California Code of Regulations › Title 18 - Public Revenues › Division 2 - California Department of Tax and Fee Administration- Business Taxes (State Board of Equalization- Business Taxes, See Ch. 6 and 9.9) › Chapter 4 - Sales and Use Tax › Article 8 - Food Products and Meals › Section 1602.5 - Reporting Methods for Grocers

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) Food Products Exemption--In General. Tax
				  does not apply to sales of food products for human consumption. Accurate and
				  complete records of all purchases and sales of tangible personal property must
				  be kept to verify all exemptions claimed as sales of exempt food products.
In preparing returns, grocers may use any method of
					 determining the amount of their sales of exempt food products which does not
					 result in an overstatement of the exemption. Grocers must be prepared to
					 demonstrate by records which can be verified by audit that the method used
					 properly reflects their sales of exempt food products.
(b) Reporting Methods.
(1) Purchase-Ratio Method. One method which
				  may be used is the purchase-ratio method sometimes referred to as the "grocer's
				  formula." Under this method, grocers may claim as sales of exempt food products
				  that proportion of their total gross receipts from the sale of "grocery items"
				  that the amount of their purchases of exempt food products bears to their total
				  purchases of grocery items.
If the grocer elects to use the purchase-ratio method of
					 reporting, the following criteria should be followed:
(A) The purchase-ratio method may be used
				  only by grocers and only with respect to sales of "grocery items."
(B) Grocers selling clothes, furniture,
				  hardware, farm implements, distilled spirits, drug sundries, cosmetics, body
				  deodorants, sporting goods, auto parts, cameras, electrical supplies,
				  appliances, books, pottery, dishes, film, flower and garden seeds, nursery
				  stock, fertilizers, flowers, fuel and lubricants, glassware, stationery
				  supplies, pet supplies (other than pet food), school supplies, silverware, sun
				  glasses, toys and other similar property should not include the purchases and
				  sales of such items in the purchase-ratio method. These items are referred to
				  as "non-grocery taxable" items.
When the purchase-ratio method is used for reporting
					 purposes and sales of nongrocery taxable items are computed by the retail
					 extension or markup method, the computation of nongrocery taxable sales should
					 include adjustments for beginning and ending inventories of these items and may
					 include adjustments for shrinkage as specified in (d) below.
(C) Grocers selling gasoline, feed for farm
				  animals, farm fertilizers or who operate a snack bar or restaurant, or sell hot
				  prepared food should not include the purchases and sales of such items or
				  operations in the purchase-ratio method.
(D) The purchases and sales of meat, fruit,
				  produce, delicatessen (except hot prepared food or food sold for immediate
				  consumption at facilities provided by the grocer), beverage (except distilled
				  spirits in the liquor department) and bakery departments must be included in
				  the purchase-ratio method if these departments are operated by the
				  grocer.
(E) The records should be
				  complete and adequate and all sales and purchases should be properly accounted
				  for in the records. All purchases of exempt food products, grocery taxable
				  items and nongrocery taxable items should be segregated into their respective
				  classifications.
(F) The following
				  definitions apply to the purchase-ratio method:
1. "Exempt food products" means those items
				  generally described as food products in Section
				  6359 and Regulation 1602. If
				  grocers are uncertain as to the classification of any product, they should
				  contact the nearest department office.
2. "Total gross receipts from the sale of
				  grocery items" means the total amount of the sales price of all exempt food
				  products and taxable grocery items, including sales tax reimbursement, amounts
				  receivable from manufacturers, or others, for coupons (excluding any handling
				  allowances) redeemed by customers, and the face value of CalFresh benefits. The
				  term does not include receipts from sales of those items described in
				  (b)(1)(B), above, which are commonly referred to as "nongrocery taxable items,"
				  or from those sales described in (b)(1)(C), above (gasoline, snack bar, etc.).
				  It does not include amounts which represent "deposits," as defined in
				  Regulation 1589, e.g., bottle deposits. When deposits are not segregated, it
				  will be presumed, and in the absence of evidence to the contrary, that the
				  total deposits received are equal to the deposits refunded.
3. "Grocery items" means exempt food products
				  and taxable items other than those generally classified under (b)(1)(B) and
				  (b)(1)(C), above.
4. "Purchases"
				  means the actual amount which a grocer is required to pay to the suppliers of
				  merchandise, net of any cash discounts, volume rebates or quantity discounts
				  and promotional allowances. The term does not include the cost of
				  transportation, processing, manufacturing, warehousing, and other costs, if
				  these operations are self-performed. It does not include the cost of operating
				  supplies such as wrapping materials, paper bags, string, or similar items. It
				  does not include amounts which represent "deposits," as defined in Regulation
				  1589, e.g., bottle deposits (see (b)(1)(F)2., above). If deposits are not
				  segregated, it will be presumed, in the absence of evidence to the contrary,
				  that the amount deposited with the supplier is equal to the credit received for
				  bottles returned by the grocer.
a. As used
				  herein, the term "cash discount" means a reduction from the invoice price which
				  is allowed the grocer for prompt payment.
b. As used herein, the term "volume rebate or
				  quantity discount" means an allowance or reduction of the price for volume
				  purchases based on the number of units purchased or sold. Such rebates or
				  discounts normally are obtained without any specific contractual obligation
				  upon the part of the grocer to advertise or otherwise promote sales of the
				  products purchased. The term does not include patronage dividends distributed
				  to members by nonprofit cooperatives pursuant to Section
				  12805 of
				  the Corporations Code, or rebates which constitute a distribution of profits to
				  members or stockholders.
c. As used
				  herein, the term "promotional allowance" means an allowance in the nature of a
				  reduction of the price to the grocer, based on the number of units sold or
				  purchased during a promotional period. The allowance is directly related to
				  units sold or purchased although some additional promotional expense may be
				  incurred by the grocer. Normally, grocers would feature the product in their
				  advertising, although they may or may not be contractually obligated to do so.
				  The retail price of the product may or may not be lowered during a promotional
				  period.
The term does not include display or other merchandising
					 plan allowances or payments which are based on agreements to provide shelf
					 space for a price not related to volume of purchases, or cooperative
					 advertising allowances which are based on a national line rate for advertising
					 and are not directly related to volume of purchases and sales. Cooperative
					 advertising allowances are intended to reimburse grocers for a portion of their
					 advertising costs for a particular product or
					 products.
(G) Sales tax reimbursement collected in
				  accordance with Regulation 1700 which is included in total sales is an
				  allowable deduction. An example of the computation of the purchase-ratio method
				  which provides for an adjustment for sales tax included follows:-
..........................
1. Taxable grocery purchases
$40,000
..........................
2. Add sales tax adjustment (8.25%
[FN*]
x Item 1)
3,300
..........................
3. Adjusted taxable grocery purchases (Item 1
				  + Item 2)
43,300
..........................
4. Exempt food products purchases
130,000
..........................
5. Total grocery purchases including sales
				  tax (Item 3 + Item 4)
173,300
..........................
6. Exempt food products ratio (Item 4 divided
				  by Item 5)
75.01%
..........................
7. Total sales including sales tax
254,088
..........................
8. Nongrocery taxable sales including sales
				  tax (if such sales are not accurately segregated, mark up nongrocery taxable
				  cost of goods sold to compute sales--add 8.25%
[FN*]
sales tax to total)
[FN**]
31,500
..........................
9. Grocery sales including sales tax (Item 7
				  - Item 8)
222,588
..........................
10. Exempt food products sales (Item 6 x Item
				  9)
166,963
..........................
11. Sales of taxable items including sales
				  tax (Item 7 - Item 10)
87,125
..........................
12. Less taxable items purchased with
				  CalFresh benefits (2% of total CalFresh benefits redeemed for period, e.g., 2%
				  x $100,000)
2,000
..........................
13. Taxable Measure including sales tax (Item
				  11 - Item 12)
85,125
..........................
14. Sales tax included (8.25/108.25
[FN*]
x Item 13)
6,488
..........................
15. Measure of tax (Item 13 - Item 14)
78,637
..........................
16. Sales tax payable (8.25%
[FN*]
x Item 15)
6,488