Reconciling Fees, Commission, and Sales Tax on Food Delivery Services with Toast
Take a deep dive into how Toast can help you account for all the nuance third-party delivery sales have on your restaurant accounting process.
Changes in dining habits and new platforms have significantly increased restaurant food delivery sales.
Many operations have shifted to delivery-centric business models and found themselves running leaner on labor and pumping out more revenue per square footage than ever before.
Data from the Toast Restaurant Trends Report highlights a 59 percent increase in takeout and delivery sales from Q4 2019 to Q4 2021.
Even fine dining and full-service concepts are rerouting resources to delivery as a significant sales channel. All this has led to the implementation of often multiple online ordering platforms and third-party delivery systems — which has subsequently led to more nuanced restaurant accounting practices.
Reconciling three to four third-party delivery deposits for multiple line items, such as sales tax commissions, delivery fees, tips, credit card fees, error charges, and marketing fees is extremely time-consuming and not easily manageable for most restaurants.
This article highlights an accurate, streamlined process to account for your third-party delivery sales to ensure you are:
Not leaving money on the table
Not overpaying or underpaying sales tax;
Correctly reporting your delivery-related expenses on your P&L
Read on to learn how third-party delivery accounting can often lead to reporting errors, leaving money on the table for restaurants through overpayment or penalties for underpayment. And see how to configure your Toast point of sale (POS) system and optimize accounting workflows within xtraCHEF by Toast to ensure sales are recorded and reconciled correctly.
Configuring sales tax for third-party delivery systems
The first steps in this process are ensuring:
All third-party delivery systems are integrated directly with Toast
Sales from these systems are being rung up correctly
The goal here is to consolidate all of your orders in Toast without an aggregation system — which streamlines marketplace facilitator sales tax tracking.
*Marketplace facilitator laws and tax implications are critical to this entire process. You can take a deep dive here. In short, if your restaurant is selling through a marketplace facilitator, such as Uber Eats, DoorDash, and Grubhub, then they may pay the sales tax that you accrue through their platform.
Common mistakes with POS & third-party delivery systems
Some restaurants add separate tax-exempt menu items for each item they sell through a third-party delivery system. We’ve seen other restaurants select the tax-exempt button for each third-party delivery payment tender. As a result, they can charge a different price for the same menu items when selling through a third-party delivery provider, and the sales tax wouldn’t be added to Toast.
The disadvantage to setting up separate menu items for third-party delivery sales is that each time a menu item gets updated, you would need to update it in multiple places. This opens up room for human error and essentially doubles the time required to make menu updates.
And the disadvantage with selecting the tax-exempt button on third-party delivery payment is that using an aggregation system to automatically consolidate orders will negate the tax-exempt feature. Sales tax then continues to accrue in Toast on these menu items. The tax-exempt method only works if you are manually keying the orders from each third-party delivery sale into your POS — again a process that’s highly inefficient and prone to human error.
Another approach is keying in sales manually from the third-party delivery systems, and closing those sales using a 100% discount named after the third-party delivery provider for that sale instead of using a payment tender. The sale gets fully discounted and no tax is collected.
However, you still have a break-out of payment tenders for each third-party delivery under the discounts section. While this generally works well for understanding your sales tax liability, the problem again is that it’s cumbersome and prone to error while also disrupting your net sales and discounts reporting.
The good news is that you no longer need the workarounds mentioned above. Toast Third Party Delivery Integrations solves these issues by aggregating all of your third-party delivery orders and pushing them directly to Toast without the need for an additional system. Toast takes it a step further by automating sales tax calculations for these orders and breaking them out on your sales reports.
The first step to accurately accounting for your third-party delivery sales is activating the third-party delivery integration in your Toast POS. Activate this feature on the first of the transition month to simplify the sales tax calculation for that month on.
Recording third-party delivery sales in your accounting system
Once your POS and sales are configured correctly, it’s time to record and reconcile your third-party delivery sales in your accounting system.
You’ll need to record these sales each day in a journal entry in your accounting system. This is frequently referred to as a “Daily Sales Entry” or “Daily Sales Journal”. Recording these entries daily is a best practice and industry standard for all restaurants.
Recording daily sales entries allow you to:
Reconcile deposits from your credit card processor and third-party delivery provider
Reconcile daily cash deposits in your bank with the cash drawer and cash tenders from Toast
Maintain a daily running balance of your customer deposits and gift cards on your books
Maintain a daily running balance of your sales tax payable balance on your books
We’re not going to get into the weeds of recording a daily sales entry — it’s something your bookkeeper or accountant should be well-versed in. All you need to know in regard to this article is that the payment tenders for your third-party delivery sales for each day should be recorded to a clearing asset account on your books. You’ll see why this matters.
Historically, bookkeepers record daily sales entries and reconcile them with deposits from the bank. It’s a tedious process — each daily sales entry usually contains anywhere from 10 to 20 line items depending on the intricacy of your restaurant chart of accounts.
This no longer has to be a manual process for Toast users. You can integrate xtraCHEF by Toast, map each POS data point to an accounting journal entry line item, and automate the daily sales entries from Toast, through xtraCHEF, and into your accounting system.
This is a game changer for restaurant bookkeeping and accounting because it can shave off anywhere from one to two hours of bookkeeping work per week. That’s more time to focus on critical restaurant insights.
Recording and reconciling the deposits
Once the sales have been recorded, you are ready to reconcile the sales with the deposits from the third-party delivery systems.
Many accounting systems, such as QuickBooks Online, include a feed that downloads transactions directly from online banking. When the deposit is received from the third-party delivery provider, you can add it as a deposit to your accounting system manually or automatically from your banking feeds.
The “two-step approach” to record deposits can be the most efficient and effective for restaurants. This approach requires you to:
Date the deposit using the sale of the last day in that period. For example, if an Uber Eats deposit includes sales from April 4-10, then you would date that deposit for April 10, even though it was received on April 14.
Bifurcate the deposit between commissions, marketing, delivery fee, error charges, refunds, sales, and/or sales tax using the payout reports in your third-party delivery system. Only the sales will get applied to your clearing asset account; the rest of the line items will appear on your P&L.
*If the third-party delivery provider is not considered a marketplace facilitator in your state, they’re not required to remit sales tax collected from customers on your behalf. You’d apply the sales tax received toward sales tax payable and then subsequent expenses toward their specific P&L account.
After the deposit is recorded with the “two-step approach” above, the balance of your clearing asset account should be zero.
If the balance isn’t zeroed out, you have a reconciliation discrepancy between the third-party delivery sales captured in your POS and your third-party delivery system. This can be caused by:
Menu configuration issues between Toast POS and your third-party delivery system
Error charges not captured in the POS
Refunds not captured in the POS
Potential employee theft (using third-party delivery payment tender to give out free meals)
You can either investigate the reconciliation discrepancies, or close-out the balance in that account to a P&L expense account (such as Bad Debt) so the P&L users can understand these discrepancies and identify red flags.
This process of identifying variances between theoretical deposits and actual deposits can save you a significant amount of money when doing high volume and help you identify issues in your third-party delivery sales setup.
Calculating final sales tax
If you follow the procedures above, the sales tax liability balance on your balance sheet should reflect the sales tax you collected from your customers that are owed to the state government.
It will not include the marketplace facilitator taxes paid by the third-party delivery systems. This is exactly what you want. Therefore, the sales tax payable on your balance sheet should match the sum of tax plus marketplace facilitator taxes not paid in the monthly Toast Sales Summary report. This is your sales tax reconciliation. If the amounts do not match, then you need to investigate.
If your restaurant is in a jurisdiction that imposes a meals tax or local sales tax, then a portion of your sales tax collected will be remitted to the local government instead of state government.
Since many local governments don’t require third-party delivery providers to remit these amounts on behalf of their customers, this amount is also your responsibility. This complicates the calculation, but the Toast Sales Summary report makes it easy to understand.
The portion that needs to be remitted to the local government directly by you will be included in the Marketplace Facilitator Taxes Not Paid line in your Toast Sales Summary report.
For example, in Arlington, VA, restaurants are required to collect 6% VA sales tax and 4% local meals tax, at the date of publication. If a restaurant sells $100 of food through Uber Eats, then Uber Eats will collect $10, but only remit $6 to VA. The restaurant is responsible for remitting the remaining $4 to Arlington.
Therefore, the Toast Sales Summary report will show $4 of Marketplace Facilitator Taxes not Paid, and $6 of Marketplace Facilitator Taxes Paid. The sales tax payable balance on the balance sheet of the restaurant will show $4 if the procedures above are followed.
Where do you go from here?
These procedures will help you ensure all your taxes are reconciled — but not a penny more.
The power of Toast POS and xtraCHEF are that they help all types of restaurants take advantage of real-time insight for sales tax payable and third-party receivables. It’s these insights that empower the processes we’ve outlined — processes designed to help you precisely pay exactly what you owe on your state and local sales taxes.
The automation and features provided by Toast and xtraCHEF by Toast have made an otherwise excessive and time-consuming process possible and seamless.
Raffi Yousefian is a CPA and the CEO of RY CPAs. RY CPAs provides restaurant owners with frictionless, streamlined, and modern restaurant bookkeeping and tax services. They believe that with the appropriate technology and accountant, restaurants of all sizes can access the same financial data as national restaurant chains.