(This corrects information presented in a June 2008 eNews article. Upon further review by the Department, that prior article was determined to be partially inaccurate. The Department regrets any confusion that may have been caused.)
Bars, restaurants, hotels, motels and other similar businesses may owe Iowa sales or use tax on complimentary items given to customers or employees.
Complimentary beverages and meals GIVEN TO CUSTOMERS
Alcoholic beverages, soft drinks, candy and other items that are not tax exempt as food are taxable as goods consumed when given to customers at no charge. This is because these items are normally subject to sales tax. The items were purchased tax free by the business because they were intended for resale. When they are given to customers, they are considered “goods consumed” by the business for its own use. The basis for the use tax on those goods consumed is the purchase price paid by the business.
Prepared meals given to customers at no charge are taxable as goods consumed because prepared foods are normally subject to sales tax. The ingredients for the meal were purchased by the business with the intent to process them into prepared meals for resale. Raw materials that will be processed into an end product may be purchased tax free because they are intended for resale. In the case of prepared meals, the raw materials, food ingredients, also happen to be exempt from tax. The principle of taxation is that the basis for taxable, processed goods consumed is the purchase price of the raw materials. As such, businesses should work with their tax advisors to establish a reasonable basis for determining the purchase price of the food ingredients used in prepared meals that are given to customers.
The value of the taxable items is reported on line 2 of the quarterly sales tax return as goods consumed. The amount entered on line 2 is the purchase price paid by the business to its supplier, not the amount normally charged a customer.
Complimentary beverages and meals GIVEN TO EMPLOYEES
Alcoholic beverages, soft drinks, candy and other items that are not tax exempt as food are taxable as goods consumed when given to employees at no charge. This is because these items are normally subject to sales tax.
Food consumed without charge by at-work employees is not taxable as goods consumed because the food used to prepare the meal is not intended for sale; rather, it is intended for the employee's consumption pursuant to an employer's arrangement with its employees.
The value of the taxable items is reported on line 2 of the quarterly sales tax return as goods consumed. The amount entered on line 2 is the purchase price paid by the business to its supplier, not the amount normally charged a customer.
Meals and Beverages SOLD TO EMPLOYEES AT A REDUCED PRICE
Alcoholic beverages, soft drinks, candy, and other items that are not tax exempt as food are taxable when sold to employees at a reduced price. The tax is calculated upon the actual selling price.
Prepared meals or food sold at a reduced price and consumed by at-work employees are taxable when sold to employees. The tax is calculated upon the actual selling price.
Hotels & Motels
If a complimentary meal is advertised as being part of the room rental package (i.e. “free continental breakfast”), and is available to all hotel guests, then tax is being paid on the food by the guest in the form of the tax paid on the room rate. The hotel would not owe additional use tax.
If a person is dining in a hotel's restaurant or ordering from room service, where there is a separately stated charge for the meal or food, and the person received the meal free of charge for some reason, that meal would be subject to use tax .
Tips or Gratuities
Tips or gratuities are often added to a bill as a mandatory charge, particularly when large groups are served. In these cases, tax is due on the full amount charged for the meal, including the gratuity or tips.
Tips or gratuities paid voluntarily by the customer are not subject to sales tax.
To Learn More...
For additional information concerning food and beverage sales, you may wish to review our Food/Restaurants and Grocery Stores publication.