The delivery apps may not be remitting your sales tax

Sales tax gets treated as a monthly filing chore. It isn't. Almost every sales tax rule that applies to a restaurant resolves to a setting in the point of sale — a tax group on a menu item, a modifier that changes taxability, a default percentage on the auto-gratuity button, a tender type. Get the setting wrong and nothing happens. The return files, the money moves, and the error compounds silently until an auditor arrives with three years of your own data.

Everything below is jurisdiction-specific and none of it is legal advice. What it is meant to do is tell you which settings to go look at, and what to ask your accountant about your particular state.

Start with the one everybody gets backwards

The common belief is that the delivery platforms now handle sales tax everywhere. Two of the largest restaurant markets in the country say otherwise.

New York's marketplace provider rules do not cover restaurant food at all. The state's own guidance is unambiguous: the requirements apply only to sales of tangible personal property, and "hotel occupancy, services and restaurant food are not considered tangible personal property." Marketplace sellers are told to include those sales on their own return as gross sales and nontaxable sales.

In California, a delivery network company is not a marketplace facilitator unless it elects to be. That's the statutory language. A platform delivering from local merchants inside a 75-mile radius sits outside the definition by default and only comes inside it by choosing to.

Both directions of this error are expensive. Assume the platform remits when it doesn't, and you have unreported taxable sales. Assume it doesn't when it does, and you remit twice — a pattern documented often enough that multiple accounting firms have written it up.

And even where the platform genuinely does remit, you are usually not excused from reporting. California requires you to report the total sales and then claim a deduction, with documentation of the facilitator's permit. New York wants the sales shown as gross and as nontaxable. Skipping that step creates an unexplained gap between your POS totals and your return — which is an audit trigger on its own, regardless of whether the tax was paid.

Two settings to check: whether your POS separates platform orders into their own sales category, and whether it records tax as collected by you or by the platform on those orders. If it can't distinguish, you cannot produce the deduction schedule.

The auto-gratuity button

This is the clearest case of a default setting creating a tax liability.

Texas. A mandatory gratuity of 20% or less is not taxable if it is separated on the check, identified as a tip or service charge, and disbursed to qualified employees. Above 20%, the entire charge becomes taxable — not the excess. A POS defaulted to 22% for parties of six or more is generating fully taxable revenue on every large party, and nobody will notice for years.

Texas also defines "qualified employees" narrowly: servers, busers, service bartenders, wine stewards, maîtres d'hôtel. Chefs, cashiers, and dishwashers are explicitly excluded. Which produces a trap worth sitting with: federal law has allowed back-of-house staff into a tip pool since 2018 where the employer takes no tip credit. Make that entirely legal change to your pool, and a previously exempt mandatory service charge in Texas becomes fully taxable. Nothing in the POS flags it. I wrote about the pooling rules themselves in the tip pooling post; this is the tax consequence sitting behind them.

California doesn't bother with conditions — mandatory tips and service charges are taxable gross receipts, full stop, and banquet gratuities agreed in advance count as required.

New York exempts a mandatory gratuity only if all three conditions hold: separately stated, specifically identified as a tip, and all of it given to employees.

Massachusetts excludes it only if separately stated and distributed to service staff — and partial distribution taxes the whole charge.

The configuration question is the same everywhere: is your auto-gratuity mapped to a tip bucket or to a taxable sales line? In three of those four states, a mandatory gratuity landing in the tips bucket never reaches the sales tax base at all.

Dine-in versus to-go is a tax group, not a receipt annotation

California's 80-80 rule is the most involved version of this. Both tests must pass: more than 80% of gross receipts from food products, and more than 80% of retail food product sales taxable. If you meet it, all to-go food is taxable unless you elect to separately account for cold food sold to go — and the state's own guidance says the register needs a separate key for cold to-go sales "or some other way of identifying such sales," because "without adequate documentation, you owe tax on such sales."

Three details in that rule that rarely make it into articles:

Alcohol and carbonated beverages are not "food products" for either 80-80 test, even though they're taxable. For a bar-forward concept that changes the arithmetic completely.

You have to retest every 90 days if you don't currently qualify, and the test runs per location. Adding a patio, adding heat lamps, or shifting the menu toward hot items can flip you into the rule mid-year with no notification from anyone.

A parklet you maintain is your premises. Food consumed there is on-premises even if the customer ordered at an inside counter.

Elsewhere the lines are drawn differently and the POS has to follow. New York taxes all sandwiches, hot or cold — a dozen plain bagels is exempt, one toasted bagel with cream cheese to go is taxable. Texas exempts bakery items regardless of portioning unless they're plated, heated, or sold with utensils; the same pie changes status the moment it hits a plate. Massachusetts exempts bakery products in units of six or more for off-premises consumption — but the exemption disappears if the same counter also sells taxable beverages, because then you're a restaurant.

If your menu items sit in a single "Food" tax group, at least one of these is wrong for you.

The other settings that quietly matter

Gift cards. A gift card is a cash equivalent. Tax attaches at redemption, on the food, not at the sale of the card. A POS configured to tax gift cards at purchase double-taxes the customer, inflates your sales tax liability account, and recognizes revenue a year early. This is one of the most common misconfigurations I've seen, and I covered the revenue side of gift cards in the gift card post.

Comps. Configuring a comp as a $0 sale hides a real liability. In California the restaurant is the consumer of comped items and owes use tax on the cost of nonfood giveaways — alcohol and carbonated beverages — reported as self-consumed merchandise. New York attaches a use tax liability to free meals. Without comp reason codes tied to cost, that exposure is invisible until it's assessed.

Discounts. Your own discounts reduce the taxable base. Third-party reimbursed coupons do not, and the reimbursement you receive from the promoter is itself taxable. Deal-of-the-day instruments follow their own rule: gross receipts include what the customer paid for the voucher plus anything additional paid at the table, not the discounted face value.

Credit card surcharges. California taxes the surcharge — the position dates back to a 1991 annotation treating it as part of the consideration for the sale. Colorado takes the opposite view when it's separately stated. Do not generalize either way; check yours. The legality of surcharging is a separate question I went through in the surcharging post.

Delivery charges. New York taxes them explicitly. And several states have layered on a retail delivery fee that isn't sales tax and doesn't follow sales tax logic — Minnesota's $0.50 fee expressly does not apply to restaurant deliveries, while Colorado's does, because Colorado's fee attaches to any delivery containing taxable tangible personal property and prepared food qualifies.

Rate boundaries. Colorado has roughly seventy self-collecting home rule cities administering their own rules. A delivery two blocks over a line is a different jurisdiction. One storefront rate applied to every delivery address is a systematic error, not an occasional one.

What an audit actually looks like

Two things are worth knowing in advance, because both are decided by your POS configuration years before the audit.

The auditor does a markup test. They take your purchase invoices, apply an expected markup, and compare the result to your reported sales. Your defense is documentation: dated purchase invoices showing glass size changes, old menus showing price changes, happy hour signage and register tapes, documented pour sizes. California's own guidance tells operators to retain exactly these, because price and glass-size changes "may significantly affect the outcome of this test."

The retention obligation is yours, not your vendor's. California requires four years of records, and its guidance is explicit that if your POS overwrites data on a shorter cycle, "you should transfer, maintain, and have available, all data that would have been overwritten or otherwise removed from the system." Massachusetts goes further: under its POS recordkeeping directive, daily summaries and Z tapes are not sufficient — the state can demand transaction-level electronic records.

So the question to ask your POS vendor this week is how long transaction-level detail is retained and how you export it. If the answer is shorter than your state's statute, that gap is your problem and it is invisible until the day it isn't.

While you're at it: sales suppression software is a crime, not a penalty. California's published position carries up to three years in county jail, fines up to $10,000, and repayment of all withheld tax plus interest.

Two small ones that surprise people

Cash robbery is not deductible. Sales tax is measured by sales. If the deposit gets stolen, you still owe the tax on the sales that generated it.

Excess tax collected isn't yours. If your configuration over-collects, the money must be refunded to the customer or remitted to the state. You cannot keep the difference, and "we were collecting too much" is not a defense that ends with a refund to you.

The practical version

Print your menu item list with tax groups attached and read it. Check what your auto-gratuity is defaulted to and where it posts. Check whether gift cards are taxed at sale. Check whether comps carry reason codes tied to cost. Check whether delivery-platform orders are separable in reporting. Then ask your vendor how long transaction detail is retained.

That's a two-hour exercise, and every item on it is a setting rather than a filing.

Disclosure: I work at Katalyst, and configurable tax groups and transaction-level retention are things we build and sell. The self-interest is real, so discount accordingly — but the exercise above works on any POS, including the one you already have, and the states quoted here published every rule I've cited for free.

Related Katalyst products

• See Katalyst Flex POS
• See Katalyst Payments