The question of whether sales tax applies to food has implications for both customers and restaurant owners. The rules for taxing prepared food varies by jurisdiction, which affects both pricing and the overall dining experience. Restaurants need to understand and comply with tax regulations to better manage their finances and be transparent with customers. In this guide, we’ll discuss what businesses need to know about how food is taxed in restaurants.

What’s in this article?

• How taxation works with restaurant food
  
• Federal and payroll tax considerations for restaurants
  
• State and city sales tax for restaurants
  
• Tax deductions for restaurant owners
  
• How takeaway food is taxed, by state
  
• How groceries are taxed, by state
  

How taxation works with restaurant food

Taxes on restaurant food typically involve a combination of sales taxes that are applied to the sale of prepared food and beverages. The exact details vary depending on state, county, and city regulations, but they generally include the following:

• Sales tax: This is the most common form of taxation applied to restaurant meals. Restaurants collect sales tax from customers at the point of sale and remit it to the appropriate tax authority.
  
• Differential rates: Some jurisdictions differentiate between types of food (e.g., prepared food vs. grocery items). Prepared foods, which include meals prepared by a restaurant, are often taxed at a higher rate than groceries that aren’t ready to eat.
  
• Additional taxes: Along with standard sales taxes, some jurisdictions impose additional taxes specific to restaurants or related to food service. These can include meal taxes, beverage taxes (especially for alcoholic beverages), and tourism-related taxes.
  
• Exemptions and holidays: The tax burden might be reduced temporarily or permanently during certain times of the year (e.g., tax holidays) or due to specific exemptions for categories such as bakery items. It depends on local rules.
  
• Including taxes in prices: In some places, menu prices must include any tax so the price you see is what you pay. In others, the tax is added to the bill.
  

Federal and payroll tax considerations for restaurants

Both federal tax and payroll tax apply to restaurants. Here’s a closer look.

Federal income tax

Like all businesses, restaurants are subject to federal income tax. This tax is calculated based on net income, which is your business’s revenue minus allowable deductions such as cost of goods sold (COGS), employee wages, and other operating expenses. The structure of your business – for example, sole proprietorship, partnership, limited liability company (LLC), and corporation – determines how you’ll file. Corporations file taxes separately from their owners, while other business structures often shift their tax obligations to the owners’ personal tax returns.

Employment taxes

Employment taxes are taxes that an employer needs to handle on behalf of their employees. They include the following:

• Social Security and Medicare taxes: Under the Federal Insurance Contributions Act (FICA), employers are required to withhold these taxes from their employees’ wages and match the amounts withheld. For 2025, the Social Security tax is assessed on the first $176,100 of an employee’s wages, and Medicare is assessed on all wages without a cap.
  
• Federal unemployment tax: Employers must also pay a tax to fund the federal government’s oversight of state unemployment programmes. Unlike with FICA taxes, this tax is paid only by the employer and not deducted from employee wages.
  

Tip reporting and taxation

Handling tips presents unique challenges for restaurants. Employees must report cash tips if they total $20 or more per month. Both cash and non-cash tips (e.g., those added to credit card payments) are subject to income and FICA taxes. It’s the employer’s responsibility to ensure FICA taxes are paid on all reported tips and to allocate tips if employees report less than the Internal Revenue Service (IRS) requires – typically 8% of total receipts.

Tax credits

Restaurants might qualify for credits that can lower their tax bills. These can include the following:

• Work Opportunity Tax Credit: This tax credit is awarded for hiring individuals from certain groups that face barriers to employment.
  
• FICA Tip Credit: Restaurants can claim this tax credit for part of the Social Security and Medicare taxes they pay on employee tips. It offsets the cost of payroll taxes on tipped income that exceeds the minimum wage.
  

State and city sales tax for restaurants

State and city sales taxes vary by jurisdiction so it’s incredibly important for restaurant owners to understand the specific requirements of the state and city where they operate. Here’s a general overview of how state and city sales taxes work for restaurants.

State sales tax

• Sales tax rates: State sales tax rates differ considerably. Alaska, Delaware, Montana, New Hampshire, and Oregon do not charge any statewide sales tax, while other states have rates as high as 7.25%.
  
• Taxable items: Generally, prepared food and beverages sold in restaurants are taxable. But some states provide exemptions for certain types of food, such as bakery items sold without utensils and cold prepared foods (e.g., salads).
  
• Filing and payment: Restaurants must register with the state tax authority, collect taxes from customers, and file tax returns and make payments according to a schedule set by the state, which could be monthly, quarterly, or annually.
  

City sales tax

• Sales tax rates: Many cities impose their own sales taxes on top of state sales taxes. These vary by city and county, which can create a complex patchwork of tax rates within a single state.
  
• Special tax districts: Additional taxes apply in certain districts such as those designated for tourism or redevelopment. These rules can affect restaurants located in popular tourist destinations or urban centres.
  
• Tax collection: As with state taxes, city taxes are collected at the point of sale and require regular reporting and remittance to the appropriate city or municipal tax authority.
  

Combined sales tax

• Total tax rate: For a restaurant, the total sales tax rate is the sum of state, county, and city rates. This combined rate is what customers pay on their bills. Restaurants should clearly communicate these taxes on their menus and receipts.
  

Tax deductions for restaurant owners

A variety of tax deductions are available to reduce restaurant owners’ taxable incomes and manage costs. Below are some of the typical ones.

COGS

COGS includes all expenses directly related to producing the food and beverages the restaurant sells (e.g., the cost of ingredients). These are deductible.

Labour costs

Wages, salaries, bonuses, and benefits paid to employees are tax-deductible. These include payroll taxes and any benefits to which employers contribute, such as health insurance and retirement plans.

Rent and utilities

The costs of leasing a restaurant space and using the associated utilities (e.g., electricity, gas, water, sewerage, phone) are deductible. If the restaurant owns the building, the mortgage interest and real estate taxes are deductible as well.

Depreciation

Restaurant owners can depreciate the cost of capital assets such as kitchen equipment, furniture, and fixtures over their useful lives. This helps spread the cost of an asset over several years, reducing the annual tax liability.

Repairs and maintenance

Repairs and maintenance expenses for the restaurant premises and equipment that don’t add to the property value or materially extend useful life are fully deductible for the year they’re incurred.

Marketing and advertising

Costs related to promoting the restaurant, including radio, print, and television ads and digital marketing, are deductible. The costs of promotional activities like public events and tastings also qualify.

Professional fees

Fees for accountants, lawyers, and business consultants are also deductible as long as their services are directly related to restaurant operations.

Insurance

Premiums for several kinds of business insurance such as property, casualty, liability, and workers’ compensation are deductible.

Taxes and licences

The costs of various business taxes, licences, and fees paid to state and local governments can be deducted. These include the costs of food service licences, alcohol licences (if applicable), and property taxes.

Travel

Travel costs related to operations, including trips to meet suppliers or attend trade shows, are deductible.

Training and education

The costs associated with training staff and improving their skills are deductible. This category includes fees for seminars, classes, and instructional materials and sometimes travel costs related to education.

Health and safety modifications

Due to recent global health concerns, any modifications made to improve the health and safety of the restaurant, such as installing protective barriers or air purification systems, can be deductible.

Employee meals

Meals provided to employees at work for the employers’ convenience (e.g., staff meals during shifts) are generally deductible.

How takeaway food is taxed, by state

Most states don’t distinguish between food that’s eaten on the premises and takeaway for sales tax purposes, as it’s all considered prepared food. Here’s a state-by-state breakdown of how takeaway food is taxed, as of January 2025.

No state sales tax on prepared takeaway food

• Alaska
  
• Delaware
  
• Montana
  
• New Hampshire
  
• Ohio
  
• Oregon
  

Standard state sales tax on prepared takeaway food

• Alabama: 4.000% sales tax on prepared food
  
• Arizona: 5.600% sales tax on prepared food
  
• Arkansas: 6.500% sales tax on prepared food
  
• California: 7.250% sales tax on hot prepared food
  
• Colorado: 2.900% sales tax on hot prepared food
  
• Connecticut: 6.350% sales tax and 1.000% meals tax on prepared meals
  
• Florida: 6.000% sales tax on prepared food
  
• Georgia: 4.000% sales tax on prepared food
  
• Hawaii: 4.000% general excise tax on prepared food
  
• Idaho: 6.000% sales tax on prepared food
  
• Illinois: 6.250% sales tax on prepared food
  
• Indiana: 7.000% sales tax on prepared food
  
• Iowa: 6.000% sales tax on prepared food
  
• Kansas: 6.500% sales tax on most prepared food
  
• Kentucky: 6.000% sales tax on prepared food
  
• Louisiana: 5.000% sales tax on prepared food
  
• Maine: 8.000% sales tax on prepared food
  
• Maryland: 6.000% sales tax on hot prepared food
  
• Massachusetts: 6.250% sales tax on prepared food
  
• Michigan: 6.000% sales tax on prepared food
  
• Minnesota: 6.875% sales tax on prepared food
  
• Mississippi: 7.000% sales tax on prepared food
  
• Missouri: 4.225% sales tax on prepared food
  
• Nebraska: 5.500% sales tax on prepared food
  
• Nevada: 6.850% sales tax on prepared food
  
• New Jersey: 6.625% sales tax on prepared food
  
• New Mexico: 4.875% sales tax on prepared food
  
• New York: 4.000% sales tax on prepared food
  
• North Carolina: 4.750% sales tax on prepared food
  
• North Dakota: 5.000% sales tax on prepared food
  
• Oklahoma: 4.500% sales tax on prepared food
  
• Pennsylvania: 6.000% sales tax on prepared food
  
• Rhode Island: 7.000% sales tax and 1.000% meals and beverage tax on prepared food
  
• South Carolina: 6.000% sales tax on prepared food
  
• South Dakota: 4.200% sales tax on prepared food
  
• Tennessee: 7.000% sales tax on prepared food
  
• Texas: 6.250% sales tax on prepared food
  
• Utah: 4.850% sales tax on prepared food
  
• Vermont: 6.000% sales tax on prepared food
  
• Virginia: 5.300% sales tax on hot prepared food
  
• Washington: 6.500% sales tax on prepared food
  
• West Virginia: 6.000% sales tax on prepared food
  
• Wisconsin: 5.000% sales tax on prepared food
  
• Wyoming: 4.000% sales tax on prepared food
  

How groceries are taxed, by state

Groceries and food ingredients are often taxed differently from prepared food, and many cities and counties add their own sales taxes to state taxes. Here’s a state-by-state breakdown of how food ingredients are taxed, as of April 2025.

No state sales tax on groceries

• Alaska
  
• Arizona
  
• California
  
• Colorado
  
• Connecticut
  
• Delaware
  
• Florida
  
• Georgia
  
• Indiana
  
• Iowa
  
• Kansas
  
• Kentucky
  
• Louisiana
  
• Maine
  
• Maryland (with exceptions)
  
• Massachusetts
  
• Michigan
  
• Minnesota
  
• Montana
  
• Nebraska
  
• Nevada
  
• New Hampshire
  
• New Jersey
  
• New Mexico
  
• New York
  
• North Carolina
  
• North Dakota
  
• Ohio
  
• Oklahoma
  
• Oregon
  
• Pennsylvania
  
• Rhode Island
  
• South Carolina
  
• Texas
  
• Vermont
  
• Washington
  
• West Virginia
  
• Wisconsin
  
• Wyoming
  

Reduced state sales tax on groceries

• Alabama: 3.000% sales tax on groceries
  
• Arkansas: 0.125% sales tax on groceries
  
• Illinois: 1.000% sales tax on groceries
  
• Missouri: 1.225% sales tax on groceries
  
• Tennessee: 4.000% sales tax on groceries
  
• Utah: 1.750% sales tax on groceries
  
• Virginia: 1.000% statewide local tax on groceries
  

Standard state sales tax on groceries

• Alabama: 4.000%
  
• Hawaii: 4.000% (general excise tax)
  
• Idaho: 6.000%
  
• Mississippi: 7.000%
  
• South Dakota: 4.200%