California Sales Tax

As a general rule, the state of California charges sales tax on the sale of all tangible personal property.  One of the exceptions to the general rule is that sales of food are tax free.  However, food sold at restaurants may be subject to sales tax.  The CDTFA always charges sales tax for hot food regardless of where the purchaser eats the food.  Cold food eaten inside a restaurant is subject to sales tax, however cold food taken to go or as takeout is not subject to sales tax.  The recent Appeal of La Baguette LLC case before the California Office of Tax Appeals (OTA)  dealt with exactly what constitutes a to-go order for CDTFA sales tax purposes and whether cold food orders eaten at mall restaurants are subject to California Sales Tax.

In La Baguette, an eatery sold hot and cold foods.  The eatery was located in a mall.  There were no tables or chairs in the eatery itself.  However, the mall had tables and chairs in the mall’s common areas.  The eatery’s customers (as well as others who were not customers of the eatery) were free to use the tables and chairs in the mall’s common area.  The eatery paid the mall money to operate and maintain the common areas (which included chairs and tables for the eatery’s customers).

The eatery in La Baguette did not charge its customers sales tax on any of its cold food orders.  The eatery reasoned that all orders were to-go because there were no tables or chairs on the eatery’s premises.  It correctly charged tax on the hot food orders, but it did not charge tax on cold food orders.

The CDTFA disagreed with the eatery and made an assessment against the eatery for the supposed to-go orders.  The Office of Tax Appeals sided with the CDTFA.

As a start, anytime a Taxpayer claims to be exempt from a tax (whether it be a sales tax, income tax, or any other type of tax), courts generally read the exemptions narrowly against taxpayers.  A restaurant or any other business trying to find a clever work-around the sales tax rules should be aware courts will view whatever loophole they think they found as being small and difficult to crawl through.

The OTA reasoned the mall tables and chairs customers used to consume their food did not necessarily have to belong to the restaurant for cold food orders to be considered “dine in” as opposed to being to-go orders.  The OTA stated the cold food orders were not to-go orders as there was a “rational relationship” between the chairs and tables and the eatery.  That rational relationship would be based on the proximity of the chairs and tables to the eatery and whether the chairs and tables were readily accessible to eatery customers.  In La Baguette the chairs and tables were a few steps away from the eatery and were supposedly used frequently by the eatery’s customers. The OTA case did cite an example where orders would be considered to-go if the chairs and tables were one quarter of a mile away from a food stand. 

It should be noted the La Baguette case is not a precedential decision meaning neither the CDTFA nor any taxpayer can use the decision as precedent.  It is not quite clear how tables and chairs must be provided by the restaurant to disqualify all of its to-go orders.  Restauranteurs who wish to sell cold food tax exempt should ask their customers if the food is to-go and record the to-go orders in a Point-of-Sale system. 

RJS LAW is a full-service Tax Law Firm that helps many types of businesses including restauranteurs.  We provide a full suite of tax services that include Estate Planning, Tax Planning, and representation before state and federal taxing authorities including the CDTFA.  If you are facing an audit or are seeking advice on how to structure your tax related issues, please feel free to call us at 619-595-1655 or visit us on the web at RSJ LAW for a free consultation.