CDTFA: California Sales Tax Audits

Like many other businesses in California, coffee shops and restaurants are subject to California Department of Tax and Fee Administration (CDTFA) sales tax audits.  The recent California Office of Tax Appeal (OTA)  decision in the Dinosaur Coffee case highlight a couple of potential pitfalls restaurants, coffee shops, and other eateries could face in a CDTFA sales tax audit.

The Dinosaur Coffee case involved a Los Angeles coffee shop that sold drinks and pastries.  The pastries were never warmed up.  The CDTFA auditors observed the employees of the coffee shop never asked the patrons whether their orders were “for here” or “to go.”  The CDTFA also found the coffee shops Point of Sale (POS) system did not adequately record which orders were “to go” orders and which orders were “for here” orders. 

Under California law, the sale of food is not subject to sales tax.  However, restaurants and other eateries must charge sales tax for (1) hot food that sold “to go” and (2) food that is eaten at the restaurant’s premises (regardless of its temperature).  At issue in Dinosaur Coffee was the percentage of the coffee shop’s “to go” orders that were not subject to sales tax. 

The CDTFA found during its audit the restaurant overstated its non-taxable sales.  After some back-and-forth negotiations during the course of the audit, the CDTFA found that at least 30% of the Coffee Shops sales were taxable “for here” orders.  The Taxpayer reported about only 20% of the orders were taxable “for here” orders.  The CDTFA arrived at its conclusion by doing a survey over a three-day period.  The CDTFA also looked to observations made of similar businesses.  As discussed above, the CDTFA took issue with the coffee shop not explicitly asking its customers if orders were “for here” or “to go.”   The CDTFA also took issue with the way the coffee shop recorded “to go” orders on its POS system.

A couple of take-home lessons all California restaurants and other eateries should learn is to properly execute non-taxable “to go” orders.  Restaurant employees should always ask patrons if an order is “for here” or “to go.”  They should never assume an order is “to go.”  Restaurants should also make sure their POS systems track “for here” and “to go” orders.  The POS systems should also track which “to go” items are non-taxable cold food items and which “to go” items are taxable hot foods. 

California restaurants and other eateries continue to face unprecedented challenges.  Unfortunately, a CDTFA audit can compound a restaurant’s woes.  Restaurants and other eateries can mitigate the risk from a CDTFA audit by adopting good practices such as properly using the POS systems and properly recording non-taxable sales such as “to go” orders.

At RJS LAW, we help all types of California businesses (including coffee shops, restaurants, and other eateries) with CDTFA audits and other tax related needs.  Our tax attorneys have decades of combined experience representing clients before the CDTFA, EDD, FTB, IRS, and other tax agencies.  If you or your business is facing a CDTFA Audit or have any other tax issues, please contact RJS LAW on the web or by phone at 619-595-1655 for a free consultation. 

Written by Joseph Cole, Esq., LL.M.