Sales Tax Basics for New Restaurant Owners
Sales tax 101 for restaurants
Sales tax is a percentage added to most purchases that you collect from your customers and send to the state. You don't keep it — you're just the middleman. The state expects you to collect the right amount, hold onto it, and send it in on time.
If that sounds like a lot of responsibility for something that isn't even your money, you're right. But it's the law, and getting it wrong comes with penalties.
Who collects sales tax?
If you sell taxable goods or services in a state that has sales tax (that's 45 states plus DC), you're required to collect it. As a restaurant, you're almost certainly on the hook. You'll need to register with your state's department of revenue and get a sales tax permit before you open your doors.
Five states don't have a general sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. But even in Alaska, some local jurisdictions charge their own sales tax. Check your state tax guide for the details.
What's taxable in a restaurant?
Prepared food: Almost always taxable. In nearly every state, food prepared for immediate consumption — anything from a plate of ribs to a cup of coffee — is subject to sales tax.
Grocery items: This is where it gets tricky. Some states exempt unprepared food (grocery items) from sales tax entirely. Others tax it at a reduced rate. And a few tax everything the same. If you sell any retail items — bottled sauces, packaged snacks, whole cakes — check your state's rules.
Alcohol: Always taxable. Most states charge the standard sales tax rate on alcohol sales. Some states also charge an additional excise tax or a higher rate for liquor, beer, and wine.
Tips: Generally not taxable if they're truly voluntary. Mandatory service charges (like an auto-gratuity on large parties) are usually taxable in most states.
Setting up your POS correctly
Your POS system is your first line of defense. If it's set up correctly, it calculates and collects the right tax on every transaction. If it's not, you'll either overcharge your customers or come up short when it's time to file.
Here's what to get right from day one:
Tax rates: Enter the correct combined rate for your location (state + county + city). Rates change — check at least once a year.
Item categories: Assign the correct tax category to every menu item. Prepared food, beverages, alcohol, and retail items may each have different tax treatment.
Exemptions: If your state exempts certain items (like groceries), make sure those items are flagged correctly in your POS.
Common mistakes new owners make
Not registering for a sales tax permit. You need one before you start collecting. Operating without one is illegal in most states.
Using the wrong tax rate. Rates vary by location — sometimes down to the street address. Don't guess.
Forgetting about local taxes. In "home rule" states like Colorado, Alabama, and Louisiana, local jurisdictions set their own rates and sometimes require separate filings.
Missing filing deadlines. New businesses often start with monthly filing requirements. Mark those deadlines on your calendar — or better yet, automate them.
Make it automatic
TaxAside works with Square, Clover, Toast, and 24 more POS systems. Set it up once, never think about sales tax again. We calculate, set aside, file, and pay — on time, every time.