When considering a restaurant as a place of amusement, last-minute catering, personnel issues, vendor meetings, and all of the other little things that make up the daily grind of running a restaurant often do not allow for as much time to dedicate to financial reporting as business owners would like. Filing your monthly or quarterly sales tax returns, for example, all too often becomes a last-minute hassle. Even worse are those times when an innocent schedule error costs you a 5%, 10%, or even 25% penalty. You may begin to wonder why you have to pay this in the first place: “Am I not simply providing a service?” or “Do I have revenue items that are not subject to sales tax?” or “Is there anything I can do to take the sting out of paying this tax every month?”
Why am I paying Missouri Sales Tax on Restaurant Sales?
There is a statute in Missouri law that specifically addresses sales tax on restaurants and bars: Section 144.020.1 (6) which has historically read:
A tax equivalent to four percent on the number of sales or charges for all rooms, meals, and drinks furnished at any . . . restaurant, bar . . . or other place in which rooms, meals or drinks are regularly served to the public[.]
The Department of Revenue has also used Section 144.020.1 (2) to tax additional transactions, generally involving cover charges and other fees:
A tax equivalent to four percent of the amount paid for admission and seating accommodations, or fees paid to, or in any place of amusement, entertainment or recreation, games and athletic events;
This taxing statute’s broad nature has caused many taxpayers to be caught off guard in both collecting and remitting the correct amount of sales tax. Many restaurants fail to remit sales tax on amusement-related fees, only to be audited and end up with an unexpected and sizeable liability. It’s important to note that sales tax on cover charges and other amusement may be due even if your business did not collect the fee. For instance, if your restaurant/bar hosts a band, and the band itself collects a $10.00 cover charge, your restaurant/bar may still be liable for the tax if you are deemed to be a place of amusement.
Is My Restaurant a Place of Amusement?
To be considered a place of amusement, the activity must constitute more than a de minimis portion of its business activity. The Missouri Supreme Court has identified a three-factor test to determine which businesses are subject to sales tax as a place of amusement:
- the manner in which the place holds itself out to the public
- the amount of revenue generated by amusement or recreational activities at the place
- the pervasiveness of the amusement or recreational activities at the place.
In reviewing Several cases decided by the Missouri Administrative Hearing Commission and the Missouri Supreme Court, some light can be shed on just how much revenue is de minimis:
- Spudich v. Director of Revenue, 745 S.W.2d 677, 681 (Mo. banc 1988). In this case, 23% of revenues from billiard-playing was sufficient where the establishment held itself out a place of amusement.
- Greinke v. Director of Revenue, No. 14-0442 RS, March 7, 2016, discusses band cover charges that encompassed 2% of revenues did not encompass more than a de minimis portion of revenue therefore, the business was not a place of amusement, and not subject to sales tax on their cover charges.
It’s important to note that the decision in Greinke represented a change in the interpretation of the taxing statutes for The Department, whose previous position was that Restaurants and Bars are always places of amusement and any amusement revenue was subject to sales tax.
What About Mandatory Gratuities?
The Missouri Department of Revenue has long then the position that any mandatory gratuity charged was subject to sales tax. Many businesses disagreed, assuming that the charges represented tip income and were therefore not subject to sales tax. The Missouri Supreme Court routinely sided with The Department who took the position that these charges, when imposed, were mandatory to the customer and directly tied to a taxable transaction (the sale of food/drink) and therefore subject to sales tax. In 2015, the Missouri legislature stepped in an amended section 144.020.1(6) to include the following paragraph:
A tax equivalent to four percent on the number of sales or charges for all rooms, meals, and drinks furnished at any . . . restaurant, bar . . . or other place in which rooms, meals or drinks are regularly served to the public. The tax imposed under this subdivision shall not apply to any automatic mandatory gratuity for a large group imposed by a restaurant when such gratuity is reported as employee tip income and the restaurant withholds income tax under section 143.191 on such gratuity.
In practical terms, restaurants should track mandatory gratuity revenue separately from other tip income in their sales documentation and enumerate mandatory gratuities separately in their payroll documentation to avoid paying tax on these gratuities.
How Can I Make Sales Tax Work for Me?
It may be hard to believe, but the collection and remission of sales tax is a revenue-producing activity for most large companies. Most states, including Missouri, offer discounts for the timely filing and payment of sales tax. In Missouri, a 2% discount is earned with timely reporting. In Missouri, sales tax returns are due on the 20th day of the month following the reporting month, unless the reporting month is at the end of the quarter of a calendar year. In these cases, returns are due on the last day of the following the reporting month. This discount is essentially free money that every business should take advantage of.
Abacus CPAs offers full-service sales and use tax consulting/preparation to streamline the filing process, allowing you to take advantage of tax law updates and early filing discounts.
Matt Clark, CPA & CIA, is a Director in the Audit and Attestation department at Abacus CPAs, LLC. He specializes in audits, reviews, compilations, sales/use tax analysis, state income tax apportionment, IRS and state audit representation, and internal audits. Matt is passionate about working with a diverse group of clients to develop gains in internal controls and operating efficiency to bring better results to the businesses’ bottom line.
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