Texas restaurant purchases: resale certificates and taxable items

A Texas restaurant pays sales tax on some of what it buys and not on others. According to the Comptroller's restaurant publication, non-reusable items given to guests with meals, such as paper napkins and plastic utensils, can be bought without tax with a resale certificate, and kitchen processing equipment such as grills and fryers is not taxable. Tables, dishes, silverware, tablecloths, cloth napkins and dishwashers are taxable, as are utilities and certain services.

What can you buy without tax using a resale certificate?

The Comptroller's publication lists non-reusable items given to customers with meals, including paper napkins, plastic utensils, straws and fry bags. These are not taxable when purchased with a resale certificate, because they are passed to the guest as part of the meal. You give the supplier a properly completed resale certificate, and the supplier keeps it on file. If you buy the same item for use in the back office, such as paper towels in the staff bathroom, the certificate does not apply.

Which equipment is not taxable?

Kitchen processing equipment, such as grills, fryers, ovens and microwaves, is not taxable according to the publication. These are the machines that cook or process food. The dividing line is between equipment used to process food and equipment that serves or cleans, and the next section shows where the line falls.

Which items are taxable?

The publication lists tables, dishes, silverware, tablecloths, cloth napkins and dishwashers as taxable purchases. These are the items the restaurant keeps and reuses rather than passes to the guest, or equipment that cleans rather than cooks. A dishwasher is taxable even though it sits in the kitchen, which surprises many new owners. Build the tax into your opening budget so a fit-out quote does not surprise you.

What about utilities and services?

Utilities used to prepare food and operate the restaurant are taxable, as are services such as janitorial cleaning, pest control and waste removal. These appear on invoices as line items, and you pay the tax to the supplier. If you see a utility or service invoice with no tax, ask the vendor to explain, since you may owe use tax on it to the Comptroller.

A worked example for an opening budget

Suppose you are fitting out a small restaurant. The quote has a $14,000 range, fryer and oven package, $6,000 of tables and chairs, $2,500 of dishes and flatware and a $4,500 dishwasher. By the publication's list, the cooking equipment is not taxable, while tables, dishes and the dishwasher are. At 8.25 percent, the taxable items of $13,000 carry about $1,070 of tax. That is a small number on a large project, but you want to know it before the bank loan is sized.

How do you use a resale certificate properly?

1. Complete the certificate with your sales tax permit number and the description of what you buy.
2. Give it to the supplier once, and ask them to note it on your account.
3. Buy only items that you will give to guests or resell.
4. Keep a copy.
5. Review your purchases quarterly for items bought tax-free that went to back-of-house use.

What is use tax?

If you buy a taxable item without paying Texas tax, such as something ordered from an out-of-state seller who did not charge it, you generally owe use tax to the Comptroller. Ask the Comptroller or your accountant how to report it on your return.

What should you keep for an audit?

The Comptroller can audit several years. Keep invoices, resale certificates, a list of what you bought tax-free and why, and the permit number you used. An organized folder turns an audit from a threat into a routine task.

What should you ask your accountant?

A publication from 2014 cannot settle every item in a modern kitchen. Ask your accountant about items that sit between categories, such as a combination oven, a point of sale terminal, a delivery tablet, smallwares you give away with takeout orders and décor. Ask how to treat repairs, installation charges and leased equipment, which the publication does not discuss. Get the answers in writing, and file them with your invoices.

How do you avoid double-paying tax?

The common double payment is on items that you pay tax on at purchase and then charge to the guest again, such as a branded cup that you sell. If you buy an item for resale, give the supplier your resale certificate and collect tax from the guest when you sell it. If you pay tax at purchase and later resell the item, you may be able to recover the tax. Ask the Comptroller how to claim a credit or refund and what records it needs.

More guides for your business:

• Texas comped meals, coupons and takeout: how sales tax works
• Texas sales tax permit and filing for new restaurants
• Texas local sales tax rates for restaurants in Houston, Dallas and Austin

More in the US guides for food businesses.