Third-party delivery accounting for restaurants
Third party delivery accounting for restaurants
During the pandemic, restaurants flocked to third-party delivery platforms, tapping into additional sales and recouping lost revenue. While demand for delivery remains strong, many restaurant operators have encountered challenges with costs and questions relating to tax remittance. Before restaurants commit to working with third-party delivery apps, consider these challenges.
What are third-party delivery platforms?
Third-party delivery platforms like Grubhub, DoorDash, Uber Eats and Postmates provide an app-based delivery service customers use to order food delivery from local restaurants. There's no upfront cost for restaurants to contract with third-party delivery companies. Ordering and payment are processed directly through the app, and the delivery companies make their money by tacking on service fees.
In addition to delivery services, third-party delivery companies collect data on customer purchasing habits. The data is then used to assist restaurants with marketing services, helping them reach more customers or fine-tune their menus. Even if restaurants pass on the additional marketing services, listing on the sites can increase their exposure.
Third-party delivery fees
Third-party delivery service runs on fees paid by both the customer and the restaurant, with delivery costs to the restaurant ranging from 15% to 25% of the order total. There are also additional delivery costs and credit card fees charged to the restaurant on each app order. Accounting for all the fees owed to the platform, a $50 order could net the restaurant as little as $34.
With the average restaurant profit margin falling between 3% and 5%, fees can quickly eat away at the bottom line. To recoup the loss, restaurants must get creative. One way to offset the services fees is with delivery app menu pricing that differs from their dining room menu. For example, on a third-party delivery order, a $15 hamburger in the restaurant would cost a DoorDash customer $17.
Third-party accounting best practices
A third-party delivery provider may simply deposit money into the restaurant’s account with little detail on the breakdown of fees and taxes withheld. For accounting best practices, it’s important restaurants request detailed reports from their third-party delivery partners and reconcile payments received from the third-party delivery payout with sales, service fees and taxes withheld.
Who pays the sales tax?
One of the most confusing aspects of contracting with third-party delivery services is determining which party is responsible for tracking and remitting to the state taxes paid on each order. This confusion has led to marketplace facilitator laws.
A marketplace facilitator is a business that provides a platform for other businesses to promote and sell products and services. Rather than require each individual business to collect, track and remit taxes on every marketplace sale, market facilitator laws require the marketplace to collect, track and remit, shifting the responsibility from many small entities to a few large entities. Depending on the laws of each state, restaurant third-party delivery apps Grubhub, Uber Eats and DoorDash may be considered marketplace facilitators along with Amazon, eBay or Etsy.
Marketplace Facilitators laws by state
Restaurant groups with a presence in multiple states find marketplace facilitator laws especially beneficial. While all states now have marketplace facilitator laws, thresholds for amounts and the number of transactions vary though and typically follow economic nexus laws, which also vary by state.
Marketplace facilitator laws can be confusing. Some states exclude restaurants and food sales while others allow third-party delivery companies to opt in or out. Restaurants would be prudent to consult with a knowledgeable CPA in states they operate in and keep a running account of all taxes paid by third-party sellers.
How marketplace facilitator laws can vary
Arizona’s marketplace facilitator laws stipulate a threshold of $100,000 on gross sales. However, third-party delivery businesses are not considered a facilitator because Arizona law stipulates only retail sales are subject to the marketplace facilitator law, and food delivery companies are simply a delivery vehicle. Only Uber Eats is registered in Arizona to collect and remit. DoorDash and Grubhub are not.
Colorado’s marketplace facilitator laws also stipulate a $100,000 economic nexus threshold but also includes a non-collecting seller use tax reporting requirement. Simply put, a third-party delivery company can opt out of the facilitator law if they provide Colorado with information about their marketplace sellers. Uber Eats, DoorDash and Grubhub are not registered to collect sales tax in Colorado.
With the rules varying so much from state to state and little guidance for restaurants specifically, a knowledgeable restaurant CPA is crucial. An accountant familiar with marketplace facilitator laws and restaurant accounting can help restaurant owners avoid paying double tax by preparing sales tax returns that separate sales tax paid by delivery apps from the total sales tax owed.
