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Sales and Use Tax: Guidance Affecting the Restaurant Industry

June 26, 2017
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The New Jersey Division of Taxation has updated its Sales and Use Tax guidance addressing the restaurant industry.  The Bulletin (S&U-1) discusses a variety of topics of significance to restaurants, cafeterias, taverns, pizzerias, caterers, and others selling prepared food and beverages. For example:
  • Coupons: How should a restaurant account for customer coupons and other discounts? Sales tax is calculated differently depending whether the seller is reimbursed by a third party for the discount or not.

  • Service Charges: Are cover or entertainment charges taxable? Yes.

  • Gratuities: What about gratuities? Not taxable, provided certain conditions are met.

  • Exempt Customers: Tax exempt organizations are generally exempt from taxation. Does that exemption follow through to customers dining at a restaurant? Under the right circumstances, yes, it can.

  • Restaurant Purchases: What items purchased by a restaurant are able to be purchased tax exempt and when are other purchases subject to tax? Here’s just a few to consider: Purchases of aluminum foil and paper cups used to deliver prepared food to customers are exempt. Purchases of soap and paper towels for use in the restaurant are taxable. What about services purchased by restaurants? Janitorial services are taxable. But, trash removal services provided under a regular contractual basis of not less than 30 days are exempt.

  • Laundered Items: Charges for laundering and/or rental of clothing, linens, and towels are subject to tax.

  • Urban Enterprise Zones: Is the restaurant located within a designated UEZ district? If so, equipment purchases may be tax exempt. Retail sales of tangible personal property may also qualify for a UEZ-reduced sales tax rate, but not sales of prepared food or beverages.

  • NJ Litter Control Fee:  NJ also imposes a Litter Control Fee on the gross receipts from sales of certain litter-generating products, such as beer, liquor, soft drinks, and food.  Generally, if the primary business is the sale of food for off premises consumption, such as a take-out or drive-through restaurant or a snack bar, then this fee may likely apply.  On the other hand, if the primary business is the sale of food for consumption inside the restaurant, then it may not.

These rules can be tricky. Consult Bulletin S&U-1 or contact your Citrin Cooperman tax partner for a discussion of these and similar issues.