The general rule for California is that all sales of tangible property are taxable unless there is a specific exemption. Food is one thing that is generally exempt. Your weekly grocery visits most likely do not have sales tax on the receipt (except for certain things such as candy, pet food, or non-food items). But establishments such as restaurants, diners, bars, and food trucks (or basically anybody selling or delivering food) have a more complicated task in determining whether they should be collecting sales tax on their food sales. There are many factors that must be considered in determining the taxability of food. So if you’ve ever wondered why certain foods are taxed and others not you’ve come to the right place.
There are really two concepts to consider when determining if there will be sales tax or not; the temperature of the food and where it will be consumed. Let’s run through a few scenarios to make this an easier process to understand. To set the scene, let’s assume you’re visiting a local sandwich shop that is also a bakery.
Example 1: You buy a hot pastrami sandwich and eat at the sandwich shop.
Prepare to see sales tax on your receipt. Heated or hot prepared food is taxable regardless if it is consumed on the restaurant premises or taken to-go.
Example 2: You buy a cold turkey sandwich. You don’t get it toasted and order it to-go.
Congratulations, you’ve avoided California’s sales tax plus any local sales tax rates. Generally if the food is cold or room temperature and not consumed on premises then it won’t be taxed. However, if you decide to eat at the sandwich shop then you will be paying sales tax. However, if the sandwich were toasted or heated, the transaction would have been taxable regardless of where the sandwich is consumed.
Example 3: After your sandwich, you line up again to buy a freshly baked hot croissant and take the order to-go.
Here’s an exception to the hot or heated food rule. There is an exemption for hot baked goods if taken to-go. But they are taxed if eaten on premises. Let’s say one of the specials is a combo meal of a hot croissant with either a hot beverage (such as coffee or tea) or hot prepared food (maybe a warm breakfast sandwich) then the entire combo is taxed.
Example 4: You decided to stay in and have food delivered. Will your food and delivery charge be taxable? Yes, if you order hot food to go. No, if you order a cold entrée. (The delivery charge taxability generally follows the taxability of the item delivered – but there are also exceptions to this rule – so be careful.)
Confused? We’ve structured these examples from the consumer’s perspective. Imagine if you are a food service business that must interpret these rules! Just when you think you’ve got it, there are other ways that something might be taxable as well.
For example, there’s a concept called the 80-80 rule which would subject all the sales of a food seller to sales tax. This rule states that if 80% or more of the seller’s gross receipts are from food products and if 80% or more of the sales of food products are considered taxable then a business must charge sales tax on all food sales. As a food seller, depending on your business this could be a complex process. What if you’re not a typical restaurant? What if you’re a food truck? What if you deliver your food or have it catered? These businesses might be wondering what’s considered “for here” and what’s considered “to-go?” It’s not all gravy for food service businesses when faced with staying in compliance with sales tax!
Other recent “California (CA)” posts by Monika Miles, CPA:
- SaaS Taxation in California - An Overview
- CA District Taxes – Are You Calculating the Full Rate?
- Business Donations in CA: No Free Lunch When It Comes to Use Tax
- When Is Food Taxable in California?
- Resale Certificates in California: Proper Documentation is the Key