Do You Have a Sales Tax Expense?

On this blog, I mainly talk about controlling costs in restaurants.  When we look at sales taxes that restaurants pay, we rarely consider them to be “costs”.  Sales taxes are considered “trust” taxes.  Restaurants, retailers and other businesses that charge sales taxes are really collecting them on behalf of the government.  This means that sales taxes are not revenues and the remittance of sales taxes is not an expense.
So, it should be obvious that restaurants don’t have sales tax expenses.  However, many restaurants do have sales tax expenses!  I’m going to tell you how.

In a perfectly honest, trustworthy world, restaurants would collect the proper amount of sales tax from customers and remit it to the tax authorities on time.  Unfortunately, we don’t live in a perfect (or an honest) world.  Some restaurateurs use tax receipts to fund their operations (usually out of necessity).  Others fail to report all of their legitimate sales and the sales taxes collected on those sales.  It’s called skimming and it has been around for at least as long as we have had sales taxes.  Most tax authorities estimate that about 50% of all restaurant operators “cheat” on their tax commitments.
If you don’t pay your taxes on time, you will be penalized and charged interest.  The penalty and interest becomes an expense of the restaurant.  But that’s not all.  If the government finds that your restaurant has not remitted all the taxes that it collected from customers, it will be reassessed for the tax, together with penalties and interest.  The difference in this case is that the restaurant may not have actually collected any sales tax from a customer!  Huh?  How can that be?
To understand this very common situation, you need to understand how tax auditors verify whether restaurants have reported all of their sales and sales taxes.  First of all, tax authorities “know” restaurateurs cheat on their taxes.  They also know that restaurants generate cash sales which can be skimmed from the till.  The tax auditor only needs to estimate the likely amount of sales and taxes that were skimmed from the restaurant’s sales, in order to issue a reassessment for the unreported tax, penalties and interest.
It all goes wrong for the restaurateur, if the auditor estimates higher sales and sales taxes than the restaurant actually generated from customers.  Unfortunately, this is a very common occurrence.  Unless the restaurant can prove that the auditor’s estimate is wrong, the assessment will stand and the phantom taxes will have to be paid (plus penalties and interest).  This can be a very significant cost to a restaurant – even ones that are run by completely honest restaurateurs.
Try to disprove the tax auditor’s estimate is a very difficult task, especially when you try to do so after the fact.  There are effective ways to minimize the possibility of these unfair tax assessments, but it requires the restaurateur to be proactive and gather ongoing evidence to support the restaurant’s margins at all times.   If you need any further incentive to get on top of your restaurant’s margins, this is it.
To learn more about government tax audit tactics and how to “audit proof” your business, visit my sister blog for a comprehensive source of information crucial to your bottom-line and maybe even your survival.  While this information is written from a Canadian perspective, identical audit approaches are employed in the U.S. and many other international jurisdictions.  If you have any questions, please leave a comment or send me an email.  All enquiries are held in the strictest of confidence.