Sales Tax Issues

Sales tax is a fact of life in all but a few states. Unfortunately, the laws concerning sales tax vary widely from state to state. Adding to the confusion is the fact that an RDS does not fit into the typical business model anticipated by state legislatures, so ensuring you are properly following the law can be daunting at best.


Do I have to collect Sales Tax?


Generally, an RDS is a retailer just like Wal-Mart or Sears. The RDS purchases the meals at a wholesale price from the restaurant, and then sells those meals to consumers. (Some RDS's take the position that they are only an agent for the restaurant, but that is a topic for another day).


As the retailer, the RDS is responsible for collecting and paying the sales tax to the State. Many RDS's choose to simply pay the sales tax to the restaurant to avoid having to account to the state. So long as proper sales tax is collected from the customer and the same amount is paid to the restaurant, there shouldn't be a problem. If you are in a jurisdiction where the sales tax rate is uniform throughout, and you are not required to collect sales tax on the delivery fee or tip, paying the taxes to the restaurant is rather straightforward. Even so, as a retailer, you may still be required to register with the state and account for all of the taxes collected and then paid to the restaurants, showing you owe nothing to the state.


What Rate Do I Charge?


In many places throughout the country, the sales tax rate can vary from county to county, and even from city to city. When this is the case, what rate do you charge your customer?There are several possibilities:(1) You charge the rate in effect at your own office, (2) you charge the rate in effect at the restaurant's location, or (3) you charge the rate at the customer's delivery address. The proper rate to charge varies from state to state.


For example, in Massachusetts, restaurant delivery services are required to register separately for each city that they deliver food to, and collect sales tax based on the location of the actual delivery.(Massachusetts is one of the few states that actually addresses restaurant delivery services directly.)In Texas, on the other hand, an RDS must charge the higher of either the tax rate of the Texas sales office of the RDS or the tax rate in effect at the customer's location.


Do I Charge Sales Tax on the Delivery Fee?


This varies from state to state. It is vitally important that your attorney properly researches this issue for you, as the taxes on the delivery fees can be significant. If you fail to collect them, and are later audited, you can wind up owing thousands of dollars in back taxes to the state. Most State laws on collecting sales tax on delivery fee look at whether the delivery is a part of the sale, or an add-on service. Some states also look to whether you (the retailer) are doing the delivery or a third party is doing the delivery.


In California, for example, the delivery fee would not be taxable only if it is listed separately on the order and is performed by an independent contractor not using your vehicle. If the amount of the delivery fee charged exceeds the amount paid to the contractor, then the difference is subject to sales tax. (Since the entire independent contractor issue is another huge topic, I would recommend charging sales tax on delivery fees in California.)In Texas, on the other hand, delivery fees are taxable if the item being delivered is taxable.


Do I charge Sales Tax on Tips?


This is a topic that most RDS's are completely unaware of. And, of course, this also varies from state to state. The key to whether or not you have to charge sales tax on tips hinges on whether the tip is voluntary or mandatory. Voluntary tips are seldom, if ever, subject to sales tax. Mandatory tips, however, are much more likely to be taxed. The general issue is whether or not a tip is considered mandatory.


In California, the tip is mandatory if it's automatically added to the order. Unless the customer has the option to write in the tip on the order receipt, it is considered a mandatory tip. Also in California, tips are still considered mandatory even if you add a statement to the order stating that the tip is voluntary and your give the customer the option to remove the tip. But in Virginia, tips are only taxable if they are mandatory and over 20%.


Do I have to list the Sales Tax on the order?


Yes. In virtually every jurisdiction, the sales tax must be stated as a separate line item on the order. It cannot be combined with any other charges. Some services have attempted to disguise their convenience fee by adding it to the sales tax line, and calling it something like “Taxes and Fees”.In most cases, this is illegal.


As you can see, there are a myriad of issues to consider when collecting sales taxes from your customers. It is highly recommend that you consult an attorney or tax professional for competent advice to ensure you are following the law properly in your state. Failure to do so could end up costing you thousands of dollar if you are later audited by the state. That can and has happened to RDS's in the past.


© 2015 by RDS Control Systems, Inc. (888) 578-9428
All rights reserved.

Home   RDS Industry   Blog   Support
Terms of Service   Contact Us