Restaurants commonly make their banquet rooms available for large parties to hold special events such as birthday parties, wedding receptions, and retirement parties. Most restaurants, however, are unaware of the potential sales tax assessment that may accompany the rental charges for these facilities.
A common practice is for the restaurant to offer the rental of its banquet room for a flat fee and then separately offer an abbreviated menu from which its customers choose the meals for their guests. The food and drinks are often served at a price per person under these arrangements.
Restaurants generally understand that food and drinks served at their establishment are subject to tax. Most restaurants, however, do not understand that the rental of the banquet room under these circumstances is asserted to be subject to sales tax as well. (An assertion we believe to be inconsistent with the law) One reason that the banquet room rental charge is asserted to be subject to tax is that many restaurants require their patrons to also purchase food and drinks. Thus, from the California Department of Tax and Fee Administration’s (CDTFA) point of view, because the food and drinks are not optional, the rental of the banquet room constitutes gross receipts related to the sale of food and drinks and is therefore taxable under Revenue and Taxation Code section 6012. The taxability of such charges is generally maintained regardless of the fact that the rental charge is separately stated on the invoice/receipt. Restaurants are held liable for sales tax on the banquet room charges regardless of whether or not they charge sales tax reimbursement to their customers and regardless of whether the amount is separately stated on the invoice/receipt.
In addition to the potential confusion regarding the taxability of room rentals, the CDTFA applies the tax differently to charges made for linens, utensils, dance floors, floral arrangements, parking attendants, and other miscellaneous items that may accompany the event. The type of item sold, how it is purchased, and how the customer is billed can all impact whether or not tax applies to a particular charge. In order to ensure that a routine sales tax audit does not result in an unexpected tax bill, it is important that restaurants and caterers take proactive steps so that they can ensure that they charge their customers the correct amount of tax on these offerings.
If you have questions about how sales tax might apply to the charges made by your business, or if you are currently undergoing an audit and need some advice on how to address these issues with the auditor, please feel free to contact us for a free consultation.