Chinese Restaurant Tax Shenanigans, Part 3

 

 

One of the first articles I ever wrote for Menuism was entitled "Why Do Some Chinese Restaurants Change Their Names So Often".  In that article, one of the reasons cited was a sales tax dodging scheme, whereby a restaurant would not report sales tax receipts to the government, then fold up their operating entity and set up a new one to continue their business, waiting for the statute of limitations to run on their past unpaid sales taxes.  More recently I wrote about the well publicized schemes of restaurants like the Sam Woo chain which used a cash only requirement for sales to avoid not only sales tax reporting, but also the much more lucrative evasion of federal and state income taxes.

Item 2 in the hiring sign above highlights probably the most prevalent tax related secret in the Chinese restaurant community.  Not that everybody doesn't know about the practices of restaurants not reporting cash sales, and paying employees at least partially in cash.  However, there are some interesting twists to this arrangement.  First of all, there is a symmetry required between cash that the restaurant receives and pays it.  Most people assume that to the extent a restaurant owner has cash sales that they pocket the entire amount that they receive.  But as I first learned as a rookie accountant nearly 50 years ago, that is nowhere near the case.  Not reporting $1,000 in cash sales doesn't mean that $1,000 in reporting of income has been avoided.   Rather if some of that cash is used to pay out expenses of operation, such as employee wages, then that amount would not be deductible for income tax purposes (since there is no documentation of the payment), and the restaurant has avoided the tax only on the net cash retained, if any.  In some cases there may not be any such net cash.

But the biggest surprise of all is that in a number of cases, restaurant owners are forced into this situation, and are not pleased about it, as I learned when one of them complained to me about the system.  That is because a lot of Chinese restaurant workers demand at least partial payment in cash, which enables them to minimize the income they report to the government, qualifying them for various social services available to low income individuals.  This is becoming even more of a dilemma for restaurant owners, because to make this system work, the restaurant has to have cash sales.  And as our society becomes more and more cashless, particularly as influenced by the pandemic, there are fewer cash receipts available to make cash payments to employees.  Indeed I wouldn't be surprised that item 2 in the sign is a direct response to the dwindling number of cash transactions.

If there's a takeaway in the help wanted poster, it may well be that paying Chinese restaurant workers in cash may be a more common practice than any of us were aware of.