is subject to state sales tax.
If a restaurant, nonprofit or any other organization purchases food from a restaurant and then resells it, this purchase is a wholesale transaction and is therefore not subject to sales tax. This is the case even though the same food, purchased at a retail level, would be taxable. However, the restaurant or group making the purchase will probably have to provide a resell certificate verifying that the transaction is a legitimate wholesale exchange.