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Multistate Tax Services Alert: Ohio Department of Taxation scrutinizing Restaurant Sales Tax Collection

The Ohio Department of Taxation (Department) announced at the 2012 Ohio Tax Conference a new sales tax audit program focused on the restaurant industry. The Department will be focusing considerable efforts to address a perceived sales tax noncompliance for restaurants.

Ohio imposes a sales tax on the sale of prepared food when the food is eaten on the premises where sold. The sale is not taxable (except for the soft drinks) if the customer orders the prepared food “to-go.” It is our understanding the Department believes a substantial number of restaurants are not collecting an appropriate amount of sales tax.

Who does this audit program impact?

This audit program impacts both company owned and franchised restaurants where a substantial amount of “to-go” sales exist. Restaurant types that have substantial “to-go” sales include: typical fast food, deli-style, pizza, and specialty (ice cream, donuts, etc.).

What is the typical audit process?

Typically, the Department will perform a test check by observing customer purchases for a specified period of days and times which are deemed representative of the activity for the audit period. Then, the test check results are applied against prior records to determine the estimated amount of tax which should have been paid for the audit period and credit is given for tax previously paid for the audit period. The resulting difference is the amount of tax that is assessed, typically with interest and penalty.

Caution: These audits are fraught with risk for those that are unfamiliar with this type of audit process. Our Multistate Tax professionals have extensive experience with these types of audits and can help ensure accurate and fair audit results.

Does a business in the restaurant industry have to wait to be contacted by the Department?

No, businesses can be proactive in addressing this issue. First, businesses should determine the accuracy of their past compliance. Second, if compliance has been less than adequate, businesses can address the potential liability in three proactive ways:

  • General Amnesty— Businesses could apply for general amnesty May 1, 2012 through June 15, 2012, (see Multistate Tax Services Alertdated March 29, 2012 for more detail), and remit the tax liability for all open years plus one-half of the normal interest (no penalty would apply);
  • Voluntary Disclosure— Businesses could apply for a voluntary disclosure agreement and remit the past three years plus full interest (no penalty would apply). We have experience in assisting businesses in determining whether Amnesty or Voluntary Disclosure is the better option; or,
  • Managed/Participatory Audit— Businesses could request a managed/participatory audit from the Department and remit the tax liability plus full interest for the audit period, which is typically three years (no penalty would apply). This approach involves the Department and the business planning the audit together and allows the business to complete part of the actual work, which minimizes the involvement of the Department in the audit process. Businesses are often more comfortable with this audit approach and feel more in control of the audit.

If you would like to discuss this audit program or how McDonald Hopkins can help assist you with resolving any potential sales tax liability, please contact:

John R. Trippier
(non-attorney professional)

Adam L. Garn

Multistate Tax Practice

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. This can be a daunting task. We provide a broad range of state and local tax services including tax planning, tax controversy, real estate tax abatement and exemption, and tax policy advocacy. With professionals who have worked both inside and outside government agencies, the multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.

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IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments), was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding any penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction matter addressed herein.

© 2012 McDonald Hopkins LLC All Rights Reserved. This Alert is designed to provide current information for our clients, friends and their advisors regarding important legal developments. The foregoing discussion is general information rather than specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal advisor before using this discussion as a basis for a specific action.