Sales and Use Tax Update for Restaurants

January 14, 2014

Restaurants in Wisconsin are constantly working to keep on top of regularly changing sales and use tax laws. This task is quite daunting because of the combination of changes in legislation, case law, and administrative guidance covering numerous jurisdictions with ever-evolving products and services.

Restaurant owners and managers need to regularly evaluate their processes and procedures to make sure they are adequately addressing sales tax requirements. This article highlights recent developments pertinent to restaurants in Wisconsin and closes with a caution for businesses that may be vulnerable to making a mistake.

Food provided to employees on the job is generally exempt from sales tax

Since October 1, 2009, an exemption from sales tax has been available for candy, soft drinks, dietary supplements, and prepared foods furnished to restaurant employees for no consideration during the employees’ work hours. Assigning a value does not constitute consideration if the value is used only to report the fair market value for FICA, social security, or union contract purposes, or when an employee who does not consume the available food has no recourse against the employer for additional cash wages.

In a “Buy One Get One Free” promotion, the cost of the free item is exempt

Beginning September 1, 2011, the Wisconsin sales tax law changed with regard to “Buy One, Get One Free” and similar promotions. A restaurant may generally purchase the product given away for free without tax for resale if the restaurant provides the free product to a person who must purchase another product that is subject to sales tax.

Accordingly, a restaurant with a “Buy One Meal, Get a Second Meal Free” promotion can purchase the ingredients it uses to prepare the free meal without tax for resale because the customer must purchase the first meal (which is taxable) in order to receive the second (free) meal. This exemption extends to other items provided to the customer as part of a taxable sale, including napkins and disposable eating utensils.

New swipe fee rules started a year ago

Restaurants and other retailers sometimes charge a swipe fee to customers using certain credit cards for payment. Beginning January 27, 2013, if the product or service sold is taxable and the restaurant elects to charge a swipe fee, sales tax applies to the total amount charged, including the swipe fee. If the credit card is used to pay for both taxable and nontaxable products or services, the restaurant may allocate the swipe fee between the taxable and nontaxable purchases.

Prepared food is redefined to include bowls as eating utensils

Wisconsin imposes sales tax on “prepared food.” The definition of “prepared food” includes food and food ingredients sold with eating utensils provided by the retailer. This definition of “prepared food” was clarified during 2013 to include bowls as eating utensils. Are the bowls necessary for the customer to receive the food and food ingredients? If the food is sold with a bowl, or if bowls are made available to the customer, the food will likely be considered prepared food and will therefore be taxable.

Milwaukee County exposition taxes can be tricky, especially for delivery services

Restaurants selling into Milwaukee County have an additional tax responsibility, consisting of the local exposition taxes. This additional 0.5% food and beverage tax is imposed on every person selling certain food or beverages in Milwaukee County. Prior to October 1, 2009, only sellers who were engaged in business in Milwaukee County were subject to the local exposition taxes. The tax is imposed on sales of candy, soft drinks, and prepared food that are subject to the state sales tax. In addition, the sale of alcoholic beverages for consumption on the seller’s premises is also subject to the tax. The measure of the taxable price includes mandatory tips. Restaurants operating near the border of Milwaukee County that have delivery services are particularly vulnerable to make a mistake, as some of their sales may be subject to this tax while others are not.

Because of the complexities of sales tax laws, restaurants operating in good faith can still be caught off guard in an audit by unintentional mistakes. We recommend regular review of sales tax laws and processes to avoid a costly mistake. We are available to assist you or provide more information.

To discuss your situation, contact your Schenck advisor, or call any member of the State & Local Tax team  at 800-236-2246.