The world of taxation can be a confusing one. Tax codes are thick with rules and regulations that can be applied a number of different ways. A recent article in the Los Angeles Times underscores this idea. The article talked about the 80/80 rule and how it’s applied to sales tax. In this post we’ll take a look at the 80/80 rule and explain how it works.
Understanding the 80/80 Rule
The rule is a useful guide for figuring out if food sold to-go or as take out is taxable. Sales tax can be applied if more than 80% of a businesses’ revenue comes from selling food, and more than 80% of sales are from food eaten on the premises or is served hot.
The 80/80 Rule in Action
The rule seems pretty straightforward but, like most things in the tax world, there is nuance that complicates matters. So, let’s say you’re the owner of a coffee shop. A customer orders a pastry and wants it heated up. You’ll likely have to charge them sales tax. Now, what about if another customer orders a cold sandwich? Sales tax may not apply in this situation based on the 80/80 rule. However, things get complicated once you start plugging different numbers into the equation. For instance, different rules may apply if less of your revenue comes from food sales, but most of what you do sell is hot.
You can see how things get complicated in a hurry. The takeaway is, as a business owner, it’s your responsibility to know the tax codes and how they relate to you. Failure to do your homework or consult with a professional like those at Miles Consulting Group can end up costing you in the way of fines and other penalties.
Photo Credit: James Morris
