United States

State tax challenges for the restaurant industry coping with COVID-19

INSIGHT ARTICLE  | 

As the spread of COVID-19 leads to a growing number of American cities closing dining rooms, takeout and delivery purchases have soared, earning the hashtag on social media, #TheGreatAmericanTakeout. Whether it is walking to the corner coffee shop, dialing up delivery or ordering gift cards for co-workers at favorite restaurants, Americans are continuing to show their support for the restaurant industry during times of self-isolation and stay-at-home orders.

Whether restaurants choose to stay open for takeout or not, the restaurant sector is seeing an unprecedented decline in revenues. Many restaurants around the nation are struggling to adapt to the “stay-at-home” lifestyle using technology and apps to expedite orders, selling home meal ready kits, changing their menu to accommodate demand, and selling through new outlets. Unfortunately, the in-person traffic decline continues to result in job losses as many companies fight to survive the crisis. This is a problem across the United States; the restaurant industry is under siege.

It will be difficult to understand the full impact of the virus on the restaurant industry until the pandemic ebbs and restaurant goers return. In the long run, most restaurants will reopen and return to normalcy. But many restaurants will remain shuttered. State and some local governments are working on economic relief measures with a focus on the service industry.

Employment tax

The majority of the restaurant sector is not actively hiring except for some delivery drivers to keep up with food delivery demands. Americans continue filing jobless claims reflecting coronavirus-related restaurant layoffs. Other businesses are asking employees to work fewer hours or are working with grocery stores to temporarily reassign their workforce. Minimizing the state unemployment tax impact of workforce reductions and analyzing independent contractor approaches from a tax perspective are key considerations for businesses struggling with these overwhelming decisions. Moreover, larger operations may have current employees working remotely. Remote employees can impact employment tax and withholding responsibilities.

Sales and use tax

Many restaurant companies have substantial sales and use tax liabilities. Carefully assessing the taxability of purchases could lead to substantial savings. Restaurants may need to re-exam what items are taxable and what is not taxable based on how the business is adapting during this crisis. Moreover, a review of past purchases can result in significant sales and use tax refunds.

Forward thinking restaurants are investing in technology to change the way they will forever do business such as online partnerships with grocery stores and contactless delivery strategies. Some innovative restaurants have temporarily converted properties to farmer markets and corner stores providing an alternative to grocery stores. Other restaurants are donating their inventories or even temporarily donating meals to those in need. All of these strategies have sales and use tax implications. Sales and use tax refunds or incentives can result in substantial and much needed cash flow for businesses.

As with any industry, it is important to remember that the sales tax is considered a “trust tax” collected on behalf of the state. Even during times of economic downturn, restaurants must remember that sales tax charged and collected must be properly and timely remitted, or there could be risk for substantial monetary penalties and potential criminal penalties. Some states have begun to delay filing dates or are waiving interest and penalties on late payments. For more information on extensions, please read our article, State and local sales tax extensions and relief due to COVID-19.

Credits and incentives

One of the centerpieces of the economic stimulus package is the relief provided through small business loans. The small business loans hope to incentivize businesses in retaining and paying employees. For businesses in the accommodation and food services industry (NAICS Sector 72), the 500-employee threshold in the bill is based on the number of workers per physical location. This may open the opportunity to a large portion of the restaurant industry, not just “small” businesses. 

Many state and local governments will be offering various other tax credits and incentives to businesses directly affected by the COVID-19 crisis. Delaware for example is providing interest free loans of up to $10,000 to restaurants that have been in operation for at least a year and have annual revenue at or below $2.5 million. The loans can be applied toward rent, utilities, and other bills, but not personnel costs. The loans have a 10-year term with a nine-month deferment period.

Even without the current crisis, restaurants often overlook credits and incentives available to their unique business. Large restaurants are not simply the venue where food and beverages are served to the consumers. Restaurant franchises and chains often have manufacturing, distribution, and back office teams that oversee the operations. Depending on the jurisdiction, the state and local programs may offer tax incentives to retain employees, train employees, and/or encourage innovation in new processes. For more information on possible incentives, please read our article, Middle market relief for businesses impacted by the coronavirus.

Income/franchise tax

As the economy enters a downturn, businesses that are shrinking may be generating net operating losses (NOLs).  Until business starts to expand, there may be ways to monetize NOLs through various planning techniques. If the business is able to carryback NOLs for federal compliance under the new stimulus package there may be states where this opportunity also exist. Reviewing prior-year filings and identifying refunds for taxes paid in prior periods could create some additional cash flow.

Additionally, and more specific to multistate restaurant groups, monitoring state and local tax extended compliance due dates for filings and payments can be a significant solution for immediate and short-term cash needs as most states have provided payment extensions. For more information on resources to aid in addressing extended filing and payment deadlines, please read our article, State taxing authorities address COVID-19 filing and business changes.

Outsourcing

For most restaurant companies, many accounting and finance personnel are working remotely. Most companies are ill equipped to conduct business remotely for long periods of time. Outsourcing some compliance functions either temporarily or permanently could reduce internal costs.

Takeaways

The COVID-19 crisis is having an unprecedented impact on the restaurant industry. The scale of the decline in revenue will be different for each business but restaurants that adjust quickly should think beyond the immediate crisis to best position themselves when both the health and economic crisis recedes. Addressing state and local tax matters during this period can prevent the rise of state tax exposures and can even result in substantial tax and/or cash savings for the businesses that plan appropriately. RSM’s state and local tax team has the industry experience required to provide comprehensive services to all sectors of the restaurant industry at this time.

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