California Restaurant Must Pay Sales Tax for Online Orders 

The California Office of Tax Appeals (OTA) determined that the owner of a California restaurant owes sales tax on orders made through delivery websites. 

The restaurant owner claimed that sales made through the online food ordering companies Grubhub and Eat24 were nontaxable sales for resale. However, the California Department of Tax and Fee Administration (CDTFA) denied that claim. The OTA upheld the CDTFA’s decision. 

According to a written agreement between GrubHub and the restaurant owner, GrubHub was an independent contractor and collected sales tax on the restaurant’s behalf. Grubhub provided monthly statements to the restaurant owner, and the restaurant owner was responsible for remitting the sales tax collected by GrubHub and filing returns.

As calculated by the CDTFA, the restaurant owner underreported taxable sales by $324,604 between June 2011 and July 2014, with the total tax liability being $36,015. 

The investigation included CDTFA agents going undercover at the restaurant, where they discovered the restaurant was voiding transactions and not reporting transactions in their point-of-sale report. The CDTFA further determined that the restaurant underreported sales through GrubHub and Eat24 since the restaurant was treating the online sales as nontaxable sales for resale.

Following the CDTFA decision, the restaurant owner appealed unsuccessfullyThe OTA noted that the restaurant owner was unable to explain discrepancies between its sales and use tax returns and its federal income tax returns. Additionally, the OTA noted that the restaurant owner offered no explanation for the high number of voided transactions, other than conceding that some of the cash transactions were improperly voided. 

The OTA also determined that the sales made through GrubHub and Eat24 were taxable sales since the online sellers were acting as agents of the restaurant. GrubHub’s written agreement indicated that it was acting as an agent of the restaurant and the restaurant was the retailer. The OTA determined that Eat24’s arrangement with the restaurant owner was similar to GrubHub’s. The restaurant owner did not provide resale certificates from GrubHub and Eat24. Therefore, it is presumed that the online sales are taxable.

This case shows the importance of proper bookkeeping. The restaurant’s history of voided transactions was deemed “highly unusual” by the OTA. 

This case also shows the importance of familiarity with state and local tax laws. Grubhub was specified as an independent contractor in their contract with the restaurant and was therefore acting on its behalf. As a result, the online orders were not considered nontaxable sales for resale and were subject to California sales tax. 

(In the Matter of the Appeal of: YNL Enterprises Inc.Office of Tax Appeals, State of California (Case No. 18053170))

Posted on May 16, 2023