Third-Party Food Delivery: Restaurant Tax & Risk Issues | GBQ
Third-party food delivery was a massive savior during the early days of the pandemic, and it has remained a viable option in the post-pandemic era as a convenience for consumers who don’t have the time or patience to visit their favorite restaurant that otherwise doesn’t offer delivery.  While there are plenty of benefits, there are certainly some drawbacks for restaurants relying on third-party delivery services to continue driving revenue from a customer base that hasn’t fully returned to pre-pandemic in-person levels. Customer service, accurate execution of orders, and dispute resolution are among many restaurants’ concerns in serving their customer base when relying so heavily on third-party delivery.  From a brand reputation risk management perspective, anything customer-facing requires attention and agility first and foremost. Behind the scenes, there are additional issues, especially from an accounting standpoint, perhaps none more noteworthy than sales tax and local food and beverage taxes (“F&B”).  While many of the sales tax collection requirements are straightforward, thanks to state marketplace facilitator rules, determining who is responsible for collecting the F&B taxes has led to inconsistent treatment across the board. It could ultimately lead to tax exposure for a restaurant. Here is an example of a typical delivery transaction that could create F&B issues:
  • A customer in North Carolina (a state that imposes a separate F&B tax) makes an order from a local restaurant through a third-party food delivery service and pays the delivery service the cost of the order plus all levels of the relevant sales taxes that include any applicable local F&B tax.
  • Since the delivery service is considered a marketplace facilitator, it collects the applicable sales tax and remits it to the state taxing jurisdiction, typically monthly. However, most state marketplace facilitator laws only contemplate sales tax, and the delivery service may not (or will not) remit the F&B tax to the local jurisdiction.
  • The delivery service, instead, may distribute the applicable local F&B tax to the restaurant, who then must find a way to include the local F&B tax into their monthly return to ensure it gets remitted with all other collected taxes.
  • An issue is created when the restaurant files its own sales tax and local F&B returns (made on-premises and through third-party food delivery). The total sales on the sales tax returns and local F&B returns will likely not match and could draw an inquiry from either taxing authority.  Additionally, the restaurant will have to take additional steps to ensure that all sales are accounted for on the F&B end.
Within the third-party food delivery industry, three different positions have emerged:
  • Follow (strictly speaking) the marketplace facilitator guidelines and remit only state-level sales tax, except in cases where states require remittance of all tax collected;
  • Remit all tax collected to all appropriate jurisdictions, state and local, or
  • Disregard marketplace facilitator guidelines and don’t collect any tax.
From a back-office accounting perspective, the inconsistent treatment from these positions means restaurants must decide how to keep track of local tax remittance obligations. Lacking uniformity ultimately requires manual manipulation of the source data coming out of the point-of-sale system and cross-referencing responsibilities with the third-party delivery service to ensure all taxes are properly remitted.  The result may be unnecessary monthly general ledger reconciliations, adjusting journal entries, and potential exposure for F&B tax that might not be properly remitted despite best efforts to do so. Until formal, consistent guidance is offered, restaurants must know their data and understand what is going into the POS at the time of sale and what’s coming out when the time comes to file monthly tax obligations, especially on the local F&B taxes, where the tax responsibility ultimately lies with the restaurant. In the meantime, restaurants must remain diligent in knowing why the numbers on monthly tax returns may not match and implementing processes to confirm all tax obligations are met. This will ease the burden that may result when a state or local auditor opens an examination and attempts to reconcile sales and F&B tax returns. If you have any questions or would like to learn more about how this may impact you, please reach out to Jeff Monsman or your GBQ advisor.