How to run a coffee shop in the US: sales tax, tip jars and gift cards

A coffee shop looks simple from the counter: a drink, a pastry, a card tap. Behind the register, four rules decide whether you keep your margin. What gets taxed, who owns the tip jar, what a gift card promises and how a loyalty offer is worded. Most of them differ by state, so this guide gives you the national shape and points to the state guide for the detail.

Is a hot drink taxed differently from a bag of coffee beans?

Often, yes, but it depends on the state. Sales tax laws split food into two groups: groceries, which many states tax lightly or not at all, and prepared food, which is taxed like a restaurant meal. The model definition used by the Streamlined Sales and Use Tax Agreement is a good guide to the idea. Food is prepared when it is sold heated, when the seller has mixed or combined two or more ingredients into a single item, or when the seller provides eating utensils.

Apply that to your counter:

• A latte or an iced coffee is a drink you make, so it is prepared food.
• A bag of whole beans is usually a grocery item, taxed lightly or not at all in many states, but fully taxed in others.
• A muffin on a plate with a fork is prepared food. The same muffin in a sealed bag may not be, depending on the state.
• A bundle of bottled drinks, candy or supplements can be taxed differently again, because the model agreement lets states carve them out.

The sharp edge is the register. If your point of sale applies one tax rate to everything, you either overcharge on beans or under-collect on drinks. Set up two or three tax categories and map every menu item to one. The guide to sales tax for US food businesses explains the basics, and state guides cover Texas, Florida, Illinois, Ohio and Wisconsin.

Who owns the tip jar?

The staff do. Under the federal Fair Labor Standards Act, an employer may not keep any part of an employee's tips for any purpose. That includes the jar by the register and the tip line on the card reader.

A few rules matter at a busy counter:

• Managers and supervisors cannot take from a tip pool. They may keep only tips a customer hands them directly.
• If you pay your baristas the full minimum wage and take no tip credit, you may share tips with kitchen or back-of-house staff. If you take a tip credit, the pool is limited to staff who customarily receive tips.
• You may deduct the card company's fee from the tip on a card payment, but no more than the actual fee, and some states ban the deduction.

Your state may be stricter. See the guides on tip pooling and service charges and the tip credit and payroll reporting.

What about a service charge or a fee for oat milk?

A charge you add to the bill is not a tip. The IRS says a service charge added by the employer and passed to employees is wages, reported on the W-2, and not tip income. Anything you charge should be on the menu or the receipt so the customer is not surprised. Employees must report cash tips to you by the 10th of the following month unless the total is under $20 in the calendar month.

What do you need to know about gift cards?

Federal rules set a floor: a gift card generally cannot expire within five years of purchase, and fees are restricted. Many states are stricter, and some bar expiry dates entirely. Cards given away as a promotion, with a bonus, often fall under looser rules, but only if they are labeled correctly. Read the federal gift card rules first, then your state guide, such as Illinois, Florida or Minnesota.

Tax adds a wrinkle. Most states tax the drink when the card is spent, not when the card is sold. Record unspent balances as a liability, not as revenue.

How should you run a loyalty program?

A free drink after ten visits is not a gift card, as long as it is a reward and not something the customer paid for. Keep the wording clear: what earns a point, what the reward is and when it expires. Do not call a purchased balance a reward. The loyalty program guide covers how independents keep it simple.

What is the first thing to fix on Monday?

Print the receipt for one hot drink, one bag of beans and one pastry, and check each tax line against your state's rules. It takes ten minutes, and it is the mistake a state auditor looks for first. Then read the tip section of your employee handbook out loud. If a barista could not explain who owns the jar, the handbook needs a rewrite.

More guides for your business:

• How to run a bar or brewpub in the US
• How to run a bakery in the US
• How to run a hotel restaurant in the US

More in the US guides for food businesses.