Tennessee Sales Tax: Six Restaurant Charges You Might Be Overlooking

Below is a list of six transactions that are subject to Tennessee sales and use tax for restaurants in addition to normal food and drink sales. This is not a complete list of taxable transactions and as some of these situations can be nuanced, we always recommend researching in more detail.

1.  Mandatory tips

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Voluntary tips paid by the customer at the end of the meal and returned in full to the person performing the service are not subject to sales tax.  If for some reason the voluntary tip is not returned in full to the person performing the service, it should be included in the sales price and is subject to sales tax.

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Mandatory tips that are automatically added to the bill (for example, a mandatory gratuity for a table that exceeds a certain number of people) are considered part of the sales price and as such, subject to sales tax. This applies even if the full amount of the gratuity is paid out to the server.  The only exception to this rule would be a policy that allows the customer to request that the charge be removed. Any tips would still need to be paid in full to the server.

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2.  Free meals and drinks offered to the public

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If free meals or drinks are offered to a customer and no additional purchase is required – for example, free coffee or doughnuts to celebrate a holiday – the restaurant is required to pay use tax on the cost of those ingredients or items withdrawn from inventory.

However, if the customer is required to purchase to receive the free item – for example, free coffee with the purchase of 2 breakfast items – the item is not subject to use tax, and the tax base is the amount charged for the required purchase items.

3.  Catering charges

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Catered food is subject to sales tax at the regular rate.  If the catered food is delivered, the delivery charge made as part of the sale is also subject to sales tax, along with any labor and service charges such as fuel or mileage related to the delivery.

However, separately stated charges for servers, setup, bartenders and valets are not considered part of the selling price of the catered food and are not subject to sales tax. These charges must be separately stated on the invoice to the customer; they cannot be part of the catered food line item.

4.  Merchandise

Any merchandise offered for sale such as t-shirts, mugs, magnets or other items are subject to sales tax. If the restaurant withdraws these items from inventory to offer as a free promotional item or employee gift,use tax should be paid on the cost of the items.

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5.  Employee meals

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Employee meals (even if furnished for free or sold at an employee discount) are subject to sales tax at the greater of the sales price for the employee or the cost of the ingredients.

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6.  Credit card surcharges

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If a credit card surcharge is added to the bill, it becomes part of the sales price and is subject to sales tax. It is considered a necessary service to complete the sale.

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