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As a restaurant owner, you live in a food world, a staff world, and a customer world. The last thing that you want is to receive a notice from the California Department of Tax and Fee Administration (CDTFA) stating that they are going to audit. However, this situation can make a successful business collapse in a span of one night.

The audits of CTDFA pay more attention to sales and use taxes, and restaurant regulations are a maze of complexity. Even a mere misunderstanding can incur huge bills of back taxes, penalties, and interest. Your business survival is based on doing it right.

The 7 most common CDTFA audit errors made by restaurants and how to avoid them are presented here.

This is the largest area where restaurants come into trouble. The CDTFA does not regard all sales equally.

The assumption that everything sold in the form of food is taxable or, in the other way around, that everything sold in the form of to-go is non-taxable. The rules are more complex.

There is no sales tax on food items in California as long as they are not sold in a form suitable to be consumed immediately. This is the vital difference.

You offer a shift meal to your line cook or comp a dessert to one of your loyal customers. Moral boosting gestures, but a tax nightmare.

The failure to collect sales tax on the fair retail value of free meals and meals for employees.

The CDTFA views such meals as being a taxable use of your inventory. You have to pay sales tax on what the customer would have paid on such goods.

Sales tax is what you charge customers. Use tax is the tax that you pay on goods you purchase without sales tax.

Not paying use tax on purchases made out of state, or on an online order, or on purchased items involving a vendor that is not on the list of registered vendors to collect tax in California.

You purchase a case of specialty chairs totaling $5,000 in one of the online stores located in Texas, which are not subject to CA sales tax. That $5,000 is subject to use tax in California. It is also the case with small wares, office supplies, or even a new POS system purchased online.

The excuse of losing the receipt cannot be used as a defense in the auditing process of CDTFA.

Not maintaining detailed and organized records over a period of at least four years. These are invoices, bank statements, sales summaries, and exemption certificates.

You are not allowed to prove a deduction (such as a deduction made due to a tax-free sale to a non-profit), or the deduction will be disallowed by the auditor. It is your burden of proof and not the state.

There are special tax implications in catering sales that are frequently missed.

The customer is giving a big catering order, so you should treat it like one of the to-go sales.

Catering services are, in general, subject to taxation. This is the price of the food, delivery fees, and even obligatory service fees or gratuities in case they are not mentioned separately and handed to employees.

An auditor will specifically examine enormous and atypical sales, which may be catering. The adjustment will be high in case you have not been taxing the entire amount.

You should purchase tax-free ingredients that will be used to make a subject to tax meal by giving the resale certificate.

Failing to issue a resale certificate to your suppliers or taking a faulty one from a customer.

A resale certificate is to enable you to acquire goods without paying sales tax since you are reselling them. In case you do not have a valid certificate in your records with your vendor, the CDTFA will be able to hold you liable to pay the tax you were supposed to pay.

Audit is a high-stakes, confrontational process. The responsibilities of the auditor are to locate tax liability. Not realizing that you can do the audit without professional representation.

An experienced tax professional/consultant with expertise in CDTFA auditing knows the ropes, what the auditor wants, and is able to negotiate on your behalf. They are able to narrow the audit extent, defeat hawkish stances, and mitigate fines.

1. It is your initial defense. Make sure it is programmed to comply with the California tax laws.
2. This should be done by your bookkeeper or accountant, who should examine your sales and purchase records as though they were a CDTFA auditor.
3. The tax law evolves. Get the updates of the CDTFA or hire a professional to do the same.

Compensating a customer is less cumbersome than paying taxes out of your earnings in the future. CDTFA audit is a tricky business, and you can only save the bottom line of your restaurant by acting ahead of the curve and not falling into these popular traps.

The most frequent and expensive mistake is in the misclassification of taxable and non-taxable sales. Imposing the tax on exempt goods (such as a loaf of cold groceries) or not imposing the tax on taxable goods (such as hot prepared food) is a huge liability. The best defense is to program your POS system properly regarding each menu item.

Yes. The CDTFA is considering the free and employee meals as a taxable use of inventory. The fair retail value of the meal is subject to sales tax. You will need to track and report this tax, or in case qualified, you can choose the simplified “80/80” method and remit tax on 75% of the food cost.

Use tax is levied on goods that you purchase without incurring any sales tax, such as internet equipment purchases or the purchase of supplies out of state. These purchases will be available to the CDTFA auditor. You must also self-assess and pay this tax so as to avoid a shocking tax bill when auditing.

Catering is fully taxable. This encompasses the food, the delivery, and any compulsory service fees not given separately and paid to the personnel. Do not make it a mere to-go order. Make sure that your catering bills and POS tax the total bill.

Refer at once to a certified tax practitioner or consultant who has specialized in CDTFA audits. Do not think of keeping it up yourself. A specialist is able to control the process, prevent the boundaries of the audit, fight on your behalf, and, in many cases, minimize the end evaluation and punishments.