Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2012
Sales And Use Tax Regulations
Article 8. Food Products
Sales And Use Tax Regulations
Article 8. Food Products
Regulation 1602. Food Products.
Reference: Sections 6091, 6353, and 6359, Revenue and Taxation Code.
California Constitution, Article XIII, Section 34.
(a) IN GENERAL. Tax does not apply to sales of food products for human consumption except as provided in Regulations 1503, 1574, and 1603. (Grocers, in particular, should note that tax applies to sales of "hot prepared food products" as provided in Regulation 1603(e).)
(1) "Food products" include cereal and cereal products, including malt and malt extracts, milk and milk products, including ice cream, ice milk and ice cream and ice milk novelties, sherberts, imitation ice cream and imitation ice milk, dried milk products, sugar of milk, milk shakes, malted milks, and any other similar type beverages composed at least in part of milk or a milk product and requiring the use of milk or a milk product in their preparation, oleomargarine, meat and meat products, fish and fish products, eggs and egg products, vegetables and vegetable products, including dehydrated vegetables, fruit and fruit products, spices and salt, coffee and coffee substitutes, tea, cocoa and cocoa products, sugar and sugar products, baby foods, bakery products, marshmallows, baking powder, baking soda, cream of tartar, coconut, flavoring extracts, flour, gelatin, jelly powders, mustard, nuts, peanut butter, sauces, soups, syrups (for use as an ingredient of, or upon, food products as defined herein), yeast cakes, olive oil, bouillon cubes, meat extracts, popcorn, honey, jams, jellies, certo, mayonnaise, and flavored ice products, including popsicles and snow cones. "Food products" include candy, confectionery, and chewing gum.
(2) "Food products" include all fruit juices, vegetable juices, and other beverages, whether liquid or frozen, including all beverages composed in part of fruit or vegetable juice and concentrates, powders, or other bases for such beverages, and noncarbonated and nonefferverscent bottled water intended for human consumption regardless of the method of delivery. "Food products" does not include carbonated or effervescent bottled waters, spirituous, malt or vinous liquors, or carbonated beverages.
Sales of purified drinking water through vending machines or outlets in retail stores where the water enters the machine or outlet through local supply lines and is dispensed into the customer's own containers are exempt under Revenue and Taxation Code section 6353.
Tax does not apply to sales of water in bulk quantities of 50 gallons or more to an individual for use in a residence when that residence is not serviced by lines, mains or pipes.
(3) "Food products" do not include medicines, cough drops, mineral oils, cigarettes, cigars, tobacco, coloring extract, ice, and dog, cat, bird and other animal foods.
(4) "Food products" do not include any product for human consumption in liquid, powdered, granular, tablet, capsule, lozenge, or pill form (A) which is described on its package or label as a food supplement, food adjunct, dietary supplement, or dietary adjunct, and to any such product (B) which is prescribed or designed to remedy specific dietary deficiencies or to increase or decrease generally one or more of the following areas of human nutrition:
4. Caloric intake
In determining whether a product falls within category (B), it is important whether the manufacturer has specially mixed or compounded ingredients for the purpose of providing a high nutritional source. For example, protein supplements and vitamin pills are taxable as food supplements.
Other items, such as cod liver oil, halibut liver oil, and wheat germ oil, are considered dietary supplements and thus subject to tax even though not specially compounded. However, unusual foods such as brewer's yeast, wheat germ and seaweed are not subject to tax except when their label states they are a food supplement or the equivalent. Finally, the compounding of nutritional elements in items traditionally accepted as food does not make them taxable, e.g., vitamin-enriched milk and high protein flour.
Tax, however, does not apply to any such products which either are exempted by Revenue and Taxation Code Section 6369, respecting prescription medicines, or are complete dietary foods providing the user in the recommended daily dosage with substantial amounts of vitamins, proteins, minerals and foods providing adequate caloric intake. The latter is a food if it provides the user with the following daily minimums:
1. 70 grams of high quality protein
2. 900 calories
3. Minimum daily requirements as established by the regulations of the Federal Food and Drug Administration of the following vitamins: A, B1, C, D, Riboflavin, and Niacin or Niacinamide; and the following minerals: Calcium, Phosphorus, Iron and Iodine.
When supplement or adjunct products that do not meet the definition of food under this subdivision ar furnished by a physician to his or her own patient as part of a medically supervised weight loss program to treat obesity, such products are regarded as "medicine." The sale and use o such products are exempt from tax pursuant to subdivision (e)(7) of Regulation 1591 which interprets and explains Revenue and Taxation Code section 6369.
(b) SALES OF COMBINATION PACKAGES. When a package contains both food products (e.g., dried fruit) and nonfood products (e.g., wine, or toys), the application of tax depends upon the essential character of the complete package. If more than 10 percent of the retail value of the complete package, exclusive of the container, represents the value of the nonfood products, a segregation must be made if the retailer has documentation that would establish the cost of the individual component parts of the package, with the tax measured by the retail selling price of such nonfood products.
When the retailer does not have documentation that would establish the cost of the individual component parts of the package, and the package consists of nonfood products whose retail selling price would exceed 10 percent of the retail selling price for the entire package, exclusive of the container, the tax may be measured by the retail selling price of the entire package.
If the retail value of the nonfood products is 10 percent or less, exclusive of the container, and the retail value of the container is 50 percent or less of the retail value of the entire package, the selling price of the entire package is not subject to tax.
(c) SALES OF NON-EDIBLE DECORATIONS. When the sale of a cake or other bakery good for a single price includes non-edible decorations, the application of tax depends upon the value of the non-edible merchandise versus the value of the cake or bakery good. If more than 50 percent of the total retail value of the cake or bakery good represents the value of non-edible decorations, a segregation must be made and the tax measured by the retail selling price of such non-edible decorations. If the price of the non-edible decoration is separately stated, then tax applies to such charge.
(d) FOOD PRODUCTS PROCESSED BY THE CONSUMER. A commodity included in the term "food products" under Revenue and Taxation Code Section 6359 may be sold to a consumer to be processed and incorporated into a product which is for human consumption but which is excluded from the term "food products." For example, grapes may be sold to be used in making wine for consumption and not for resale. If the commodity sold to the consumer is included in the term "food products" and if the product into which it is incorporated is for human consumption, the sale of the commodity is within the exemption provided by this section.
History: Effective, except as above indicated, July 1, 1935.
Amended August 19, 1953.
Amended September 18, 1963.
Amended September 2, 1965, applicable as amended September 17, 1965.
Amended November 3, 1969, applicable on and after January 1, 1970.
Amended February 18, 1970, applicable on and after January 1, 1970.
Amended and renumbered November 3, 1971, effective December 3, 1971.
Amended December 15, 1971, applicable on and after December 15, 1971.
Amended February 16, 1972, effective March 25, 1972.
Amended May 10, 1973, effective June 23, 1973.
Amended September 18, 1973, effective October 27, 1973.
Amended June 25, 1981, effective November 1, 1981. Added Section 6359.6 to references; deleted amended effective dates in (a)(1) and (2) and (3). In (a)(2) added exemption for bottled water operative 1/1/81.
Amended March 6, 1985, effective May 31, 1985. Subdivision (a)(2) has been changed to provide that the exemption from tax for the sale of noncarbonated and noneffervescent bottled water shall be expanded to apply to water sold in individual containers of one-half gallon or more in size.
Amended August 1, 1991, effective August 30, 1991.
Amended pursuant to Chapter 85, Statutes of 1991, and Chapter 88, Statutes of 1991, to exclude from the definition of "food products" snack foods, as defined, candy, confectionery and nonmedicated gum and to repeal the exemption from tax for sales of noncarbonated and noneffervescent bottled water under certain conditions. Chapter 85, Stats. 1991, repealed the exemption effective July 1, 1991; Chapter 88, Stats. 1991, changed the effective date to July 15, 1991.
Amended September 29, 1994, effective October 29, 1994. Amended to provide that sales of snack foods are not subject to tax effective December 1, 1992; "food products" does not include carbonated or effervescent bottled water but does include noncarbonated and noneffervescent water intended for human consumption regardless of the method of delivery.
Amended March 17, 1999, effective June 12, 1999. New subdivision (c) added, old subdivision (c) renumbered to (d).
Amended August 29, 2006, effective April 7, 2007. Deleted obsolete language in subdivisions (a)(1), (a)(2), (a)(3), and (a)(4) related to the application of tax to snack foods for the period from July 15, 1991 through November 30, 1992. Amended subdivision (b) to provide a clear standard for taxing sales of combination packages that include food and nonfood products sold for a single price.
Amended September 17, 2008, effective December 14, 2008. In subdivision (a)(4), added language to clarify that when supplement or adjunct products that do not meet the definition of food are furnished by a physician to his or her own patient as part of a medically supervised weight loss program to treat obesity, such products are regarded as "medicine."
Regulation 1602.5. Reporting Methods for Grocers.
Reference: Sections 6359 and 6373, Revenue and Taxation Code.
(a) FOOD PRODUCTS EXEMPTION—IN GENERAL. Tax does not apply to sales of food products for human consumption. Accurate and complete records of all purchases and sales of tangible personal property must be kept to verify all exemptions claimed as sales of exempt food products.
In preparing returns, grocers may use any method of determining the amount of their sales of exempt food products which does not result in an overstatement of the exemption. Grocers must be prepared to demonstrate by records which can be verified by audit that the method used properly reflects their sales of exempt food products.
(b) REPORTING METHODS.
(1) PURCHASE-RATIO METHOD. One method which may be used is the purchase-ratio method sometimes referred to as the "grocer's formula". Under this method, grocers may claim as sales of exempt food products that proportion of their total gross receipts from the sale of "grocery items" that the amount of their purchases of exempt food products bears to their total purchases of grocery items.
If the grocer elects to use the purchase-ratio method of reporting, the following criteria should be followed:
(A) The purchase-ratio method may be used only by grocers and only with respect to sales of "grocery items".
(B) Grocers selling clothes, furniture, hardware, farm implements, distilled spirits, drug sundries, cosmetics, body deodorants, sporting goods, auto parts, cameras, electrical supplies, appliances, books, pottery, dishes, film, flower and garden seeds, nursery stock, fertilizers, flowers, fuel and lubricants, glassware, stationery supplies, pet supplies (other than pet food), school supplies, silverware, sun glasses, toys and other similar property should not include the purchases and sales of such items in the purchase-ratio method. These items are referred to as "nongrocery taxable" items.
When the purchase-ratio method is used for reporting purchases and sales of nongrocery taxable items are computed by the retail extension or markup method, the computation of nongrocery taxable sales should include adjustments for beginning and ending inventories of these items and may include adjustments for shrinkage as specified in (d) below.
(C) Grocers selling gasoline, feed for farm animals, farm fertilizers or who operate a snack bar or restaurant, or sell hot prepared food should not include the purchases and sales of such items or operations in the purchase-ratio method.
(D) The purchases and sales of meat, fruit, produce, delicatessen (except hot prepared food or food sold for immediate consumption at facilities provided by the grocer), beverage (except distilled spirits in the liquor department) and bakery departments must be included in the purchase-ratio method if these departments are operated by the grocer.
(E) The records should be complete and adequate and all sales and purchases should be properly accounted for in the records. All purchases of exempt food products, grocery taxable items and nongrocery taxable items should be segregated into their respective classifications.
(F) The following definitions apply to the purchase-ratio method:
1. "Exempt food products" means those items generally described as food products in Section 6359 and Regulation 1602. If grocers are uncertain as to the classification of any product, they should contact the nearest board office.
2. "Total gross receipts from the sale of grocery items" means the total amount of the sales price of all exempt food products and taxable grocery items, including sales tax reimbursement, amounts receivable from manufacturers, or others, for coupons (excluding any handling allowances) redeemed by customers, and the face value of federal food stamps. The term does not include receipts from sales of those items described in (b)(1)(B), above, which are commonly referred to as "nongrocery taxable items", or from those sales described in (b)(1)(C), above (gasoline, snack bar, etc.). It does not include amounts which represent "deposits", as defined in Regulation 1589, e.g., bottle deposits. When deposits are not segregated, it will be presumed, in the absence of evidence to the contrary, that the total deposits received are equal to the deposits refunded.
3. "Grocery items" means exempt food products and taxable items other than those generally classified under (b)(1)(B) and (b)(1)(C), above.
4. "Purchases" means the actual amount which a grocer is required to pay to the suppliers of merchandise, net of any cash discounts, volume rebates or quantity discounts and promotional allowances. The term does not include the cost of transportation, processing, manufacturing, warehousing, and other costs, if these operations are self-performed. It does not include the cost of operating supplies such as wrapping materials, paper bags, string, or similar items. It does not include amounts which represent "deposits", as defined in Regulation 1589, e.g., bottle deposits (see (b)(1)(F)2., above). If deposits are not segregated, it will be presumed, in the absence of evidence to the contrary, that the amount deposited with the supplier is equal to the credit received for bottles returned by the grocer.
A. As used herein, the term "cash discount" means a reduction from the invoice price which is allowed the grocer for prompt payment.
B. As used herein, the term "volume rebate or quantity discount" means an allowance or reduction of the price for volume purchases based on the number of units purchased or sold. Such rebates or discounts normally are obtained without any specific contractual obligation upon the part of the grocer to advertise or otherwise promote sales of the products purchased. The term does not include patronage dividends distributed to members by nonprofit cooperatives pursuant to Section 12805 of the Corporations Code, or rebates which constitute a distribution of profits to members or stockholders.
C. As used herein, the term "promotional allowance" means an allowance in the nature of a reduction of the price to the grocer, based on the number of units sold or purchased during a promotional period. The allowance is directly related to units sold or purchased although some additional promotional expense may be incurred by the grocer. Normally, grocers would feature the product in their advertising, although they may or may not be contractually obligated to do so. The retail price of the product may or may not be lowered during a promotional period.
The term does not include display or other merchandising plan allowances or payments which are based on agreements to provide shelf space for a price not related to volume of purchases, or cooperative advertising allowances which are based on a national line rate for advertising and are not directly related to volume of purchases and sales. Cooperative advertising allowances are intended to reimburse grocers for a portion of their advertising costs for a particular product or products.
(G) Sales tax reimbursement collected in accordance with Regulation 1700 which is included in total sales is an allowable deduction. An example of the computation of the purchase-ratio method which provides for an adjustment for sales tax included follows:
1. Taxable grocery purchases
2. Add sales tax adjustment (8.25%* × Item 1)
3. Adjusted taxable grocery purchases (Item 1 + Item 2)
4. Exempt food products purchases
5. Total grocery purchases including sales tax (Item 3 + Item 4)
6. Exempt food products ratio (Item 4 divided by Item 5)
7. Total sales including sales tax
8. Nongrocery taxable sales including sales tax (if such sales are not accurately segregated, mark up nongrocery taxable cost of goods sold
to compute sales—add 8.25% * sales tax to total)**
9. Grocery sales including sales tax (Item 7 – Item 8)
10. Exempt food products sales (Item 6 × Item 9)
11. Sales of taxable items including sales tax (Item 7 – Item 10)
12. Less taxable items purchased with food stamps (2% of total
food stamps redeemed for period, e.g., 2% × $100,000)
13. Taxable measure including sales tax (Item 11 – Item 12)
14. Sales tax included (8.25/108.25 × Item 13)
15. Measure of tax (Item 13 – Item 14)
16. Sales tax payable (8.25% * × Item 15)
* Use applicable tax rate—tax rate of 8.25% used for illustration purposes.
** Adjust for shrinkage if applicable—see paragraph (d).
(2) MODIFIED PURCHASE-RATIO METHOD. Any grocer who does not follow the procedure outlined in (b)(1), above, but reports on a purchase-ratio basis of some type is using a modified version of the purchase-ratio method. For example, grocers who include self-performed processing, manufacturing, warehousing or transportation costs in the purchase-ratio formula are using a modified version. Grocers using such a modified version must establish that their modified version does not result in an overstatement of their food products exemption. They may demonstrate the adequacy of their modified method by extending taxable purchases, adjusted for inventories, to retail for a representative period or computing taxable sales by marking up taxable purchases, adjusted for inventories, for a representative period. Grocers must retain adequate records which may be verified by audit, documenting the modified purchase-ratio method used.
(3) RETAIL INVENTORY METHOD AND MARKUP METHOD. Grocers who engage in manufacturing, processing, warehousing or transporting their own products may prefer to use a retail or markup method of reporting. These methods are described below:
(A) Retail Inventory Method.
1. The opening inventory is extended to retail and segregated as to exempt food products and taxable merchandise.
2. As invoices for merchandise are received, they are extended to retail and segregated as to exempt food products and taxable merchandise.
3. The ending inventory at retail is segregated as to exempt food products and taxable merchandise.
4. The total of segregated amounts determined in 1 and 2 less 3 represent anticipated exempt and taxable sales.
5. The segregated amounts determined in 4 are adjusted for net markons, net markdowns, and shrinkage to determine realized exempt and taxable sales.
6. Physical inventories are taken periodically to adjust book inventories.
(B) Cost Plus Markup Method—Taxable Merchandise.
1. The cost of all taxable merchandise is marked up to anticipated selling prices at the time of purchase. Records are kept of net markons, net markdowns, and shrinkage for all taxable merchandise. Such records are used to adjust the anticipated selling price to the realized price. Inventory adjustments are required unless the inventory of taxable merchandise at the beginning and ending of reporting periods is substantially constant. Returns should reflect as taxable sales the realized selling price of all taxable merchandise during a reporting period (anticipated sales price on purchases adjusted for inventory changes and other adjustments of the types mentioned).
2. If the grocer elects to use the cost plus markup method of reporting, the following criteria should be followed:
A. Markup factor percentages*** applicable to taxable merchandise should be determined by a shelf test sample of representative purchases, covering a minimum purchasing cycle of one month within a three-year period, segregated by commodity groupings, i.e., beer, wine, carbonated beverages, tobacco and related products, paper products, pet food, soap, detergents, etc. The markup factor percentages determined for commodity groupings should be applied to the cost of sales of the respective commodities for the reporting period to determine taxable sales.
In order to insure that markup factor percentages typical of the total business are determined, grocers who conduct multistore operations should include purchases from several representative stores in the shelf test sample of markup factor percentages.
*** Markup factor percentage is the markup + 100%. When applied to cost, it computes the selling price. For example, an item costing $1.00 and selling at a 25% markup will have a markup factor of 125%. The markup factor (125%) when applied to $1.00 cost results in a $1.25 selling price.
B. As an alternate procedure to A., above, the overall average markup factor percentage for all taxable commodity groupings may be used to determine taxable sales for the reporting period. This markup factor percentage is applied to the overall cost of taxable sales for the reporting period.
The overall average markup factor percentage should be determined as follows:
a. Determine markup factor percentages by commodity groupings based on shelf tests covering a minimum purchasing cycle of one month within a three-year period.
b. Determine cost of sales, segregated by commodity groupings, for a representative one-year period.
c. Apply markup factor percentages (Step a) to the cost of sales of the respective commodity groupings (Step b) to determine anticipated sales by commodity groupings and in total.
d. Divide total anticipated sales (Step c) by the respective total cost of sales to determine the overall average markup factor percentage.
C. In calculating markup factor percentages, appropriate consideration should be given to markon and markdown price adjustments, quantity price adjustments such as on cigarettes sold by the carton, liquor sold by the case and other selling price adjustments. Quantity and other price adjustments may be determined by a limited test of sales of a representative period or by sales experience of a representative store within the operating entity.
D. The computation of taxable sales for the reporting period should be based on cost of sales for the period. If for any particular reporting period or periods, cost of sales is not determinable because actual physical inventories are unknown and inventories remain substantially constant, the computation of taxable sales may be based on purchases for the period. However, if inventories are not substantially constant, adjustments for physical inventories should be taken into consideration in one of the reporting periods occurring within the accounting year.
E. Shrinkage should be adjusted as specified in (d) below.
F. Taxable markup factor percentages based on shelf test samples will generally be considered valid for reporting purposes for a period of three years, provided business operations remain substantially the same. A substantial change in business operations will be considered as having occurred when there is a significant change in pricing practices, commodities handled, commodity mix, locations operated, sources of supply, or other circumstances affecting the nature of the business.
(4) ELECTRONIC SCANNING SYSTEMS. The use of a scanning system is another acceptable reporting method for grocers. Electronic scanning systems utilize electronic scanners and central computers to automatically compile and record taxable and nontaxable sales, sales tax, and related data from scanning of products imprinted with the Universal Product Code. It is the grocer's responsibility to establish the propriety of reported amounts. Grocers must ensure that proper controls are maintained for monitoring and verifying the accuracy of the scanning results and tax returns. Adequate documentation must be retained which may be verified by audit, including all scanning programs relating to product identity, price, sales tax code, program changes and corrections to the programs. Records which clearly show a segregation of taxable and nontaxable merchandise purchases would provide an additional source from which the scanning accuracy may be monitored or verified.
(c) FOOD STAMPS. Tangible personal property eligible to be purchased with federal food stamps and so purchased is exempt from the tax. Grocers who receive gross receipts in the form of federal food stamp coupons in payment for such tangible personal property which normally is subject to the tax, e.g., nonalcoholic carbonated beverages, may deduct on each sales tax return an amount equal to two percent (2%) of the total amount of food stamps redeemed during the period for which the return is filed. Effective January 1, 1993, grocers may claim amounts in excess of two percent whenever the following computation results in a greater percentage: total purchases of taxable items eligible to be purchased with federal food stamps divided by an amount equal to the total of the exempt food product purchases as defined in subdivision (b)(1)(F)1 plus the purchase of taxable items eligible to be purchased with federal food stamps. For example, for a reporting period, if the total purchases of carbonated beverages equals $5,000 and the total purchases of exempt food products equals $130,000, a percentage of 3.7% ($5,000 ÷ $135,000) may be used in computing the allowable food stamp deduction for that period. This deduction may be taken in lieu of accounting separately for such sales.
(d) SHRINKAGE. As used herein, the term "shrinkage" means unaccounted for losses due to spoilage, breakage, pilferage, etc. Grocers who incur such losses, may, for reporting purposes, adjust for such losses as follows:
(1) An adjustment of up to 1 percent of the cost of taxable merchandise may be taken into consideration when the retail inventory or markup method is used for reporting purposes.
(2) An adjustment of up to 3 percent of the cost of nongrocery taxable items may be taken into consideration when the purchase-ratio method is used for reporting purposes and sales of nongrocery taxable items are computed by the retail extension or markup method. The adjustment is limited to an overall 1 percent of taxable purchases when other than the purchase-ratio method is used for reporting purposes.
Losses in excess of the above are allowable when supported by records which show that a greater loss is sustained.
(e) LIST OF METHODS NOT EXHAUSTIVE. The methods by which grocers may determine their sales of exempt food products are not limited to the methods described above. Grocers may use any method which they can support as properly reflecting their exempt food sales. As is the case for all exemptions, it is the grocer's responsibility to establish the propriety of the amount of the claimed exemption.
(f) AUDITS. Taxpayers using one of the approved methods of reporting described in this regulation will normally be audited by application of the same approved procedure in the audit to verify the accuracy of claimed deductions. However, determinations may be imposed or refunds granted if the board, upon audit of the retailer's accounts and records, determines that the returns did not accurately disclose the amount of tax due.
History: Adopted May 10, 1973, effective June 23, 1973. Amended August 24, 1988, effective, November 17, 1988. In subdivision (c) amended to provide that certain items purchased with food stamps coupons are exempt from sales and use taxes.
Amended July 28, 1993, effective October 21, 1993.
Amended subdivision (c) to provide an alternative method which grocers may use to compute the allowance deduction for the total amount of food stamp coupons redeemed during the return period.
Amended February 8, 1995, effective July 19, 1995. Added subparagraph (b)(4) to recognize electronic scanning systems as an acceptable means of reporting and to specify documentation to be retained for audit verification; amended subparagraphs (a), (b)(1)(F)1. and 4.C., (b)(2), and (e) to delete gender-based language.
Amended October 1, 2008, effective December 31, 2008. Deleted second paragraph in subdivision (b)(4) to eliminate the obsolete requirement that grocers get Board approval before using an electronic scanning method to determine the amount of their sales of exempt food products. Also deleted last two sentences in subdivision (b)(2) and deleted subdivision (b)(3)(B)2.G. to remove language urging grocers to seek Board approval prior to using the modified purchase-ratio and the cost plus markup methods for reporting tax.
Amended March 25, 2010, effective May 13, 2010. Amended subdivision (b)(1)(G) and corresponding footnote to utilize current tax rate of 8.25 percent in purchase ratio method calculation with tax included deduction.
Regulation 1603. Taxable Sales of Food Products.
Reference: Sections 6006, 6012, 6359, 6359.1, 6359.45, 6361, 6363, 6363.5, 6363.6, 6363.8, 6370, 6373, 6374, and 6376.5, Revenue and Taxation Code.
Food Products Generally, see Regulation 1602.
Alcoholic Beverages, tax reimbursement when served with, see Regulation 1700.
"Free" meals with purchased meals, see Regulation 1670.
Meals served to patients and inmates of an institution, see Regulation 1503.
Vending Machines, when considered selling meals, see Regulation 1574.
Meals at summer camp, see Regulation 1506(e).
Parent-teacher associations as consumers, see Regulation 1597.
(a) RESTAURANTS, HOTELS, BOARDING HOUSES, SODA FOUNTAINS, AND SIMILAR ESTABLISHMENTS.
(A) Boarding House. The term "Boarding House" as used in this regulation means any establishment regularly serving meals on the average to five or more paying guests. The term includes a "guest home," "residential care home," "halfway house," and any other establishment providing room and board or board only, which is not an institution as defined in Regulation 1503 and section 6363.6 of the Revenue and Taxation Code. The fact that guests may be recipients of welfare funds does not affect the application of tax. A person or establishment furnishing meals on the average to fewer than five paying guests during the calendar quarter is not considered to be engaged in the business of selling meals at retail.
(B) American Plan Hotel. The term "American Plan Hotel" as used in this regulation means a hotel which charges guests a fixed sum by the day, week, or other period for room and meals combined.
(C) Complimentary Food and Beverages. As used in this subdivision (a), the term "complimentary food and beverages" means food and beverages (including alcoholic and non-alcoholic beverages) which are provided to transient guests on a complimentary basis and:
1. There is no segregation between the charges for rooms and the charges for the food and beverages on the guests' bills, and
2. The guests are not given an option to refuse the food and beverages in return for a discounted room rental.
(D) Average Retail Value of Complimentary Food and Beverages. The term "average retail value of complimentary food and beverages" (ARV) as used in this regulation means the total amount of the costs of the complimentary food and beverages for the preceding calendar year marked-up one hundred percent (100%) and divided by the number of rooms rented for that year. Costs of complimentary food and beverages include charges for delivery to the lodging establishment but exclude discounts taken and sales tax reimbursement paid to vendors. The 100% markup factor includes the cost of food preparation labor by hotel employees, the fair rental value of hotel facilities used to prepare or serve the food and beverages, and profit.
(E) Average Daily Rate. The term "average daily rate" (ADR) as used in this regulation means the gross room revenue for the preceding calendar year divided by the number of rooms rented for that year. "Gross room revenue" means and includes the full charge to the hotel customers but excludes separately stated occupancy taxes, revenue from contract and group rentals which do not qualify for complimentary food and beverages, and revenue from special packages (e.g., New Year's Eve packages which include food and beverages as well as guest room accommodations), unless it can be documented that the retail value of the food and beverages provided as a part of the special package is 10% or less of the total package charge as provided in subdivision (a)(2)(B). "Number of rooms rented for that year" means the total number of times all rooms have been rented on a nightly basis provided the revenue for those rooms is included in the "gross room revenue". For example, if a room is rented out for three consecutive nights by one guest, that room will be counted as rented three times when computing the ADR.
(2) APPLICATION OF TAX.
(A) In General. Tax applies to sales of meals or hot prepared food products (see (e) below) furnished by restaurants, concessionaires, hotels, boarding houses, soda fountains, and similar establishments whether served on or off the premises. In the case of American Plan hotels, special packages offered by hotels, e.g., a New Year's Eve package as described in subdivision (a)(1)(E), and boarding houses, a reasonable segregation must be made between the charges for rooms and the charges for the meals, hot prepared food products, and beverages. Charges by hotels or boarding houses for delivering meals or hot prepared food products to, or serving them in, the rooms of guests are includable in the measure of tax on the sales of the meals or hot prepared food products whether or not the charges are separately stated. (Caterers, see (h) below.) Sales of meals or hot prepared food products by restaurants, concessionaires, hotels, boarding houses, soda fountains, and similar establishments to persons such as event planners, party coordinators, or fundraisers, which buy and sell on their own account, are sales for resale for which a resale certificate may be accepted (see subdivision (h)(3)(C)2.).
Soufflé cups, straws, paper napkins, toothpicks and like items that are not of a reusable character which are furnished with meals or hot prepared food products are sold with the meals or hot prepared food products. Sales of such items for such purpose to persons engaged in the business of selling meals or hot prepared food products are, accordingly, sales for resale.
(B) Complimentary Food and Beverages. Lodging establishments which furnish, prepare, or serve complimentary food and beverages to guests in connection with the rental of rooms are consumers and not retailers of such food and beverages when the retail value of the complimentary food and beverages is "incidental" to the room rental service regardless of where within the hotel premises the complimentary food and beverages are served. For complimentary food and beverages to qualify as "incidental" for the current calendar year, the average retail value of the complimentary food and beverages (ARV) furnished for the preceding calendar year must be equal to or less than 10% of the average daily rate (ADR) for that year.
If a hotel provides guests with coupons or similar documents which may be exchanged for complimentary food and beverages in an area of the hotel where food and beverages are sold on a regular basis to the general public (e.g., a restaurant), the hotel will be considered the consumer and not the retailer of such food and beverages if the coupons or similar documents are non-transferable and the guest is specifically identified by name. If the coupons or similar documents are transferable or the guest is not specifically identified, food and beverages provided will be considered sold to the guest at the fair retail value of similar food and beverages sold to the general public. In the case of coupons redeemed by guests at restaurants not operated by the lodging establishment, the hotel will be considered the consumer of food and beverages provided to the hotel's guests and tax will apply to the charge by the restaurant to the hotel.
Lodging establishments are retailers of food and beverages which do not qualify as "incidental" and tax applies as provided in subdivision (a)(2)(A) above. Amounts paid by guests for food and beverages in excess of a complimentary allowance are gross receipts subject to the tax. Lodging establishments are retailers of otherwise complimentary food and beverages sold to non-guests.
In the case of hotels with concierge floor, club level or similar programs, the formula set forth above shall be applied separately with respect to the complimentary food and beverages furnished to guests who participate in the concierge, club or similar program. That is, the concierge, club or similar program will be deemed to be an independent hotel separate and apart from the hotel in which it is operated. The ADR and the retail value of complimentary food and beverages per occupied room will be computed separately with respect to the guest room accommodations entitled to the privileges and amenities involved in the concierge, club or similar program.
The following example illustrates the steps in determining whether the food and beverages are complimentary:
FORMULA: ARV ÷ ADR <10%
Average Daily Rate (ADR):
ADR ($9,108,000 ÷ 74,607)
Average Retail Value of Complimentary Food and Beverages (ARV):
Complimentary Food Cost
Complimentary Beverage Cost
Add 100% Markup
Average Retail Value
ARV per occupied room ($443,140 ÷ 74,607)
Application of Formula:
$5.94 ÷ $122.08 = 4.87%
In the above example, the average retail value of the complimentary food and beverages per occupied room for the preceding calendar year is equal to or less than 10% of the average daily rate. Therefore, under the provisions of this subdivision (a)(2)(B), the complimentary food and beverages provided to guests for the current calendar year qualify as "incidental". The lodging establishment is the consumer and not the retailer of such food and beverages. This computation must be made annually.
When a lodging establishment consists of more than one location, the operations of each location will be considered separately in determining if that location's complimentary food and beverages qualify as incidental.
(C) "Free" Meals. When a restaurant agrees to furnish a "free" meal to a customer who purchases another meal and presents a coupon or card, which the customer previously had purchased directly from the restaurant or through a sales promotional agency having a contract with the restaurant to redeem the coupons or cards, the restaurant is regarded as selling two meals for the price of one, plus any additional compensation from the agency or from its own sales of coupons. Any such additional compensation is a part of its taxable gross receipts for the period in which the meals are served.
Tax applies only to the price of the paid meal plus any such additional compensation.
(b) "DRIVE-INS." Tax applies to sales of food products ordinarily sold for immediate consumption on or near a location at which parking facilities are provided primarily for the use of patrons in consuming the products purchased at the "drive-in" establishment, even though such products are sold on a "take out" or "to go" order and are actually packaged or wrapped and taken from the premises of the retailer. Food products when sold in bulk, i.e., in quantities or in a form not suitable for consumption on the retailer's premises, are not regarded as ordinarily sold for immediate consumption on or near the location at which parking facilities are provided by the retailer. Accordingly, with the exception of sales of hot prepared food products (see (e) below) and sales of cold food under the 80-80 rule (see (c) below), sales of ice cream, doughnuts, and other individual food items in quantities obviously not intended for consumption on the retailer's premises, without eating utensils, trays or dishes and not consumed on the retailer's premises, are exempt from tax. Any retailer claiming a deduction on account of food sales of this type must support the deduction by complete and detailed records.*
* The records acceptable in support of such a deduction are:
(a) A sales ticket prepared for each transaction claimed as being tax exempt showing:
(1) Date of the sale,
(2) The kind of merchandise sold,
(3) The quantity of each kind of merchandise sold,
(4) The price of each kind of merchandise sold,
(5) The total price of merchandise sold,
(6) A statement to the effect that the merchandise purchased is not to be consumed on or near the location at which parking facilities are provided by the retailer, and
(b) A daily sales record kept in suffi cient detail to permit verifi cation by audit that all gross receipts from sales have been accounted for and that all sales claimed as being tax exempt are included therein.
(c) COLD FOOD SOLD ON A "TAKE-OUT" ORDER.
(A) Seller Meeting Criteria of 80-80 Rule. When a seller meets both criteria of the 80-80 rule as explained in subdivision (c)(3) below, tax applies to sales of cold food products (including sales for a separate price of hot bakery goods and hot beverages such as coffee) in a form suitable for consumption on the seller's premises even though such food products are sold on a "take-out" or "to go" order. Sales of cold food products which are suitable for consumption on the seller's premises are subject to the tax no matter how great the quantity purchased, e.g., 40 one-half pint containers of milk. Except as provided elsewhere in this regulation, tax does not apply to sales of food products which are furnished in a form not suitable for consumption on the seller's premises.
Operative April 1, 1996, although a seller may meet both criteria of the 80-80 rule, he or she may elect to separately account for the sale of "take-out" or "to go" orders of cold food products which are in a form suitable for consumption on the seller's premises. The gross receipts from the sale of those food products shall be exempt from the tax provided the seller keeps a separate accounting of these transactions in his or her records. Tax will remain applicable to the sale of food products as provided in subdivisions (a), (b), (e), or (f) of this regulation. Failure to maintain the required separate accounting and documentation claimed as exempt under this subdivision will revoke the seller's election under this subdivision.
(B) Seller Not Meeting Criteria of 80-80 Rule. When a seller does not meet both criteria of the 80-80 rule as explained in subdivision (c)(3) below, tax does not apply to sales of cold food products (including sales for a separate price of hot bakery goods and hot beverages such as coffee) when sold on a "take-out" or "to go" order.
(A) For purposes of this subdivision (c), the term "suitable for consumption on the seller's premises" means food products furnished:
1. In a form which requires no further processing by the purchaser, including but not limited to cooking, heating, thawing, or slicing, and
2. In a size which ordinarily may be immediately consumed by one person such as a large milk shake, a pint of ice cream, a pint of milk, or a slice of pie. Cold food products (excluding milk shakes and similar milk products) furnished in containers larger in size than a pint are considered to be in a form not suitable for immediate consumption.
Pieces of candy sold in bulk quantities of one pound or greater are deemed to be sold in a form not suitable for consumption on the seller's premises.
The term does not include cold food products which obviously would not be consumed on the premises of the seller, e.g., a cold party tray or a whole cold chicken.
(B) For purposes of this subdivision (c), the term "seller's premises" means the individual location at which a sale takes place rather than the aggregate of all locations of the seller. For example, if a seller operates several drive-in and fast food restaurants, the operations of each location stand alone and are considered separately in determining if the sales of food products at each location meet the criteria of the 80-80 rule.
When two or more food-selling activities are conducted by the same person at the same location, the operations of all food related activities will be considered in determining if the sales of food products meet the criteria of the 80-80 rule. For example, if a seller operates a grocery store and a restaurant with no physical separation other than separate cash registers, the grocery store operations will be included in determining if the sales of food products meet the criteria of the 80-80 rule. When there is a physical separation where customers of one operation may not pass freely into the other operation, e.g., separate rooms with separate entrances but a common kitchen, each operation will be considered separately for purposes of this subdivision (c).
(3) 80-80 RULE. Tax applies under this subdivision (c) only if the seller meets both of the following criteria:
(A) More than 80 percent of the seller's gross receipts are from the sale of food products, and
(B) More than 80 percent of the seller's retail sales of food products are taxable as provided in subdivisions (a), (b), (e), and (f) of this regulation.
Sales of alcoholic beverages, carbonated beverages, or cold food to go not suitable for immediate consumption should not be included in this computation. Any seller meeting both of these criteria and claiming a deduction for the sale of cold food products in a form not suitable for consumption on the seller's premises must support the deduction by complete and detailed records of such sales made.
(d) PLACES WHERE ADMISSION IS CHARGED.
(1) GENERAL. Tax applies to sales of food products when sold within, and for consumption within, a place the entrance to which is subject to an admission charge, during the period when the sales are made, except for national and state parks and monuments, and marinas, campgrounds, and recreational vehicle parks.
(A) "Place" means an area the exterior boundaries of which are defined by walls, fences or otherwise in such a manner that the area readily can be recognized and distinguished from adjoining or surrounding property. Examples include buildings, fenced enclosures and areas delimited by posted signs.
(B) "Within a place" means inside the door, gate, turnstile, or other point at which the customer must pay an admission charge or present evidence, such as a ticket, that an admission charge has been paid. Adjacent to, or in close proximity to, a place is not within a place.
(C) "Admission charge" means any consideration required to be paid in money or otherwise for admittance to a place.
"Admission charge" does not include:
1. Membership dues in a club or other organization entitling the member to, among other things, entrance to a place maintained by the club or organization, such as a fenced area containing a club house, tennis courts, and a swimming pool. Where a guest is admitted to such a place only when accompanied by or vouched for by a member of the club or organization, any charge made to the guest for use of facilities in the place is not an admission charge.
2. A charge for a student body card entitling the student to, among other things, entrance to a place, such as entrance to a school auditorium at which a dance is held.
3. A charge for the use of facilities within a place to which no entrance charge is made to spectators. For example, green fees paid for the privilege of playing a golf course, a charge made to swimmers for the use of a pool within a place, or a charge made for the use of lanes in a public bowling place.
(D) "National and state parks and monuments" means those which are part of the National Park System or the State Park System. The phrase does not include parks and monuments not within either of those systems, such as city, county, regional, district or private parks.
(3) PRESUMPTION THAT FOOD IS SOLD FOR CONSUMPTION WITHIN A PLACE. When food products are sold within a place the entrance to which is subject to an admission charge, it will be presumed, in the absence of evidence to the contrary, that the food products are sold for consumption within the place. Obtaining and retaining evidence in support of the claimed tax exemption is the responsibility of the retailer. Such evidence may consist, for example, of proof that the sales were of canned jams, cake mixes, spices, cooking chocolate, or other items in a form in which it is unlikely that such items would be consumed within the place where sold.
(4) FOOD SOLD TO STUDENTS. The exemption otherwise granted by Section 6363 does not apply to sales of food products to students when sold within, and for consumption within, a place the entrance to which is subject to an admission charge, and such sales are subject to tax except as provided in (p) of this regulation. For example, when food products are sold by a student organization to students or to both students and nonstudents within a place the entrance to which is subject to an admission charge, such as a place where school athletic events are held, the sales to both students and nonstudents are taxable.
(e) HOT PREPARED FOOD PRODUCTS.
(1) GENERAL. Tax applies to all sales of hot prepared food products unless otherwise exempt. "Hot prepared food products" means those products, items, or components which have been prepared for sale in a heated condition and which are sold at any temperature which is higher than the air temperature of the room or place where they are sold. The mere heating of a food product constitutes preparation of a hot prepared food product, e.g., grilling a sandwich, dipping a sandwich bun in hot gravy, using infra-red lights, steam tables, etc. If the sale is intended to be of a hot food product, such sale is of a hot food product regardless of cooling which incidentally occurs. For example, the sale of a toasted sandwich intended to be in a heated condition when sold, such as a fried ham sandwich on toast, is a sale of a hot prepared food product even though it may have cooled due to delay. On the other hand, the sale of a toasted sandwich which is not intended to be in a heated condition when sold, such as a cold tuna sandwich on toast, is not a sale of a hot prepared food product. When a single price has been established for a combination of hot and cold food items, such as a meal or dinner which includes cold components or side items, tax applies to the entire established price regardless of itemization on the sales check. The inclusion of any hot food product in an otherwise cold combination of food products sold for a single established price, results in the tax applying to the entire established price, e.g., hot coffee served with a meal consisting of cold food products, when the coffee is included in the established price of the meal. If a single price for the combination of hot and cold food items is listed on a menu, wall sign or is otherwise advertised, a single price has been established. Except as otherwise provided in (b), (c), (d) or (f) of this regulation, or in regulation 1574, tax does not apply to the sale for a separate price of bakery goods, beverages classed as food products, or cold or frozen food products. Hot bakery goods and hot beverages such as coffee are hot prepared food products but their sale for a separate price is exempt unless taxable as provided in (b), (c), (d) or (f) of this regulation, or in Regulation 1574. Tax does apply if a hot beverage and a bakery product or cold food product are sold as a combination for a single price. Hot soup, bouillon, or consommé is a hot prepared food product which is not a beverage.
(2) AIR CARRIERS ENGAGED IN INTERSTATE OR FOREIGN COMMERCE. Tax does not apply to the sale, storage, use, or other consumption of hot prepared food products sold by caterers or other vendors to air carriers engaged in interstate or foreign commerce for consumption by passengers on such air carriers, nor to the sale, storage, use, or other consumption of hot prepared food products sold or served to passengers by air carriers engaged in interstate or foreign commerce for consumption by passengers on such air carriers. "Air carriers" are persons or firms in the business of transporting persons or property for hire or compensation, and include both common and contract carriers. "Passengers" do not include crew members. Any caterer or other vendor claiming the exemption must support it with an exemption certificate from the air carrier substantially in the form prescribed in Appendix A of this regulation.
(f) FOOD FOR CONSUMPTION AT FACILITIES PROVIDED BY THE RETAILER. Tax applies to sales of sandwiches, ice cream, and other foods sold in a form for consumption at tables, chairs, or counters or from trays, glasses, dishes, or other tableware provided by the retailer or by a person with whom the retailer contracts to furnish, prepare, or serve food products to others.
A passenger's seat aboard a train, or a spectator's seat at a game, show, or similar event is not a "chair" within the meaning of this regulation. Accordingly, except as otherwise provided in (c), (d), and (e) above, tax does not apply to the sale of cold sandwiches, ice cream, or other food products sold by vendors passing among the passengers or spectators where the food products are not "for consumption at tables, chairs, or counters or from trays, glasses, dishes, or other tableware provided by the retailer."
(g) TIPS, GRATUITIES, AND SERVICE CHARGES.
This subdivision applies to restaurants, hotels, caterers, boarding houses, soda fountains, drive-ins and similar establishments.
An optional payment designated as a tip, gratuity, or service charge is not subject to tax. A mandatory payment designated as a tip, gratuity, or service charge is included in taxable gross receipts, even if the amount is subsequently paid by the retailer to employees.
(1) OPTIONAL PAYMENT.
(A) A payment of a tip, gratuity, or service charge is optional if the customer adds the amount to the bill presented by the retailer, or otherwise leaves a separate amount in payment over and above the actual amount due the retailer for the sale of meals, food, and drinks that include services. The following examples illustrate transactions where a payment of a tip, gratuity or service charge is optional and not included in taxable gross receipts. This is true regardless of printed statements on menus, brochures, advertisements or other materials notifying customers that tips, gratuities, or service charges will or may be added by the retailer to the prices of meals, food, or drinks:
Example 1. The restaurant check is presented to the customer with the "tip" area blank so the customer may voluntarily write in an amount, or
Example 2. The restaurant check is presented to the customer with options computed by the retailer and presented to the customer as tip suggestions. The "tip" area is blank so the customer may voluntarily write in an amount:
Food Item A
Beverage Item B
8% sales tax
15%=$2.06; 18%=$2.47; 20%=$2.74; other
If an employer misappropriates these payments for these charges, as discussed in subdivision (g)(1)(B) below, such payments are included in the retailer's taxable gross receipts.
(B) No employer shall collect, take, or receive any gratuity or a part thereof, paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of such gratuity, or require an employee to credit the amount, or any part thereof, of such gratuity against and as a part of the wages due the employee from the employer. (Labor Code Section 351.) If this prohibition is violated, any amount of such gratuities received by the employer will be considered a part of the gross receipts of the employer and subject to the tax.
(2) MANDATORY PAYMENT.
(A) An amount negotiated between the retailer and the customer in advance of a meal, food, or drinks, or an event that includes a meal, food, or drinks is mandatory.
(B) When the menu, brochures, advertisements or other printed materials contain statements that notify customers that tips, gratuities, or service charges will or may be added, an amount automatically added by the retailer to the bill or invoice presented to and paid by the customer is a mandatory charge and subject to tax. These amounts are considered negotiated in advance as specified in subdivision (g)(2)(A). Examples of printed statements include:
"An 18% gratuity [or service charge] will be added to parties of 8 or more."
"Suggested gratuity 15%," itemized on the invoice or bill by the restaurant, hotel, caterer, boarding house, soda fountain, drive-in or similar establishment.
"A 15%voluntary gratuity will be added for parties of 8 or more."
An amount will be considered "automatically added" when the retailer adds the tip to the bill without first conferring with the customer after service of the meal and receiving approval to add the tip or without providing the customer with the option to write in the tip. Nonetheless, any amount added by the retailer is presumed to be mandatory. This presumption may be overcome as discussed in subdivision (g)(2)(C) below.
(C) It is presumed that an amount added as a tip by the retailer to the bill or invoice presented to the customer is mandatory. A statement on the bill or invoice that the amount added by the retailer is a "suggested tip," "optional gratuity," or that "the amount may be increased, decreased, or removed" by the customer does not change the mandatory nature of the charge.
This presumption may be controverted by documentary evidence showing that the customer specifically requested and authorized the gratuity be added to the amount billed.
Examples of documentary evidence that may be used to overcome the presumption include:
1. A guest check that is presented to the customer showing sales tax reimbursement and the amount upon which it was computed, without tip or with the "tip" area blank and a separate document, such as a credit card receipt, to which the retailer adds or prints the requested tip.
2. Guest receipts and payments showing that the percentage of tips paid by large groups varies from the percentage stated on the menu, brochure, advertisement or other printed materials.
3. A retailer's written policy stating that its employees shall receive confirmation from a customer before adding a tip together with additional verifiable evidence that the policy has been enforced. The policy is not in itself sufficient documentation to establish that the customer requested and authorized that a gratuity be added to the amount billed without such additional verifiable evidence.
The retailer must retain the guest checks and any additional separate documents to show that the payment is optional. The retailer is also required to maintain other records in accordance with the requirements of Regulation 1698, Records.
(1) DEFINITION. The term "caterer" as used in this regulation means a person engaged in the business of serving meals, food, or drinks on the premises of the customer, or on premises supplied by the customer, including premises leased by the customer from a person other than the caterer, but does not include employees hired by the customer by the hour or day.
(2) SALES TO CATERERS. A caterer generally is considered to be the consumer of tangible personal property normally used in the furnishing and serving of meals, food or drinks, except for separately stated charges by the caterer for the lease of tangible personal property or tangible personal property regarded as being sold with meals, food or drinks such as disposable plates, napkins, utensils, glasses, cups, stemware, place mats, trays, covers and toothpicks.
(3) SALES BY CATERERS.
(A) Caterer as Retailer. Tax applies to the entire charge made by caterers for serving meals, food, and drinks, inclusive of charges for food, the use of dishes, silverware, glasses, chairs, tables, etc., used in connection with serving meals, and for the labor of serving the meals, whether performed by the caterer, the caterer's employees or subcontractors. Tax applies to charges made by caterers for preparing and serving meals and drinks even though the food is not provided by the caterers. Tax applies to charges made by caterers for hot prepared food products as in (e) above whether or not served by the caterers. A caterer who separately states or itemizes charges for the lease of tangible personal property regardless of the use of the property will be deemed to be the lessor of such property. Tax applies in accordance with Regulation 1660 Leases of Tangible Personal Property—In General. Tax does not apply to charges made by caterers for the rental of dishes, silverware, glasses, etc., purchased by the caterer with tax paid on the purchase price if no food is provided or served by the caterers in connection with such rental.
(B) Caterers as Lessors of Property Unrelated to the Serving or Furnishing of Meals, Food, or Drinks by a Caterer.
1. When a caterer who is furnishing or serving meals, food, or drinks also rents or leases from a third party tangible personal property which the caterer does not use himself or herself and the property is not customarily provided or used within the catering industry in connection with the furnishing and serving of food or drinks, such as decorative props related solely to optional entertainment, special lighting for guest speakers, sound or video systems, dance floors, stages, etc., he or she is a lessor of such property. In such instance, tax applies to the lease in accordance with Regulation 1660.
2. When a person who in other instances is a caterer does not furnish or serve any meals, food, or drinks to a customer, but rents or leases from a third party tangible personal property such as dishes, linen, silverware and glasses, etc., for purposes of providing it to his or her customer, he or she is not acting as a caterer within the meaning of this regulation, but solely as a lessor of tangible personal property. In such instances tax applies to the lease in accordance with Regulation 1660.
(C) Caterers Planning, Designing and Coordinating Events.
1. Tax applies to charges by a caterer for event planning, design, coordination, and/or supervision if they are made in connection with the furnishing of meals, food, or drinks for the event. Tax does not apply to separately stated charges for services unrelated to the furnishing and serving of meals, food, or drinks, such as optional entertainment or any staff who do not directly participate in the preparation, furnishing, or serving of meals, food, or drinks, e.g., coat-check clerks, parking attendants, security guards, etc.
2. When a caterer sells meals, food, or drinks, and the serving of them, to other persons such as event planners, party coordinators, or fundraisers, who buy and sell the same on their own account or for their own sake, it is a sale for resale for which the caterer may accept a resale certificate. However, a caterer may only claim the sale as a resale if the caterer obtains a resale certificate in compliance with Regulation 1668. A person is buying or selling for his or her own account, or own sake, when such person has his or her own contract with a customer to sell the meals, food, or drinks to the customer, and is not merely acting on behalf of the caterer.
3. When a caterer sells meals, food or drinks and the serving of them to other persons who charge a fee for their service unrelated to the taxable sale, the separately stated fee is not subject to tax.
(D) Sales of Meals by Caterers to Social Clubs, Fraternal Organizations. Sales of meals to social clubs and fraternal organizations, as those terms are defined in subdivision (i) below, by caterers are sales for resale if such social clubs and fraternal organizations are the retailers of the meals subject to tax under subdivision (i) and give valid resale certificates therefor.
(E) Tips, Gratuities, or Service Charges. Tips, gratuities, and service charges are discussed in subdivision (g).
(4) PREMISES. GENERAL. Separately stated charges for the lease of premises on which meals, food, or drinks are served, are nontaxable leases of real property. Where a charge for leased premises is a guarantee against a minimum purchase of meals, food or drinks, the charge for the guarantee is gross receipts subject to tax. Where a person contracts to provide both premises and meals, food or drinks, the charge for the meals, food or drinks must be reasonable in order for the charge for the premises to be non taxable.
(5) PRIVATE CHEFS. A private chef is generally not an employee of the customer, but an independent contractor who pays his or her own social security, and federal and state income taxes. Such a private chef, who prepares and serves meals, food and drinks in the home of his or her customer is a caterer under this regulation.
(i) SOCIAL CLUBS AND FRATERNAL ORGANIZATIONS. "Social Clubs and Fraternal Organizations" as used herein include any corporation, partnership, association or group or combination acting as a unit, such as service clubs, lodges, and community, country, and athletic clubs.
The tax applies to receipts from the furnishing of meals, food, and drink by social clubs and fraternal organizations unless furnished: (1) exclusively to members; and also, (2) less frequently than once a week. Both these requirements must be met. If the club or organization furnishes meals, food or drink to nonmembers, all receipts from the furnishing of meals, food or drink are subject to tax whether furnished to members or nonmembers, including receipts on occasions when furnished exclusively to members. Meals, food or drink paid for by members are considered furnished to them even though consumed by guests who are not members.
(j) STUDENT MEALS.
(A) "Food Products." As used herein, the term "food products" as defined in Regulation 1602 (18 CCR 1602) includes food furnished, prepared, or served for consumption at tables, chairs, or counters, or from trays, glasses, dishes, or other tableware provided by the retailer or by a person with whom the retailer contracts to furnish, prepare or serve food to others.
(B) "Meals." As used herein, the term "meals" includes both food and nonfood products, which are sold to students for an established single price at a time set aside for meals. If a single price for the combination of a nonfood product and a food product is listed on a menu or on a sign, a single price has been established. The term "meals" does not include nonfood products which are sold to students for a separate price and tax applies to the sales of such products. Examples of nonfood products are: carbonated beverages and beer. For the purpose of this regulation, products sold at a time designated as a "nutrition break", "recess", or similar break, will not be considered "meals".
(2) APPLICATION OF TAX.
(A) Sales By Schools, School Districts and Student Organizations. Sales of meals or food products for human consumption to students of a school by public or private schools, school districts, and student organizations, are exempt from tax, except as otherwise provided in (d)(4) above.
(B) Sales by Parent-Teacher Associations. Tax does not apply to the sale of, nor the storage, use or other consumption in this state of, meals and food products for human consumption furnished or served to the students of a school by parent-teacher associations. Parent-teacher associations qualifying under Regulation 1597 as consumers are not retailers of tangible personal property, which they sell. Accordingly, tax does apply to the sale to such associations of nonfood items such as carbonated beverages, containers, straws and napkins.
(C) Sales by Blind Vendors. Tax does not apply to the sale of meals or food products for human consumption to students of a school by any blind person (as defined in Section 19153 of the Welfare and Institutions Code) operating a restaurant or vending stand in an educational institution under Article 5 of Chapter 6 of Part 2 of Division 10 of the Welfare and Institutions Code, except as otherwise provided in (d)(4) above.
(D) Sales by Caterers. The application of tax to sales by caterers in general is explained in subdivision (h) above. However, tax does not apply to the sale by caterers of meals or food products for human consumption to students of a school, if all the following criteria are met:
1. The premises used by the caterer to serve the lunches to the students are used by the school for other purposes, such as sporting events and other school activities, during the remainder of the day;
2. The fixtures and equipment used by the caterer are owned and maintained by the school; and
3. The students purchasing the meals cannot distinguish the caterer from the employees of the school.
(k) EMPLOYEES' MEALS.
(1) IN GENERAL. Any employer or employee organization that is in the business of selling meals, e.g., a restaurant, hotel, club, or association, must include its receipts from the sales of meals to employees, along with its receipts from sales to other purchasers of meals, in the amount upon which it computes its sales tax liability. An employer or an employee organization selling meals only to employees becomes a retailer of meals and liable for sales tax upon its receipts from sales of meals if it sells meals to an average number of five or more employees during the calendar quarter.
(2) SPECIFIC CHARGE. The tax applies only if a specific charge is made to employees for the meals. Tax does not apply to cash paid an employee in lieu of meals. A specific charge is made for meals if:
(A) Employee pays cash for meals consumed.
(B) Value of meals is deducted from employee's wages.
(C) Employee receives meals in lieu of cash to bring compensation up to legal minimum wage.
(D) Employee has the option to receive cash for meals not consumed.
(3) NO SPECIFIC CHARGE. If an employer makes no specific charge for meals consumed by employees, the employer is the consumer of the food products and the non-food products, which are furnished to the employees as a part of the meals.
In the absence of any of the conditions under (k)(2) a specific charge is not made if:
(A) A value is assigned to meals as a means of reporting the fair market value of employees' meals pursuant to state and federal laws or regulations or union contracts.
(B) Employees who do not consume available meals have no recourse on their employer for additional cash wages.
(C) Meals are generally available to employees, but the duties of certain employees exclude them from receiving the meals and are paid cash in lieu thereof.
(4) MEALS CREDITED TOWARD MINIMUM WAGE. If an employee receives meals in lieu of cash to bring his or her compensation up to the legal minimum wage, the amount by which the minimum wage exceeds the amount otherwise paid to the employee is includable in the employer's taxable gross receipts up to the value of the meals credited toward the minimum wage.
For example, if the minimum rate for an eight-hour day is $46.00, and the employee received $43.90 in cash, and a lunch is received which is credited toward the minimum wage in the maximum allowable amount of $2.10, the employer has received gross receipts in the amount of $2.10 for the lunch.
(5) TAX REIMBURSEMENT. If a separately stated amount for tax reimbursement is not added to the price of meals sold to employees for which a specific charge is made, the specific charge will be regarded as being a tax-included charge for the meals.
(l) RELIGIOUS ORGANIZATIONS. Tax does not apply to the sale of, and the storage, use or other consumption in this state of, meals and food products for human consumption furnished or served by any religious organization at a social or other gathering conducted by it or under its auspices, if the purpose in furnishing or serving the meals and food products is to obtain revenue for the functions and activities of the organization and the revenue obtained from furnishing or serving the meals and food products is actually used in carrying on such functions and activities. For the purposes of this regulation, "religious organization" means any organization the property of which is exempt from taxation pursuant to Subdivision (f) of section 3 of Article XIII of the State Constitution.
(m) INSTITUTIONS. Tax does not apply to the sale of, nor the storage, use, or other consumption in this state of, meals and food products for human consumption furnished or served to and consumed by patients or residents of an "institution" as defined in Regulation 1503. Tax, however, does apply to the sale of meals and food products by an institution to persons other than patients or residents of that institution.
(n) MEAL PROGRAMS FOR LOW-INCOME ELDERLY PERSONS. Tax does not apply to the sale of, and the storage, use or other consumption in this state of, meals and food products for human consumption furnished or served to low-income elderly persons at or below cost by a nonprofit organization or governmental agency under a program funded by this state or the United States for such purposes.
(o) FOOD PRODUCTS, NONALCOHOLIC BEVERAGES AND OTHER TANGIBLE PERSONAL PROPERTY TRANSFERRED BY NONPROFIT YOUTH ORGANIZATIONS. See Regulation 1597 for application of tax on food products, nonalcoholic beverages and other tangible personal property transferred by nonprofit youth organizations.
(p) NONPROFIT PARENT-TEACHER ASSOCIATIONS. Nonprofit parent-teacher associations and equivalent organizations qualifying under Regulation 1597 are consumers and not retailers of tangible personal property, which they sell.
(q) MEALS AND FOOD PRODUCTS SERVED TO CONDOMINIUM RESIDENTS. Tax does not apply to the sale of and the storage, use, or other consumption in this state of meals and food products for human consumption furnished to and consumed by persons 62 years of age or older residing in a condominium and who own equal shares in a common kitchen facility; provided, that the meals and food products are served to such persons on a regular basis.
This exemption is applicable only to sales of meals and food products for human consumption prepared and served at the common kitchen facility of the condominium. Tax applies to sales to persons less than 62 years of age.
(r) VETERAN'S ORGANIZATION. Beginning April 1, 2004, tax does not apply to the sale of, and the storage, use or other consumption in this state of, meals and food products for human consumption furnished or served by any nonprofit veteran's organization at a social or other gathering conducted by it or under its auspices, if the purpose in furnishing or serving the meals and food products is to obtain revenue for the functions and activities of the organization and the revenue obtained from furnishing or serving the meals and food products is actually used in carrying on those functions and activities.
(s) FOOD STAMP COUPONS. Tax does not apply to tangible personal property, which is eligible to be purchased with federal food stamp coupons acquired pursuant to the Food Stamp Act of 1977 and so purchased. When payment is made in the form of both food stamps and cash, the amount of the food stamp coupons must be applied first to tangible personal property normally subject to the tax, e.g., nonalcoholic carbonated beverages. Retailers are prohibited from adding any amount designated as sales tax, use tax, or sales tax reimbursement to sales of tangible personal property purchased with food stamp coupons. (See paragraph (c) of Regulation 1602.5 for special reporting provisions by grocers.)
(t) HONOR SYSTEM SNACK SALES. An "honor system snack sale" means a system where customers take snacks from a box or tray and pay by depositing money in a container provided by the seller. Snacks sold through such a system may be subject to tax depending upon where the sale takes place. Sales of such snacks are taxable when sold at or near a lunchroom, break room, or other facility that provides tables and chairs, and it is contemplated that the food sold will normally be consumed at such facilities. Honor system snack sales do not include hotel room mini-bars or snack baskets.
History: Amended September 14, 1955.
Amended September 13, 1961.
Amended September 18, 1963.
Amended September 2, 1965, applicable as amended September 17, 1965.
Amended October 8, 1968, applicable on and after October 1, 1968.
Amended November 3, 1969, effective as amended January 1, 1970.
Amended December 10, 1969, applicable as amended January 1, 1970.
Amended and renumbered June 5, 1970, effective July 9, 1970.
Amended June 19, 1970, effective July 23, 1970.
Amended November 5, 1970, effective December 10, 1970.
Amended May 12, 1971, effective June 13, 1971, as a restatement.
Amended September 15, 1971, effective October 1, 1971.
Amended December 15, 1971, applicable on and after January 1, 1972.
Amended February 16, 1972, effective March 25, 1972.
Amended September 14, 1972, effective September 15, 1972.
Amended October 17, 1973, effective November 18, 1973.
Amended October 8, 1974, effective October 10, 1974. Noted effect of change of definition of "institution".
Amended December 19, 1974, effective January 26, 1975. Clarified tax exempt sales of hot food to interstate air carriers, reorganized (d) and (e), and added (n) on reference to section on tax exempt sales by nonprofit youth sports organizations.
Amended September 19, 1975, effective October 26, 1975. Corrected reference and clarified the taxable status of sales of hot bakery goods and hot beverages, of vending machine sales, and of credited tips against the minimum wage.
Amended December 17, 1975, effective January 1, 1976. Noted that employers can no longer credit tips against wages of employees and deleted references to such credit of tips as taxable receipts.
Amended September 28, 1978, effective November 18, 1978. Amends (i)(2)(A) and (c)(4); adds (i)(2)(B) and (o).
Amended April 9, 1980, effective July 6, 1980. In Subsection (k) deleted "section 1½" and added "subdivision (f) of Section 3 of Article XIII of the State Constitution. Added to Appendix A all banks except "Purchasing Air Carrier."
Amended April 1, 1981, effective August 19, 1981. In (1) changed "inmates" to "residents." Added (p).
Amended May 9, 1984, effective September 12, 1984. In (d)(1) added reference to Regulation 1574; in (i)(2)(A) and (i)(3) deleted reference to 33 percent of gross receipts from sale of cold food products sold for more than 15 cents; and in (i)(2)(A) deleted reference to Regulation 1574.
Amended April 9, 1985, effective June 27, 1985. A new subdivision (c) was added to interpret and explain the 1984 amendments to Section 6359. Subdivisions (d) through (p) were relettered to (e) through (q) consecutively. Subdivision (f), formerly designated (e) was changed by deleting obsolete language which was contrary to the provisions of Section 6359, as amended by Chapter 930, Statutes of 1984, and there were corrections of cross references.
Amended May 6, 1986, effective July 24, 1986. In subdivision (d)(1), amended regulation to include marinas, campgrounds, and recreational vehicle parks. In subdivision (o), amended regulation to limit organizations covered by regulation, and made the organizations consumers of certain items of tangible personal property.
Amended August 24, 1988, effective November 19, 1988. In subdivision (s) amended to provide that certain items purchased with food stamp coupons are exempt from sales and use taxes. In subdivision (r) amended to provide guidance with reference to free meals provided by restaurants under a sales promotional plan.
Amended August 1, 1989, effective October 15, 1989. Subdivision (m), added the explanation that tax does apply to sales of meals and food productions to persons other than patients or residents.
Amended March 17, 1992, effective July 3, 1992. Divided former paragraph (j)(1) into (A) Food Products, as defined in Regulation 1602, and (B) Meals, which includes tax application to food and non-food products; deleted "or equivalent organizations" in paragraph (j)(2)(B); corrected various references, printing errors and numbering; added footnote 1 to paragraph (b).
Amended October 26, 1993, effective February 20, 1994. Amended subdivision (j)(1)(B) to delete "snack food" as an example of a non-food product; amended subdivisions (b) and (c); added (c)(1)(B), (c)(2) and (c)(3) to clarify the application of the 80-80 rule.
Amended September 23, 1998, effective January 9, 1999. Subdivision (a) rewritten and expanded. New subdivision (a)(1) designated; former first unnamed paragraph renamed subdivision (a)(1)(A), new subdivisions (a)(1)(B–E) added; former unnumbered paragraph included in new subdivision (a)(2)(A) with references to special packages and beverages added; subdivision (2)(B) added. Subdivision (c)(1)(A) amended by substituting phrase "meets both criteria of the 80-80 rule as explained in" for "qualifies under the provisions of" and "(80-80 rule)" and adding new unnumbered paragraph; subdivision (c)(1)(B) amended by substituting phrase "meets both criteria of the 80-80 rule as explained in" for "qualifies under the provisions of" and "(80-80 rule)"; subdivision (c)(2) amended by moving substance of subdivision (c)(2) to new subdivision (c)(2)(A) and redesignating former paragraphs (c)(2)(A) & (B) as new subdivisions (c)(2)(A)1. & 2. (with references to milkshakes added to new subdivision (c)(2)(A)2.); new subdivision (c)(2)(B) added; subdivision (c)(3)(B) revised for clarity and new first sentence added to unnumbered paragraph. Subdivision (k)(2) amended by adding "to employees" to first sentence. Subdivision (k)(3) amended by adding phrases "by an employer" and "consumed by employees" and "and . . . meals" and deleting "purchased . . . employer."; and subdivision (k)(4) amended by adding "or her" to first paragraph and substituting "$46.00" for "$13.20" and "$43.90" for "$12.20" and "$2.10" for "$1.00." Subdivision letters deleted from cross-references to Regulation 1597 in subdivisions (o) and (p).
Amended February 6, 2002, effective June 13, 2002. Subdivision (a)(1)(C)—words "there" and "the" capitalized. Subdivision (a)(2)(A)—new sentence added to the end of the first paragraph; first unnumbered paragraph—spelling of "Soufflé" corrected. Subdivision (e)(1)—spelling of "consommè " corrected. Subdivision (h) is expanded with several new subdivisions. First paragraph of existing subdivision (h) moved to new subdivision (h)(1) and entitled "DEFINITION"; word "and" replaced with "or" and phrase "or . . . caterer," added. Phrase "customer by the" added. New subdivisions (h)(2) and (h)(3) added. Language of first unnumbered paragraph of existing subdivision (h) transferred to new subdivision (h)(3)(A) and re-written. Phrase "A . . . General" added. New subdivisions (h)(3)(B), (C) & (E), (h)(4), and (h)(5) added. Language of current second unnumbered paragraph promulgated as new subdivision (h)(3)(D). Subdivision (j)(2)—new subdivision (D) added. Subdivision (k)(3)—subdivision re-written from passive to active voice. Subdivision (t) added.
Amended June 30, 2004; effective September 10, 2004. Word "Section" changed to lower case and spelling errors corrected throughout. Subdivision (a)(2)(C)—added with language of former subdivision (r) regarding free meals served by restaurants moved to here. Subdivisions (c)(3)(A&B)—first words in subdivisions corrected to upper case. Subdivisions (h)(1&2)—line spaces added. Subdivision (h)(5) line space added after title; word "and" added before word "federal." Subdivision (j)(2)(D)—parentheses deleted from sub-designations. Subdivision (l)—letter "s" deleted from word "sales" and words "the" and ", and the storage, use or other consumption in this state of," added. Subdivision (r)—new subdivision added.
Amended April 25, 2007, effective August 15, 2007. Amended subdivision (g) to clarify the application of tax to tips, gratuities and service charges.
CALIFORNIA SALES TAX EXEMPTION CERTIFICATE
SUPPORTING EXEMPTION UNDER SECTION 6359.1
The undersigned certifies that it is an air carrier engaged in interstate or foreign commerce and that the hot prepared food products purchased from ___________ will be consumed by passengers on its flights.
The undersigned further certifies that it understands and agrees that if the property purchased under this certificate is used by the purchaser for any purpose other than that specified above, the purchaser shall be liable for sales tax as if it were a retailer making a retail sale of the property at the time of such use, and the sales price of the property to it shall be deemed the gross receipts from such sale.
Date Certificate Given
Purchasing Air Carrier
(signature of authorized person)
(print or type name)
(owner, partner, purchasing agent, etc.)
Seller's Permit No. (if any)