Grocery Stores
Preface
This publication is designed for owners, managers, and other operators of grocery stores and provides basic
information on the application of the California Sales and Use Tax Law to grocery store sales and purchases.
For purposes of this publication, a grocery store is an establishment having as its principal line of business the sale
of food products and related items. The term includes separate grocery departments in department stores but does
not include delicatessens, country or general stores, and establishments that handle groceries as a sideline.
If you have questions that are not answered in this publication, please visit our Tax Guide for Grocery Stores at
www.cdtfa.ca.gov/industry/grocery.htm or call our Customer Service Center at 1-800-400-7115 (CRS:711). Customer
service representatives are available to assist you Monday through Friday from 7:30 a.m. to 5:00 p.m. (Pacific time),
except state holidays. This publication complements publication 73, Your California Seller’s Permit, which includes
general information about obtaining a permit; using a resale certificate; collecting and reporting sales and use
taxes; buying, selling, or discontinuing a business; and keeping records. Please also refer to the For More
Information section for California Department of Tax and Fee Administration (CDTFA) information and the complete
list of regulations, guides, and publications referenced in this publication.
We welcome your suggestions for improving this or any other publication. If you would like to comment, please
provide your comments or suggestions directly to:
Audit and Information Section MIC:44
California Department of Tax and Fee Administration
PO Box 942879
Sacramento, CA 94279-0044
Please note: This publication summarizes the law and applicable regulations in effect when the publication was
written, as noted on the cover. However, changes in the law or in regulations may have occurred since that time.
If there is a conflict between the text in this publication and the law, the law is controlling.
Contents
1
Taxable sales 1
Nontaxable sales 1
Food product sales 2
Vitamin enhanced water 2
Combination packages 2
Nonedible cake decorations 4
Food or dietary supplements or adjuncts (additives) 4
Dietary supplements provided by physicians 5
Herbal products 5
Hot prepared food products 5
To-go sales of meal packages that do not include hot items 5
Food service operations 6
Miscellaneous charges and transactions 6
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California Redemption Value (recycling fee)
Diapers and Menstrual Hygiene Products
Discounts, coupons, rebates, and incentive programs
When is the rebate or incentive payment taxable?
Promotional programs offered by third parties
Discount club cards
EBT Card - Cal Fresh Benefits
Film processing
Lottery
Newspapers and periodicals
Point-of-sale fees (fees for use of debit cards)
Prepaid telephone debit cards and prepaid wireless cards
Carpet Cleaners
Sales of capital assets
Self-consumed merchandise
Vending machines
11
Chapter Page
General Application of Tax
11
Chapter Page
Reporting Tax: Special Considerations for Grocery Stores 12
Total sales 12
Methods for computing exempt food sales and taxable sales 12
Electronic scanning systems 12
Recordkeeping requirements for grocers using
electronic scanning systems
13
Purchase-ratio method (grocer’s formula) 14
Modified purchase-ratio method 16
Cost-plus-markup method—taxable merchandise 17
Retail inventory method 20
Other methods to avoid 20
Sales tax ring-up 20
Taxable sale ring-up 21
Estimates 21
Deductions 21
Losses 21
Shrinkage (unaccounted-for-losses) 21
Robbery, theft, shoplifting 21
Bad debts 21
How long should I keep my business records? 22
For More Information 23
Appendix: Classification of Products Sold by Grocers 25
General Application of Tax
It is important to understand how tax applies to your sales of food, merchandise, and other physical products. This
chapter is designed to answer questions commonly asked by grocers. Please visit our online Tax Guide for Grocery Stores
at www.cdtfa.ca.gov/industry/grocery.htm or the For More Information section for the complete list of regulations and
publications referenced in this publication.
Examples of taxable and nontaxable sales
The following examples do not represent all taxable and nontaxable sales.
Taxable sales
Sales tax generally applies to sales of:
• Alcoholic beverages
• Books and publications
• Cameras and film
• Carbonated and effervescent water
• Carbonated soft drinks and mixes
• Clothing
• Cosmetics
• Dietary supplements
• Drug sundries, toys, hardware, and household goods
• Fixtures and equipment used in an activity requiring the holding of a seller’s permit, if sold at retail
• Food sold for consumption on your premises (see Food service operations)
• Hot prepared food products (see Hot prepared food products)
• Ice
• Kombucha tea (if alcohol content is 0.5 percent or greater by volume)
• Medicated gum (Nicorette, Aspergum)
• Newspapers and periodicals
• Nursery stock
• Over-the-counter medicines, such as aspirin, cough syrups, cough drops, throat lozenges, etc.
• Pet food and supplies
• Soaps or detergents
• Sporting goods
• Tobacco products
Nontaxable sales
Sales tax generally does not apply to sales of:
• Baby formulas (including Isomil)
• Cooking wine
• Edge Bars, Energy Bars, Power Bars
• Food products—This includes baby food, artificial sweeteners, candy, gum, ice cream, ice cream novelties,
popsicles, fruit and vegetable juices, olives, onions, and maraschino cherries. Food products also include
beverages and cocktail mixes that are neither alcoholic nor carbonated. The exemption applies whether sold in
liquid or frozen form.
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• Granola Bars
• Kombucha tea (if less than 0.5 percent alcohol by volume and naturally effervescent)
• Sparkling Cider
• Noncarbonated sports drinks (Gatorade, Powerade, All-Sport, etc.)
• Pedialyte
• Phone cards (see Prepaid telephone debit cards and prepaid wireless cards)
• Water—Bottled noncarbonated, noneffervescent drinking water
Food product sales
Although sales of food products for human consumption (food that people eat) are generally exempt from tax,
there are many sales of food products that are taxable. For example, you must report tax on sales of food products
sold for consumption on your premises when eating facilities are provided. Because certain sales of food products
are taxable, it is important to understand when tax applies.
If an item does not qualify as a food product, or if it is not sold for human consumption, it is generally subject to tax.
For example, the following items do not qualify as food products and, as a result, are subject to tax:
• Alcoholic beverages
• Carbonated beverages, including semi-frozen beverages
containing carbonation, such as slushies
(also see “Please note” below)
• Coloring extracts
• Dietary supplements
• Ice
• Over-the-counter medicines
• Tobacco products
Likewise, a food product sold for consumption by a dog, cat, bird, and other domestic pets, or for use as fish bait, is
taxable because it is not sold as a food for people to eat.
Please note: Carbonated fruit juices. Carbonated products that qualify as 100 percent natural fruit juice are not
subject to tax. If the fruit juice includes a preservative, such as sodium benzoate, or any other additive, it is not
considered a natural fruit juice and is taxable.
Vitamin enhanced water
Noncarbonated, vitamin enhanced water beverages and sport drinks that come in packages similar in size and
volume to nonenhanced bottled water are generally considered food products. Your sales of these products
on a to-go basis are generally not subject to tax. Noncarbonated bottled water is specifically considered a food
item. The specially mixing or compounding of nutritional elements, such as vitamins, in an item traditionally
accepted as food, such as vitamin enriched bread, does not alone render the product taxable nor does including
the word “vitamin” in a food product name, description, or product advertising. For more information, please see
Regulation 1602, Food Products.
Combination packages
Combination packages may include food or a combination of food and nonfood items. If you create gift packages
(basket) that contain only food, such as cheese, crackers, or fruit, the sale of these gift packages is generally exempt
from tax. If you decide to include a nonfood product in a gift basket, it is necessary to determine the taxable portion
of the combination package. A container is generally considered the package and any packaging material that
holds the product being sold.
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If you maintain records that verify the cost of the individual items
You must continue to separate the retail value of the nonfood products when:
1. You have records that verify the cost of the individual items in the package and
2. The retail price of the nonfood product is more than ten percent of the retail value of the entire package,
not including the container.
The tax is based on the retail sales price of the nonfood products not including the value of the container. For
example, you have records to establish the cost of the individual items of a combination package, and your sale
includes the following components:
Meat and cheese, retail value (exempt food products) $22.00
Serving utensil, retail value (nonfood product) 5.00*
Total retail value of contents $27.00
Tray (container) retail value 3.00
Total 30.00
Sales tax ($5 * x 8.25%) .41
Total selling price of combination package $30.41
*Total retail value of the nonfood products
In this example, the retail value of the nonfood item, $5.00, is greater than 10 percent of the retail value of the
entire package, not including the container (tray) ($27 x 10% = $2.70). Additionally, the retail value of the container
is less than 50 percent of the retail value of the entire package. Since you have records to establish the cost of the
individual items of the combination package, the tax is measured by the retail sales price of the nonfood products
not including the value of the tray ($5.00 x appropriate tax rate).
If you do not have records to verify the cost of the individual items
Tax may be measured by the retail sales price of the entire package, including the value of the container if:
1. The retail value of the nonfood product exceeds ten percent of the retail price of the entire package, not
including the container, and
2. You do not have records to establish the cost of the individual items of the combination package.
This would also apply if you were selling prepackaged gift baskets, since you do not have records for the cost of the
individual items in the package. For example, if you do not have records to establish the cost of the individual items
of a combination package and your sale includes the following components:
Meat and cheese, retail value (exempt food products) $22.00
Serving utensil, retail value (nonfood product) 5.00
Total retail value of contents $27.00
Tray (container) retail value 3.00
Total $30.00
Sales tax ($30 x 8.25%) 2.48
Total selling price of combination package $32.48
In this example, the retail value of the nonfood item, $5.00, is greater than ten percent of the retail value of the
entire package, not including the container ($27 x 10% = $2.70). However, since you do not have records to
establish the cost of the individual items of the combination package, the tax is measured by the retail sales price of
the entire package, including the value of the tray ($30.00 x appropriate tax rate).
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If you do or do not have records to verify the cost of the individual items
The sales price of the package is nontaxable if:
1. The retail value of the nonfood products is ten percent or less than the total value of the contents (not
including the container), and
2. The container’s retail value is 50 percent or less of the entire package value.
For example, your sale includes the following components:
Cheeses, retail value (exempt food products) $45.00
Small knife, retail value (nonfood product) 5.00
Total retail value of contents $50.00
Container, retail value 10.00
Total selling price of combination package $60.00
The nontaxable combination package meets both conditions explained in the example above. The value of the nonfood
items, $5.00, is 10 percent of the $50 total value of the contents ($50 x 10% = $5). The value of the container, $10.00, is less
than 50 percent of the retail value of the entire package ($60 x 50% = $30). Your sale qualifies as a nontaxable sale.
Please note: In these examples, we show tax calculated at a rate of 8.25 percent, however, you should use the tax
rate in effect at your business location. For current tax rates, see California City and County Sales and Use Tax Rates,
available on our website or by calling our Customer Service Center. If you would like more information, please also
see Regulation 1602, Food Products.
Nonedible cake decorations
If you sell a cake or other bakery goods that includes nonedible decorations, you must report tax on the retail-
selling price of the decorations if they represent 50 percent or more of the total retail value of the cake or bakery
item. You must segregate the charge for the decorations from the charge for the cake or bakery item, and you must
calculate the tax based on the retail value of the decorations.
You may already separately state the retail value of decorations on the invoice. If you do, and the decorations are
nonedible, you must report tax based on the retail value of the decorations—whether or not they represent at least
50 percent of the total retail value of the cake or bakery item.
Food or dietary supplements or adjuncts (additives)
Sales tax generally applies to preparations in liquid, powdered, granular,
tablet, capsule, lozenge and pill form sold as food supplements, dietary
supplements, food additives or dietary additives. Supplements or
additives are not included in the definition of exempt food products. If an
item is sold in one of these specified forms, the following methods may be
used to determine its taxability:
• If an item is described on its label or package as a food supplement,
food adjunct, dietary supplement, or dietary additive, its sale would be
subject to the sales tax.
• If an item is prescribed or designed to remedy specific dietary
deficiencies or to increase or decrease generally those areas of human nutrition dealing with vitamins, proteins,
minerals or calories, its sale would be subject to the sales tax.
• If an item is in one of the specified forms above, it may be taxable if it is generally recognized as a dietary
supplement regardless if it is not described as such on its package, and the package does not emphasize its
vitamin, protein, mineral, or calorie content. Examples include cod liver oil, wheat germ oil, and halibut liver oil.
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Revisions to Regulation 1602, Food Products, and Regulation 1591, Medicines and Medical Devices, clarify that dietary
supplements can, in limited circumstances, be considered “medicines.” This applies when supplements (provided by
a physician to his or her own patient) are part of a medically supervised weight loss program to treat obesity.
Dietary supplements provided by physicians
Generally, if a supplement does not qualify as a complete dietary food under Regulation 1602, Food Products, it is
taxable. However, the sale will not be taxable if a physician prescribes such a supplement to his or her own patient
as part of a medically supervised weight loss program to treat obesity.
Herbal products
A product’s labeling does not determine that it is a medicine and disqualify it from the food products exemption.
If a product does not meet the definition of medicine, as provided in Regulation 1591, Medicines and Medical Devices, it
may still be considered a food product for human consumption. This is true even if medicinal claims are made on the
product’s label or product brochures.
If an herb is sold in cut leaf form, the herb cannot be considered a supplement or additive, regardless of what is
written on the label because cut leaf is not in one of the forms listed in Regulation 1602, Food Products. Only a dried
herb that is ground or crushed into fine particles should be considered a powder. For such an herb to be considered
to be sold as a supplement or additive, it must be either:
• Labeled as a supplement or adjunct, or
• Prescribed or designed to meet specific dietary deficiencies or increase or decrease vitamins, proteins, minerals,
or caloric intake.
If the herb is not described on its package or label as a food supplement, food additive, dietary supplement, or
dietary additive, the herb is a food product the sale of which is exempt from tax.
Hot prepared food products
Sales of hot prepared food products are subject to sales tax regardless of whether sold for consumption on the
premises or sold to go.
A food product is considered a hot prepared food product if it is heated to a temperature above room temperature.
Hot food is considered a hot prepared food product even if it has cooled by the time of sale since it was intended to
be sold as a hot food.
Examples of hot prepared food products include hot pizza, hot barbecued chicken, hot spareribs, hot popcorn, and
hot nuts (if you sell nuts from an enclosed display case which is heated through the use of an ordinary light globe,
the sales are sales of hot food products and are subject to sales tax). Hot bouillon, consommé, and soup are also
considered hot prepared food products and their sale is subject to tax. However, tax does not apply to the sale of
hot bakery items, hot coffee, and other hot beverages if they are sold individually and to go.
Hot prepared food products also include a combination of hot and cold food items where a single price has been
established for the combination. Examples include a combination of coleslaw, rolls, and hot chicken sold for a single
price; and a doughnut and coffee sold for a single price.
To-go sales of meal packages that do not include hot items
If you sell a combination meal to go that includes cold food and a carbonated beverage, the portion of the selling
price that represents the carbonated beverage is subject to tax. If the combination package includes cold food and
a beverage other than a carbonated beverage, the sale of the package is not taxable.
Example: You sell a combination of a cold sandwich, chips, and iced tea for a single price to go—the sale is not
taxable. You sell the same package with a carbonated soda—the portion of the selling price representing the
charge for the soda is taxable.
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Food service operations
Food sold for consumption at tables, chairs, or other facilities, that you provide
If your store has a snack bar, soda fountain, cafeteria or a similar operation, you must report sales tax for sales
of sandwiches, ice cream, and other foods if those foods are sold in a form for consumption at tables, chairs, or
counters or from trays, glasses, dishes or other tableware that you provide. For example, if you provide either a
stand-up or sit-down counter in the delicatessen section, tax applies to food sold for consumption at the counter.
To-go sales
In general, sales of cold food to go are not subject to tax. If you claim an exemption from tax for cold food sold to
go, you must show that no facilities are provided where the food can be consumed immediately. If facilities are
provided, you must segregate your receipts of the nontaxable sales from the taxable “for here” sales. Your receipts
could include tapes from a separate cash register key, copies of sales slips, or some similar record that can be
verified by audit.
• You can elect to charge tax on to go sales of cold food if more than 80 percent of your store’s sales are from the
sale of food products and more than 80 percent of your store’s sales are taxable dine-in or hot food sales.
Catering
You are considered a caterer for tax purposes if you serve meals, food, and drinks on the premises of your customers.
If you make sales as a caterer, please see publication 22, Dining and Beverage Industry. Please also refer to the
For More Information section.
If you deliver food and you do not use your employees or your own dishes, flatware, etc., to serve food, you are
considered a food seller rather than a caterer. As a food seller, tax applies to your sales as described in this publication.
Miscellaneous charges and transactions
The following information applies to a variety of sales and charges that occur at grocery stores.
California Redemption Value (recycling fee)
California Redemp tion Value (CRV) Table
Beverages subject to the CRV when sold in glass, plastic,
aluminum, and certain other metal containers (if in liquid,
ready-to-drink form and intended for people to drink)
Not subject to the CRV,
regardless of the container type
Water (carbonated and noncarbonated) Milk
Coffee and tea drinks Medical food (such as amino acid-free food)
Soft drinks, sport drinks, and fruit drinks (carbonated and
noncarbonated)
Infant formula
Beer and other malt beverages Wine, including nonalcoholic and sparkling
Wine and distilled spirit coolers containing seven percent or
less alcohol
Distilled spirits with more than seven percent alcohol
Vegetable juice in containers of 16 ounces or less Vegetable juice in containers more than 16 ounces
100 percent fruit juice in containers of less than 46 ounces 100 percent fruit juice in containers of 46 ounces or more
Tax sometimes applies to your CRV charges for nonrefillable containers. If sales tax applies to the sale of the beverage,
the CRV charge is taxable. If sales tax does not apply to the sale of the beverage, the CRV charge is not taxable.
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If sales tax does apply, the amount due is based on the amount received for the beverage or container and the
amount charged for the CRV.
If you give the beverage away and charge only the CRV fee, tax still applies to the CRV if the sale of the beverage
would have been taxable.
Sales of noncarbonated drinks are generally not taxable, but their containers may be subject to the CRV. On the
other hand, sales of carbonated and alcoholic beverages are generally taxable and the CRV fee that is charged for
their containers is taxable.
Examples of beverage sales subject to tax:
• Beer and other malt beverages
• Carbonated mineral and soda waters
• Carbonated soft drinks in liquid form
• Wine coolers and other alcoholic beverage coolers
Examples of beverage sales not subject to tax:
• Noncarbonated, 100 percent natural fruit juice
• Noncarbonated, noneffervescent bottled water
The CRV program is administered by the Department of Resources
Recycling and Recovery (CalRecycle). If you have questions regarding
the fee or how to apply it, please contact CalRecycle at
www.calrecycle.ca.gov/bevcontainer.
Diapers and Menstrual Hygiene Products
Beginning January 1, 2020, the sale and use of specified diapers and menstrual hygiene products are exempt
from tax.
Specified diapers and menstrual hygiene products only include:
• Diapers that are designed, manufactured, processed, fabricated, or packaged for use by infants, toddlers, and
children, and
• Tampons, sanitary napkins primarily designed and labeled for menstrual hygiene use, menstrual sponges, and
menstrual cups.
You should continue to include your sales of these items in the reported total gross sales on your sales and use
tax return and claim the deduction as “diapers” and/or “menstrual hygiene products” for your sales on and after
January 1, 2020.
Discounts, coupons, rebates, and incentive programs
If you participate in rebate or incentive programs offered by manufacturers, vendors, or other third parties to
promote sales of specific products, you should be aware of how tax applies to the payments you receive.
In general, third parties offer incentive programs where you are required to offer discounts to your customers on
specific products, and the third party compensates you directly for the price reduction. There are also programs in
which you reduce the sales prices in exchange for discounts on what you pay for the products.
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When is the rebate or incentive payment taxable?
Payments received through a third-party rebate or incentive program are part of your total taxable sales when all
three of the following conditions exist:
1. The third party requires you to reduce the sales prices of particular products in order to receive payments for
the discounted amount from the third party.
2. Conditions for receipt of payment are certain, and not dependent on other factors outside your control.
(The term “certain” means conditions in the agreement that you have control over. For example, you will
receive payment from the third party if you place product signs in your store.) An example of a factor
outside your control would be that you receive payment only if you meet a sales quota for the discounted
products within a specific time period.
3. The payment is for a like amount on a transaction-by-transaction basis (payment must be tied to the specific
sale of the particular product in the agreement). The third party reimburses you for the specified price
reduction in the agreement.
If all of these conditions are met as part of the incentive program, the third-party payment is part of your taxable
gross receipts. When reporting your sales, you must include the total amount you receive from your sales of the
particular products—including the amount paid by the customer and the amount that will be paid by the third
party as reimbursement for the price reduction.
Here are two examples where the value of a buy-down rebate program and a manufacturer coupon are part of your
gross receipts (or sales price if subject to use tax) from the sale of the product:
1. You purchase bottle openers directly from the manufacturer and you enter into a buy-down rebate program
with them. Assume you normally sell the bottle openers for $5.00, but under a buy-down rebate plan, agree
to sell the bottle openers for $4.50 and receive $0.50 from the manufacturer. The tax amount due is based
on your gross receipts for the sale—which includes both the rebate amount and the amount paid by your
customer; therefore, tax is due based on the $5.00 you receive for the entire sale.
2. A customer clips a coupon out of a newspaper and presents it to you at the time of sale to receive a
discounted price on the product purchased. The coupon indicates “manufacturer coupon.” Since the
manufacturer will compensate you for the amount of the price reduction and the customer presents a
manufacturer coupon to you, the value of the coupon is included in your gross receipts. Tax is based on the
full retail selling price of the product, which is the amount paid by your customer and the amount of the
manufacturer’s coupon.
Promotional programs offered by third parties
When you participate in a promotional program, the payments you receive from a person other than your customer
are presumed taxable until you can present documentation to establish the payments as being nontaxable. Please
see Regulation 1671.1, Discounts, Coupons, Rebates, and Other Incentives, for additional examples of documentation
that would be used to accomplish this.
When you collect sales tax, or if you are required to collect the use tax, you must let the customer know the amount
on which they are paying tax. This includes the amount of any taxable discounts, rebates, or incentives offered or paid
to you by third parties. Even though the customer buys an item at a discounted price, you collect tax for the full retail
(prediscounted) price. You may itemize this amount on the customer’s receipt, sales invoice, or other proof of sale.
When applicable, you may also post a notice in a location visible to your customer, or in advertisements, flyers, or
brochures sent to customers. The notice should indicate that tax will be added to the sales price of all items and
that the tax includes the amount of any taxable discounts or rebates.
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Sellers of cigarettes and tobacco products at retail must have a separate California Cigarette and Tobacco Products
Retailer’s License for each retail location. This is true even if you have a seller’s permit or other permits or licenses
issued by us. For more information, see
publication 78, Sales of Cigarettes and Tobacco Products in California,
available from our website.
Discount club cards
If you offer price discounts to customers through the use of discount club cards, the discount amount is not subject
to tax. The price reductions associated with the club card are not part of your total taxable sales if you are not
receiving compensation from a third party. Amounts paid by a third party (such as a manufacturer) to reimburse
you for the club card discount are subject to tax. Some stores also offer “club rewards”—such as discount coupons
or “reward bucks”—based on a customer’s purchases during a particular time period. These reward discounts are
not taxable, because they are considered retailer cash discounts.
For more information and examples, please see Regulation 1671.1, Discounts, Coupons, Rebates, and Other Incentives,
and publication 113, Coupons, Discounts and Rebates.
EBT Card – CalFresh Benets
CalFresh is known federally as the Supplemental Nutrition Assistance Program or SNAP and provides benefits to
qualified individuals who meet federal income eligibility rules. Electronic Benefits Transfer (EBT) cards containing
CalFresh benefits are issued to qualified individuals by their respective county’s human or social services department.
CalFresh benefits may be used by qualified individuals to purchase eligible food items at authorized retail food stores.
Sales of eligible food items purchased with CalFresh benefits are exempt from tax, even if the sale of the food item is
normally taxable. For example, the sales of carbonated beverages, ice, and food coloring are exempt from tax when
purchased with CalFresh benefits.
If your customer has CalFresh benefit redemptions that exceed the total amount of eligible taxable food items, the
remainder should be applied only to nontaxable food items. Tax applies to all sales of taxable items that are not
eligible to be purchased with CalFresh benefits.
Under SNAP, items purchased with CalFresh benefits are considered to be sold to the United States Government
and are exempt from tax in California. However, items purchased with CalWORKs cash aid benefits are not
considered sales to the United States Government and are subject to tax, unless another exemption applies.
You are allowed to take a sales and use tax deduction for CalFresh benefits redeemed. You may report the
deduction of CalFresh benefit sales on an actual basis (itemization of sales including CalFresh benefit sales) if you
separately account for those sales. Alternatively, there are two approved methods for computing the allowable
deduction instead of separately accounting for CalFresh benefit sales:
Method 1
You may take a deduction on your sales and use tax return of two percent of the total amount of CalFresh
benefits redeemed during the period for which the return is filed.
Method 2
You may take a deduction of a greater percentage if the total of taxable items purchased with CalFresh
benefits divided by the total of taxable items purchased with CalFresh benefits plus exempt food purchases
is greater than two percent. See example below:
Eligible taxable food items purchased with CalFresh Benefits $5,000 (a)
Exempt food products $130,000 (b)
Total $135,000 (c)
Allowable percentage for CalFresh benefits deduction: (a) $5,000 ÷ (c) $135,000 = 3.7%
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Customers may not use CalFresh benefits to buy items such as alcoholic beverages, tobacco products, pet food,
soaps, paper products, vitamins, food that will be eaten in the store, or hot foods. If you are using Method 2, please
make sure that these items are not included in your total of items that are normally taxable and may be purchased
with CalFresh benefits.
Film processing
Tax generally applies to all charges involved in processing film, including charges for:
• Enlarging photos
• Placing photographic images on a CD, DVD, or disk
• Printing photos from a digital storage medium
Tax generally also applies to charges for coloring and tinting
new pictures. However, itemized charges for developing
negatives from your customers’ exposed film are generally
not taxable. This is to be distinguished from charges for
developing film by the reverse process method, which
is subject to tax. The reverse process method consists of
developing the film to a negative and reversing it into a
positive, usually in the form of a slide or a home movie
film. For additional information, please see
publication 68,
Photographers, Photo Finishers, and Film Processing Laboratories.
Lottery
Lottery receipts are not part of a retailer’s gross receipts for tax purposes and should not be included on your sales
and use tax return. Appropriate recordkeeping procedures should be established to segregate lottery receipts from
sales. If you do not maintain adequate documentation of exempt lottery receipts, such sales could be confused with
taxable sales.
Newspapers and periodicals
Sales of newspapers and periodicals are taxable, except for periodicals sold by subscription. Retailers who sell
newspapers and periodicals in their stores should include these items with their reported taxable sales. Also taxable
are sales of catalogs, maps, and books.
Point-of-sale fees (fees for use of debit cards)
Tax does not apply to debit card fees if all of the following conditions apply:
• The fee is separately stated,
• The customer would not incur the charge if they did not use the card,
• The fee is not calculated as a percentage of the amount of the purchase, and
• The fee is reasonably related to the cost of the transaction.
Prepaid telephone debit cards and prepaid wireless cards
In general, sales of prepaid telephone debit cards are not taxable (see Exception, below). You are considered to be
selling a future telephone service rather than selling physical products.
However, sales of telephone cards that include prepaid wireless airtime are subject to the Emergency Telephone Users
(911) Surcharge when sold in a retail transaction in California. For more information about this program, please see our
online Tax Guide for Sellers of Prepaid Mobile Telephony Services (MTS) and Telecommunications Services Suppliers.
Exception: If you sell a prepaid telephone card for its value as a collectible item rather than for future telephone
service, the sale is subject to tax. For example, if you sell an expired card with a picture of a famous person or classic
automobile, you are selling a collectible item, and the sale is subject to sales or use tax.
11
Carpet cleaners
Your rental receipts are sometimes taxable and you may be required to report and pay tax on all or a portion of the
receipts. It will depend on whether you paid sales tax or use tax on your purchase of the carpet cleaning equipment.
If you did not pay tax on the carpet cleaning equipment:
• You must report and pay tax on all rental receipts, including charges for soaps and cleansers.
If you paid tax to your supplier or you reported use tax on your tax return*:
• If you charge your customer a lump-sum amount for the rental, including equipment, soaps, and cleansers, you
are not required to report and pay tax. However, you are considered the consumer of the soaps and cleansers
and are liable for tax on your purchase of those items.
• If you charge a separate amount for the equipment and a separate amount for the soaps and cleansers, you are
not liable for tax on the rental receipts for the equipment but are liable for tax on your receipts for the soaps
and cleansers. Under this example, you can purchase the soaps and cleansers with a resale certificate.
* If you report use tax on your return, your purchase must be reported by the due date for the reporting period during which you
first place the equipment in rental service.
Sales of capital assets
Tax applies to sales of capital assets used in your business—such as showcases, gondolas, and cash registers.
This holds true whether the assets are sold intermittently or are included with the sale of your business.
Self-consumed merchandise
Taxable merchandise that you purchase without tax for resale and divert to some other use is subject to use tax
measured by its purchase price. Examples of such use include cigarettes, soap, and other taxable items taken home
by an owner; given to friends, associates, employees, or donated to certain organizations (see “Please note” below).
The cost of such merchandise should be reported under “Purchases Subject to Use Tax” on your tax return.
Please note—Donations to organizations. You are not required to report use tax if you donate property from your
resale inventory to a qualified organization, as defined in Regulation 1669, Demonstration, Display, and Use of
Property Held for Resale—General. Donations to organizations that do not qualify under this regulation are taxable.
Paper bags and other wrapping and packaging supplies used to wrap merchandise you sell may be purchased
for resale, without payment of tax. But purchases of all other supplies, such as price tags and store equipment,
are taxable. Normally, these items are purchased from local suppliers who charge sales tax and report the tax. If
equipment or supplies are purchased from out-of-state with no tax added, the purchase should be reported on
your tax return, under “Purchases Subject to Use Tax.”
Vending machines
Commissions received from vending machine operators who have placed vending machines on your premises are
not taxable.
Some grocers, however, sell their own merchandise through vending machines. Regulation 1574, Vending Machine
Operators, and publication 118, Vending Machine Food Sales, explain the application of tax to sales through
vending machines.
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Reporting Tax: Special Considerations for Grocery Stores
The information in this chapter is designed to help you compute some of the figures needed for your sales and use tax
return. If you need additional information about completing a return, please refer to the return instructions or download
a copy of
publication 73, Your California Seller’s Permit. You can also call our Customer Service Center for assistance.
Total sales
Total sales entered on your tax return should include your
gross receipts from all sales made during the period covered
by the return. Gross receipts include sales of exempt
merchandise as well as taxable merchandise.
They also include charge sales and credit card sales.
Credit card sales should be reported as if no credit cards
were involved. Your sales should not be reduced by the
amount of any service charges made by a credit card
organization. Since there was no reduction in the amount of
the sale to your customers, no deduction is allowable.
Methods for computing exempt food sales and taxable sales
In preparing tax returns, you may use any method of determining the amount of your sales of exempt food items
and taxable items so long as the method accurately discloses the correct amount of tax due. Regardless of the
method used, you must be prepared to demonstrate, by records which can be verified by audit that the method
used accurately discloses the correct amount of tax due.
This chapter includes descriptions of the following methods:
• Electronic scanning systems
• Purchase-ratio method (grocer’s formula)
• Modified purchase-ratio method
• Cost-plus-markup method—taxable merchandise
• Retail inventory method
• Sales tax ring-up
• Taxable sale ring-up
• Estimates
Electronic scanning systems
You can use electronic scanning systems to separate taxable sales from nontaxable sales. These systems record and
compile taxable and nontaxable sales, sales tax, and related data from information imprinted on a Universal Product
Code (UPC).
You must ensure that the proper controls are maintained to monitor and verify the accuracy of your scanning
results and tax returns. Your nearest CDTFA office will be able to provide you with information about the type of
documentation that you should develop and maintain. You are required to keep all records relating to sales and
purchases for four years from the date of the sale or purchase.
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Recordkeeping requirements for grocers using electronic scanning systems
In addition to the normal books of account, the following records should also be developed and retained by all
grocers using electronic scanners:
Master listings
Whether you operate an independent store or a chain store operation, you
should maintain a master listing of all the taxable and nontaxable products
you sell. If you sell products that are not included in the master list,
(products without a UPC such as salad bars, seasonal items, and deli items)
you should keep a separate accounting for these products. Regardless of
the type of storage (paper, tape, drive, or disk) used to maintain the list, it
should generally include all of the following product information:
1. The Universal Product Codes
2. The product’s taxable or nontaxable status
3. An identifying description of the product
4. The package or size of the product
5. The stores that carry the product
6. Department numbers
7. A warehouse or vendor item number
Product coding reports
It is very important to verify that products are coded accurately and to keep a sufficient record of changes made
to your product codes. New or improved products are continually introduced and decisions to add or discontinue
products can be made on a daily basis. As a result, your master list can change daily. Therefore, a history of product
changes is required to support your claimed sales of exempt food products (using electronic scanners).
We require retailers to prepare and save a minimum of one Product Coding Report (PCR) for each return reporting
period. This report should include all additions or new products, deletions of old products, and coding changes of
existing products that have occurred since the preparation of the prior period’s report.
Saving the PCR for each reporting period will assist you in identifying and correcting any possible coding errors
within the same reporting period in which they occurred. Otherwise, you may be subject to interest and penalty
adjustments for any coding errors not disclosed until later reporting periods.
Product movement report
No matter what the size of your grocery business, you should create and maintain a product movement report or
similar type of inventory tracking report that covers the same period as your PCR. This report should include the
same product information contained in the master listing. If you identify product coding errors, this report should
assist you in determining the quantity and price of products sold during the reporting period and allow you to
compute the additional sales tax due.
This report should provide you a satisfactory method to verify what products were miscoded, when the erroneous
coding was corrected, the price of the product, and how much of the product was sold during the period in
question. If you discover that you have collected too much sales tax, please refer to Regulation 1700, Reimbursement
for Sales Tax.
General outline of reports, records and procedures used when reporting with electronic scanners
As a grocer you are required to keep a general outline of your electronic scanner reporting methods. The outline
should include the following areas:
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1. The type and form of records and reports generated.
2. A description of who is responsible for testing, maintaining and correcting the scanning system. It is
necessary to identify the person with the authority to enter and/or alter information contained in the master
list, such as price, product, and codes.
3. How the scanner system accounts for such items as food stamps, manufacturers’ coupons, bottle deposits,
and over rings.
4. If there are department(s) and/or stores handling sales, in whole or in part, without using scanners, it is
necessary to keep records that account for your sales.
Grocers are required to segregate a representative sample of taxable and nontaxable merchandise purchases, if
requested for audit purposes.
Purchase-ratio method (grocer’s formula)
Under this method, you calculate your exempt food sales by using a formula that compares your purchases of food
products and all grocery items. The formula, which adjusts for sales tax reimbursements, provides a percentage
figure that is applied to total grocery sales in order to determine exempt food sales. The example shown below
illustrates the use of the purchase-ratio method, and shows how nongrocery taxable purchases and sales are
included in the calculations.
If you use this method, you must accurately segregate your purchases into the following categories: exempt food
products, taxable grocery items, and nongrocery taxable items.
You will find information about these particular line entries below the example:
• Line 1—Taxable grocery purchases
• Line 4—Exempt food product purchases
• Lines 1 and 4—Adjustments for allowances and discounts
Purchase-ratio method example
The following example shows how nongrocery taxable purchases and sales are included in the calculations.
1. Taxable grocery purchases $40,000
2. Add sales tax adjustment (8.25%* 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 ÷ 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 and add 8.25%*
sales tax to total)**
- 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 food stamps (2% of total food stamps redeemed
for period, for example, 2% x $100,000) - 2,000
13. Taxable measure including sales tax (Item 11 - Item 12) 85,125
14. Sales tax included (.0825/1.0825* x Item 13) - 6,488
15. Measure of tax (Item 13 - Item 14) 78,637
16. Computed sales tax payable (8.25%* x Item 15) $6,488
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* Use the applicable tax rate. We have used a tax rate of 8.25 percent for illustration purposes.
** Adjust for shrinkage if applicable—not to exceed three percent except as specified in Regulation 1602.5,
Reporting Methods for Grocers. Adjustment should also be made for significant inventory fluctuations.
Line 1—Taxable grocery purchases
a. The following is a partial list of purchases that should be included in taxable grocery purchases:
• Beer purchases
• California Redemption Value (CRV) fees on beer, wine coolers, and carbonated beverages
• Carbonated beverage purchases
• Cigarette purchases
• Wine purchases
• All other taxable grocery purchases (see Appendix A for an expanded list of taxable grocery items)
b. Do not include the following as part of taxable grocery purchases:
• California Redemption Value (CRV) fees on nontaxable beverages
• Distilled spirits purchases
• Farm feed purchases
• Farm fertilizer purchases
• Gasoline purchases
• Hot prepared food ingredients
• Manufacturing costs*
• Nongrocery taxable purchases (see Appendix B for an expanded list)
• Paper and plastic bags used as containers for items sold by grocers
• Processing costs*
• Restaurant purchases
• Snack bar purchases
• Transportation costs*
• Vending machine dispensed purchases
• Warehousing costs*
* If these operations are self-performed, the costs must be excluded from grocery purchases for purchase-ratio purposes; however,
if you use a modified purchase-ratio method, these costs may be included among grocery purchases, subject to our approval.
c. Do not include exempt food products in taxable grocery purchases. See the discussion of Line 4 below for more
information on exempt food products.
d. If you have received a volume rebate, promotional allowance, or a discount for your purchases, you must ensure
that the purchase price you use reflects the reduced cost. (see, Lines 1 and 4—Adjustments for allowances and
discounts.)
Line 4—Exempt food product purchases
a. The following is a partial list of exempt food products:
• Bakery ingredient purchases
• Deli purchases
• Meat purchases (do not adjust for meat scraps)
• Produce purchases
• All other exempt food product purchases
b. If you have received a volume rebate, promotional allowance, or a discount for your purchases, you must ensure that
the purchase price you use reflects the reduced cost. (see, Lines 1 and 4—Adjustments for allowances and discounts.)
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Lines 1 and 4—Adjustments for allowances and discounts
Cash discounts, volume rebates, quantity discounts, and promotional allowances represent reductions of cost,
and should be used to reduce the purchase price of taxable grocery purchases and exempt food products for ratio
purposes. These items are defined below:
Cash Discount: As used for this reporting method, cash discount means a reduction from invoice price allowed the
grocer for prompt payment.
Volume Rebate, Quantity Discount: As used for this
reporting method, 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 generally does not include
patronage dividends distributed to members by
nonprofit cooperatives, or rebates that constitute a
distribution of profits to members or stockholders.
Promotional Allowance: As used for this reporting method, promotional allowance means 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 expenses may be incurred
by the grocer. Normally, the product would be featured in the grocer’s advertising, although the grocer 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.
Promotional allowances do not include:
• Display or other merchandising plan allowances
• Payments based on agreements to provide shelf space for a price not related to volume of purchases
• Cooperative advertising allowances that 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.
Line 8—Nongrocery taxable sales
Sales and purchases of nongrocery taxable items such as distilled spirits, drug sundries, and hardware must be
accounted for in the ratio computation. If such sales are not accurately segregated in your records, then nongrocery
taxable cost of goods sold should be marked up by applicable markup rates, plus sales tax, to determine such sales.
An adjustment for shrinkage may be taken into consideration in the sales computation, if applicable.
This adjustment may not exceed three percent of the cost of nongrocery taxable items when the purchase-ratio
method is used, except as specified in section (d) of Regulation 1602.5, Reporting Methods for Grocers.
Modified purchase-ratio method
If you do not follow the procedure outlined on the previous pages, but report on a different purchase-ratio basis, you
are using a modified version of the purchase-ratio method. For example, if you include self-performed processing,
manufacturing, warehousing or transportation costs in the purchase-ratio formula, you are using a modified version.
If you use a modified version, you must establish that the modified version does not result in an overstatement of
the food products exemption. The adequacy of the modified method may be demonstrated by extending taxable
purchases, adjusted for inventories, to retail for a representative period or computing taxable sales by marking up
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taxable purchases, adjusted for inventories, for a representative period. Grocers must retain adequate records that
may be verified by audit, documenting the modified purchase-ratio method used. (See AM 0905.15 for information
regarding “Extending Taxable Merchandise to Retail Method.”)
Cost-plus-markup method—taxable merchandise
This is a method in which applicable markups are added to your cost of taxable merchandise, adjusted for
inventories, to determine taxable sales for the reporting period. Adjustments are made for markons, markdowns,
quantity sales and case sales. A shrinkage adjustment of up to one percent of the cost of taxable merchandise is
also allowable if losses are incurred.
Markup factor percentages (cost plus the markup) must be determined by conducting a shelf test of representative
purchases covering a minimum purchasing cycle of one month within a three-year period, segregated by
commodity groupings (for example, beer, wine, paper products, and pet foods, etc.). Commodity markup factor
percentages are applied to cost of sales of the respective commodities for the reporting period to determine
taxable sales for each commodity.
As an alternative procedure, the overall average markup factor for all taxable commodity groupings may be used
to determine total taxable sales for the reporting period. This factor is applied to the overall cost of taxable sales for
the reporting period. It should be noted that shelf tests (to determine commodity markup factors) use purchases
covering a complete purchasing cycle, typically one month. The markup factors determined from the shelf tests are
then applied to respective commodity costs in a one-year base period to compute the overall average markup factor.
Cost-plus-markup example
Computation of Taxable Sales to be Reported (3rd quarter 20
XX)
Recorded cost of taxable sales $403,815
Less 1% allowance for shrinkage – 4,038
Adjusted cost of taxable sales $399,777
Overall taxable markup factor
1
(31.59% + 100%) x 131.59%
Computed taxable sales (131.59% x $399,777) $526,067
Computed sales tax payable (8.25% x $526,067)
2
$43,401
1
See example on the following page for an illustration of how the markup calculation was done.
2
Use the applicable tax rate. A tax rate of 8.25 percent was used for illustration purposes.
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Computation of Overall Taxable Markup (Test Year: 20XX)
A
Recorded
Cost of Sales
B
Markup
Factor
1
(MU+100%)
C
Computed
Taxable
Sales
(AxB=C)
Commodity
Grocery Taxables
Beer $105,078 132.49%
2
$139,218
Wine 32,438 147.19% 47,745
Carbonated beverages 223,815 135.50% 303,269
Tobacco and related products 100,781 112.63% 113,510
Paper products 131,931 127.55%
2
168,278
Pet food 142,316 123.87% 176,287
Soap and detergents 125,712 110.95% 139,477
Laundry supplies 26,101 123.87%
2
32,331
Household cleaners, waxes, and insecticides 23,087 127.05% 29,332
Brooms, mops, brushes, and sponges 7,522 139.26% 10,475
Outdoor living needs (charcoal briquettes, starter fluid, etc.) 6,519 124.40% 8,110
Total Taxable Grocery $ 925,300 $1,168,032
Total Taxable Nongrocery + 358,626 145.40% + 521,442
Total Taxable Sales $1,283,926 $1,689,474
Cost of Computed Taxable Sales - $1,283,926
Gross Profit $405,548
Overall Markup ($405,548 ÷ $1,283,926) 31.59%
1
All markups have been adjusted for any markons or markdowns and quantity price adjustments (for example, cigarettes sold
by the carton).
2
The shelf test used to compute the markup on this commodity is illustrated below.
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Shelf Test Period: April 20XX
Shelf Test on Beer
Date
Invoice
Number Vendor Cost
Retail
Ex-tax*
4-2-XX 629452 Lane Distributing Co. $559.64 $737.20
4-2-XX 39819 National Brewers 222.72 297.20
4-4-XX 45293B City Distributors 553.78 737.52
4-7-XX 098757 Smythe Brewing Co. 475.66 620.11
4-7-XX 75923 Bunkers Brewers Inc. + 173.10 + 237.79
Totals
Cost
Gross Profit
Markup ($644.92 ÷ $1,984.90)
$1,984.90 $2,629.82
- $1,984.90
$644.92
32.49%
* Purchased without the payment of tax.
Shelf Test on Paper Products
Date
Invoice
Number Vendor
General
Description Cost
Retail
Ex-tax
4-3-XX 123276 Monsanto-Pacific, Inc. Paper towels $962.59 $1,152.80
4-3-XX B30031 Value-Line Products Paper plates, napkins 514.29 696.50
4-5-XX 191156
Lunch-a-Bunch Bags 396.31 504.35
4-8-XX 42445A Fawcett and Son Tissues 1,204.14 1,584.45
4-8-XX 19416 M. I. Green Paper Co. Aluminum foil + 481.52 + 601.14
Totals
Cost
Gross Profit
Markup ($980.39 ÷ $3,558.85)
$3,558.85 $4,539.24
- $3,558.85
$980.39
27.55%
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Shelf Test on Laundry Supplies
Date
Invoice
Number Vendor
General
Description Cost
Retail
Ex-tax
4-3-XX 314652 Silver Seal Products Bleach $192.23 $224.96
4-4-XX B92845 Lewis and Final Ammonia 262.01 330.29
4-7-XX 1-22958 Columbia Laundry Prod. Starch 268.92 324.42
4-8-XX 496372 Arnile and Co. Water Softener 180.47 234.87
4-8-XX A19485 Goldfard and Hubbard Cleaners + 190.52 + 240.75
Totals
Cost
Gross Profit
Markup ($261.14 ÷ $1,094.15)
$1,094.15 $1,355.29
- $1,094.15
$261.14
23.87%
Retail inventory method
This method is generally appropriate for use only
for larger grocery stores. It is for use by grocers who
have suitable automatic data processing equipment
capabilities.
It is a method in which control records for inventories
and purchases are maintained at retail values. As
purchase invoices are received, the merchandise is
segregated according to exempt food products and
taxable items priced and recorded at the retail value.
The total retail amounts for the reporting period,
adjusted for inventories at retail and segregated
according to exempt food products and taxable
items, represent anticipated exempt and taxable
sales for the reporting period. Adjustments are made for markons, markdowns, quantity sales and case sales.
A shrinkage adjustment of up to one percent of taxable items is also allowable if losses are incurred.
Additional information on the retail inventory method is included in Regulation 1602.5, Reporting Methods for Grocers.
Other methods to avoid
Sales tax ring-up
Sales tax ring-ups at the cash register are converted to the equivalent taxable measure to determine taxable sales
for the reporting period. Use of this method is generally not satisfactory because:
• Checkout clerks may not be well informed on the taxability of all items sold.
• Checkout clerks often work under pressure, which can lead to errors in classifying items or errors in the amount
of tax reimbursement added.
• It is sometimes trade practice to sell certain types of merchandise, such as cigarettes and tobacco, at a
tax-included price.
Since this method is susceptible to errors, it is not recommended for use as a reporting method.
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Taxable sale ring-up
This is similar to the sales tax ring-up method, except that under this method the taxable sales amounts are recorded
on a separate key of the cash register and compiled to determine taxable sales for the reporting period. As with the
sales tax ring-up, this method is susceptible to errors and is not recommended for use as a reporting method.
Estimates
The following methods for reporting tax liability based on estimates are not recommended:
• Estimates based on tax reported in a prior period
• Estimates based on a ratio of taxable sales to total sales in a prior period
• Estimates based on the application of unsubstantiated markups or based on other methods that have not been
approved by us.
Deductions
Deductions should be taken for the gross receipts from your sales of exempt merchandise. The usual exempt
merchandise sold in grocery stores are nontaxable sales of food products. To support your deduction for exempt
sales of food products, all purchases of food products should be segregated in your records from taxable items.
When claiming a deduction, be sure to verify the amount claimed does in fact actually represent exempt sales.
You should also verify the amount claimed is included on line one, “Total Sales.” Be sure to retain documentation
supporting the deduction.
Losses
Shrinkage (unaccounted-for losses)
When losses such as spoilage, breakage, pilferage, etc., are incurred, grocers may, for reporting purposes, adjust up
to one percent of the cost of taxable merchandise when using the retail inventory or markup method.
An adjustment of up to three percent of the cost of your nongrocery taxable items may be taken when using the
purchase-ratio method of reporting.
An adjustment for shrinkage is not allowed in all cases; its use is limited to reporting methods involving a markup
or an extension of purchases to retail. For example, under the purchase-ratio method of reporting, an adjustment
for shrinkage would not be in order if your sales of nongrocery taxable items are based on actual sales, rather
than based on a markup or extension of nongrocery taxable purchases to retail, since shrinkage would already be
reflected in recorded gross receipts.
Robbery, theft, and shoplifting
Losses in excess of that allowed for shrinkage must be supported by some form of specific proof of loss. Proof may
be in the form of a report from a private agency employed to track down losses, a police report, insurance claim,
or other documentary evidence. As with shrinkage, deductions for robbery, theft, and shoplifting would not be
appropriate if you report taxable sales based on actual sales.
Robberies of cash are not deductible for sales tax purposes because tax is measured by sales. You still have the
responsibility to pay tax on taxable sales in the usual manner despite a loss of the proceeds of sales.
Bad debts
If a check that you accepted as payment for merchandise is returned unpaid by the bank, is found to be
uncollectible, and is charged off for income tax purposes, you can claim a bad debt deduction for the amount of
the taxable items included in the original sale. If the original sale included both taxable and exempt items, you may
determine the amount of the taxable items by applying the ratio of your total taxable sales for the reporting period
to your total sales for the reporting period.
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When a check is cashed for an amount in excess of the total sale, that excess portion over the sale amount is not
deductible as a bad debt. In such situations, the amount of the sale should be noted on the check.
Frequently, the money for a bad debt or a bad check is later collected from a customer. If collection is made after
a deduction has been claimed, the portion previously claimed as a deduction must be reported as additional
taxable sales.
No deduction is allowable for expenses you may incur in attempting to collect the bad account, and no deduction
is allowable for that portion of a debt recovered that is retained by or paid to a third party as compensation for
collecting the account.
In the event the tax rate has changed since the time of the sale, the amount of the bad debt deduction must be
adjusted to conform to the tax rate in effect at the time the deduction is taken. Please refer to Regulation 1642,
Bad Debts.
How long should I keep my business records?
You should keep required records for at least four years unless we give you specific, written authorization to destroy
them sooner.
If you are being audited, you should retain all records that cover the audit period until the audit is complete, even
if that means you keep them longer than four years. In addition, if you have a dispute with us about how much tax
you owe, you should retain the related records until that dispute is resolved. For instance, if you appeal the results
of an audit or another determination (billing), or you file a claim for refund, you should keep your records while that
matter is pending.
If you have a point-of-sale system that overwrites data after a period of time less than four years, you should
transfer, maintain, and have available, all data that would have been overwritten or otherwise removed from the
system for the required time periods indicated above.
For more information, you may obtain a copy
of publication 116, Sales and Use Tax Records, or
Regulation 1698, Records, from our website or call
our Customer Service Center.
Sales Suppression Software Programs and Devices
It is a crime to knowingly, sell, purchase, install,
transfer, or possess software programs or devices
that are used to hide or remove sales and to falsify
records.
Using these devices gives an unfair competitive
advantage over business owners who comply with
the law and pay their fair share of taxes and fees.
Violators could face up to three years in county
jail, fines of up to $10,000, and will be required to
pay all illegally withheld taxes, plus penalties and
applicable interest and fees.
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For More Information
For additional information or assistance, please take advantage of the resources listed below.
INTERNET
www.cdtfa.ca.gov
You can visit our website for additional information—such as laws, regulations, forms, publications, industry guides,
and policy manuals—that will help you understand how the law applies to your business.
You can also verify seller’s permit numbers on our website (see Verify a Permit, License, or Account).
Multilingual versions of publications are available on our website at www.cdtfa.ca.gov/formspubs/pubs.htm.
Another good resource—especially for starting businesses—is the California Tax Service Center at www.taxes.ca.gov.
TAX INFORMATION BULLETIN
The quarterly Tax Information Bulletin (TIB) includes articles on the application of law to specific types of
transactions, announcements about new and revised publications, and other articles of interest. You can find
current TIBs on our website at www.cdtfa.ca.gov/taxes-and-fees/tax-bulletins.htm. Sign up for our CDTFA updates
email list and receive notification when the latest issue of the TIB has been posted to our website.
FREE CLASSES AND SEMINARS
We offer free online basic sales and use tax classes including a tutorial on how to file your tax returns. Some classes are
offered in multiple languages. If you would like further information on specific classes, please call your local office.
WRITTEN TAX ADVICE
For your protection, it is best to get tax advice in writing. You may be relieved of tax, penalty, or interest charges that
are due on a transaction if we determine that we gave you incorrect written advice regarding the transaction and
that you reasonably relied on that advice in failing to pay the proper amount of tax. For this relief to apply, a request
for advice must be in writing, identify the taxpayer to whom the advice applies, and fully describe the facts and
circumstances of the transaction.
For written advice on general tax and fee information, please visit our website at www.cdtfa.ca.gov/email to email
your request.
You may also send your request in a letter. For general sales and use tax information, including the California
Lumber Products Assessment, or Prepaid Mobile Telephony Services (MTS) Surcharge, send your request to:
Audit and Information Section, MIC:44, California Department of Tax and Fee Administration, P.O. Box 942879,
Sacramento, CA 94279-0044.
For written advice on all other special tax and fee programs, send your request to: Program Administration Branch,
MIC:31, California Department of Tax and Fee Administration, P.O. Box 942879, Sacramento, CA 94279-0031.
TAXPAYERS’ RIGHTS ADVOCATE
If you would like to know more about your rights as a taxpayer or if you have not been able to resolve a problem
through normal channels (for example, by speaking to a supervisor), please see publication 70, Understanding Your
Rights as a California Taxpayer, or contact the Taxpayers’ Rights Advocate Office
for help at 1-888-324-2798. Their fax
number is 1-916-323-3319.
If you prefer, you can write to: Taxpayers’ Rights Advocate, MIC:70, California Department of Tax and Fee Administration,
P.O. Box 942879, Sacramento, CA 94279-0070.
CUSTOMER SERVICE CENTER
1-800-400-7115 (CRS:711)
Customer service representatives are available
Monday through Friday from 7:30 a.m. to 5:00 p.m.
(Pacific time), except state holidays. In addition to
English, assistance is available in other languages.
OFFICES
Please visit our website at
www.cdtfa.ca.gov/office-locations.htm
for a complete listing of our office locations. If you
cannot access this page, please contact our
Customer Service Center at 1-800-400-7115 (CRS:711).
Regulations, forms, publications, and industry guides
Lists vary by publication
Selected regulations, forms, publications, and industry guides that may interest you are listed below.
Spanish versions of certain publications are also available online.
Regulations
1602 Food Products
1602.5 Reporting Methods for Grocers
1603 Taxable Sales of Food Products
1669 Demonstration, Display, and Use of Property Held for Resale—General
1698 Records
1700 Reimbursement for Sales Tax
Publications
17 Appeals Procedures: Sales and Use Taxes and Special Taxes and Fees
22 Dining and Beverage Industry
24 Liquor Stores
27 Drug Stores
44 District Taxes (Sales and Use Taxes)
51 Resource Guide to Tax Products and Services for Small Businesses
58A How to Inspect and Correct Your Records
61 Sales and Use Taxes: Exemptions and Exclusions
70 Understanding Your Rights as a California Taxpayer
73 Your California Seller’s Permit
74 Closing Out Your Account
75 Interest, Penalties, and Collection Cost Recovery Fee
76 Audits
103 Sales for Resale
110 California Use Tax Basics
113 Coupons, Discounts and Rebates
116 Sales and Use Tax Records
118 Vending Machine Food Sales
Industry Guide
Tax Guide for Grocery Stores
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Appendix: Classification of Products Sold by Grocers
The products listed in this chapter are divided into the following classifications:
A. Taxable Grocery Items
B. Nongrocery Taxable Items
If you have any questions regarding the taxability of a sale, please call our Customer Service Center.
A. Examples of taxable grocery items
Aluminum foil
Ammonia
Antacid mints
Bags—lunch
Beer
Bird seed
Bird treats (food)
Bleach—laundry
Bottle brushes
Brooms
Candles
Canning jars and lids
Carbonated beverages (generally)
Cat food
Charcoal briquettes, lighter fluid
Cigarettes
Cigars
Cleaners and polishes (household)
Clothes pins
Coloring extracts
Cough drops
Deodorizers (air fresheners)
Dietary supplements or adjuncts (additives)
Dishcloths
Drain cleaners (Drano, etc.)
Dye—clothes
Facial tissues
Floor wax and applicators
Fly swatters
Fuel—cooking, heating
Furniture polish
Garbage bags
Glass cleaner
Ice
Insect spray, poison, bombs
Kleenex
Light bulbs and fuses
Lighter fluid
Lozenges (medicated)
Matches
Mops, mop handles
Moth protection—all kinds
Muffin papers
Paper cups, plates, napkins, table covers
Paper towels, drinking straws
Pet food
Plastic eating utensils
Plastic film (such as Saran Wrap, etc.)
Pot scrubbers
Powder (cleaning)
Rolaids
Rust stain remover
Salt for making ice cream
Sandwich bags
Scouring pads
Silver polish
Soap and detergent
Sponges
Spray bottles (empty)
Starch—laundry
Table covers—paper
Tile cleaner
Toilet tissue
Toothpicks
Upholstery cleaner
Water softener (laundry)
Water softener salt
Wax paper
Wax remover
Whisk brooms
Wine
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B. Examples of nongrocery taxable items
Accessories—auto Glassware
Adhesive tape Gloves
Ammunition Hair dye
Antacid liquids Hair styling products
Appliances—household, auto Hardware
Auto cleaner, polish, waxes Medicated cleansers
Baby oil Medicine for pets
Batteries—auto, flashlight Notebooks
Books Nursery stock
Bubble bath Pencils, pens, and ink
Cameras Pet supplies and equipment (not food)
Chinaware Pots and pans
Cigarette lighters Powder (face or body)
Clothing Rawhide chew bones
Cosmetics Razors
Deodorizers (body) Razor blades
Dishes Rubber bands
Distilled spirits Pet litter
Drug sundries School supplies
Electrical supplies Scotch tape
Farm and garden implements Shaving cream and lotion
Fertilizers Shampoo and rinse
Film Shoe laces and polish
Firearms Silverware
Flashlights Sporting goods
Flower and garden seeds Stationery
Flowers Sunglasses
Fuel and lubricants Sun tan lotion and sunscreen
(includes diesel fuel, grease, etc.) Thread
Furniture Tools
Garden tools and supplies Toothpaste
Toys
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