Vending Machine Business Taxes: Cash, Sales Tax, Machines

What do the books for a vending route need to show?

A vending route is a retail business with many small sales at many sites, so its books keep five things apart: sales by machine and location, product cost, machine cost, route costs, and money that belongs to others. The IRS does not require a set format, only a system that clearly shows income and expenses (Publication 583).

A route is not simple when:

• machines sit in more than one county or state, so each place may have its own permit, rate and return;
• locations take a percentage of sales, or the agreement does not say what the payment is for;
• the cash counted at the machines does not match the deposits;
• machines were bought during the first year, so the first return must choose how to deduct them;
• sales tax may have gone uncollected in a state.

You are taxed on the route's profit, which is sales less product, machine and route costs, not on the cash you collect. A sole owner's profit also carries self-employment tax and may need quarterly payments (see quarterly estimated tax payments).

Gather before the first return: collection sheets, deposit slips and bank statements, card processor statements, supplier invoices and store receipts for stock, location agreements, machine invoices with serial numbers, permits, and the taxpayer number (SSN, ITIN or EIN) that card processors and locations ask for.

How do I track the cash from each machine?

Count and record the cash at each machine on every visit, deposit all of it, and tie the deposits to the collection records each month. The IRS expects documents that show the amount and source of every receipt, such as deposit slips, and says to balance the records with actual cash and credit receipts at the end of each business day (Publication 583; Publication 334).

1. One collection sheet per machine per visit. Record the date, machine, location, cash counted, card sales since the last visit, and the machine's own sales counter if it has one.
2. Restocking on the same sheet. Record units added, units removed as spoiled, and their cost, so product can be traced to a machine.
3. Deposit the cash as collected. Paying costs out of the cash hides both the sale and the cost. Keep a separate business bank account (Publication 334). If a change float (coins kept back for change) is kept, write down the amount and date.
4. Match every month. Cash collected, plus cash still waiting to be deposited at the start of the month, less cash waiting at the end and any rise in the change float, should equal the cash deposits. A deposit the bank credits next month is timing, not a gap. A difference by machine shows which count is off. Compare card sales separately with processor payouts and fees. At year-end, also count the cash still in the machines so sales are recorded in the year received (Publication 334, cash method).
5. Record card sales at the full amount. Card processors deposit net of fees, so book the sale and the fee separately. The year-end Form 1099-K may not equal gross receipts, because it may leave out cash and may include sales tax (Publication 334). See reconciling sales and payouts.

For what the IRS expects of a cash-heavy business and how deposits are read, see cash sales records.

Do I owe sales tax on vending sales, and is it already in the price?

Sales tax is state law, so the answer depends on where each machine sits. Ask each state's revenue agency whether you need a seller's permit, whether you or the location is the retailer, whether the tax is inside the price or added to it, which items are taxable, and how to report machines in several counties.

California's Regulation 1574 is one example of the answers; other states differ. In California:

• The operator reports and pays the tax on gross receipts from machine sales and needs a seller's permit when the machines sell taxable items. One permit covers all of the operator's machines.
• Machine sales are presumed to be tax-included, so taxable receipts are total receipts less the tax inside them.
• The operator's records must show each machine's location and serial number, purchases and inventories of product, prices charged, receipts at each location and receipts from exempt sales.
• Machines in more than one county need a schedule allocating the tax by county.
• For cold food and for hot coffee, tea and chocolate, only 33% of receipts, after taking out the tax included, is taxable. Other hot prepared food gets no such partial exemption. Food sold at very low prices, and certain coin-operated bulk vending, is treated differently: the operator is the consumer, not the retailer. Check Regulation 1574(b)(2) before applying the share.

If tax is inside the price, book each month's receipts as sales plus a sales tax payable balance, not as all sales. See sales tax journal entries.

Whether the tax counts as income depends on who the state imposes it on. The Schedule C instructions say a tax imposed on you as the seller and collected from the customer is part of gross receipts, and the tax you pay over is deducted as a tax. A tax imposed on the buyer, which you only collect and pay over, is neither income nor a deduction (Schedule C instructions, line 23). Ask the state which applies, and keep sales tax in its own account either way.

Which states need a permit is covered in when you must collect sales tax, and the return in filing sales tax returns.

What do I do about location commissions or rent, and do I send a 1099?

Where the route owns the machines and collects the money, the books show the full cash collected as sales and each location's share as its own expense, not netted. Books must show gross income, as well as deductions (Publication 583). If the location rings up the sale and pays the route a share, the route's sales may be only that share, and the agreement decides.

Whether the share is rent for the space or a fee for a service picks the 1099 form and the Schedule C line. A percentage of sales can still be rent: the IRS says rent is not unreasonable just because it is figured as a percentage of gross receipts (Publication 334).

The IRS instructions address a close case, coin-operated amusements such as jukeboxes and pinball machines: a lease of the machines or the space goes in box 1 of Form 1099-MISC, and a joint venture files Form 1065 (1099 instructions). They do not name vending machines. Whether a vending placement is a lease, a fee or a venture is a question to confirm from the signed agreement, not a settled rule.

Payments to a corporation, including an LLC taxed as a C or S corporation, generally need neither form. Neither do payments made by payment card or through a third-party network, which the processor reports on Form 1099-K (1099 instructions). Ask each location for a Form W-9 before the first payment: it gives the taxpayer identification number and shows how the location is taxed. If a location will not give a number, backup withholding at 24% can apply to rent or fees that reach the threshold, and the route may become liable for any amount it should have withheld (Publication 1099). Who gets a form, how payments are totaled per payee and when forms are due are in which contractors get a tax form.

Is the product I stock inventory or an expense, and what about spoilage?

Product bought to resell through the machines is inventory. A small business taxpayer may skip a formal inventory; other businesses count stock at the start and end of the year, wherever it sits (machines, vehicle, storage), take cost of goods sold from the count, and use an accrual method for purchases and sales (Publication 538).

A small business taxpayer that treats stock as non-incidental materials and supplies still recovers its cost through cost of goods sold, when the stock goes to a customer and no earlier than it is paid for (Regulation 1.471-1(b)(4)). Who qualifies as a small business taxpayer, and how product cost reaches Schedule C, are in inventory or supplies for small sellers and cost of goods sold on Schedule C.

Sales tax paid at the store on product you resell is treated differently by state; see resale certificates and sales tax refunds.

Product that expires or is damaged may be "goods that cannot be sold" at normal prices. Under the inventory rules these goods are valued at their bona fide selling price less the cost of disposing of them (Publication 538). Bona fide means the goods were actually offered for sale during a period ending no later than 30 days after the inventory date, and the records must show what became of them (Regulation 1.471-2(c)). Log every write-off with the date, machine, product, units, cost, reason and how the stock was disposed of. The log lets a preparer place the loss under whichever method the business uses.

How do I treat the machines themselves?

A machine that lasts more than a year is a business asset. Its cost is depreciated, or elected as a first-year deduction, and is not entered as an ordinary expense (Publication 334). Three methods apply in this order, and all are reported on Form 4562.

New machines and certain used machines can qualify, but a Section 179 purchase from a related person such as a parent or spouse does not (Publication 946). The opt-out from bonus depreciation is a statement with the timely filed return, including extensions. A partnership or corporation makes its own, and revoking it needs IRS consent (Publication 946). The election is made on Form 4562 with the return for the year the machine is placed in service (Form 4562 instructions). See writing off equipment in the first year for the order, used property and the later sale.

Publication 946 lists no asset class for vending machines. Its asset class for assets used in retail trade is 57.0, with a 5-year recovery period under the regular system. Whether a route's machines belong in that class is a question to settle before filing.

For each machine the books keep:

• the cost, which includes the sales tax paid, freight and installation (Publication 946);
• the date it was placed in service, meaning ready and available for use, not the date ordered;
• the serial number, the seller and where it sits.

A machine that costs no more than the small-purchase limit of $2,500 per item or invoice, for a business with no audited financial statement, may be expensed under the de minimis safe harbor. The books must expense it under a policy in place on the first day of the year, and an election statement must go with the timely filed original return, including extensions (IRS tangible property regulations). See expense or capitalize small purchases.

Which route costs count?

Ordinary and necessary costs of running the route are business expenses, each with a home on Schedule C (Schedule C instructions).

Standard mileage versus actual truck costs is covered in standard mileage or actual car expenses.

Where does a vending route go on a tax return?

The return depends on how the route is owned. A sole owner reports on Schedule C, whose instructions list a business code for vending machine operators (Schedule C instructions).

Gross receipts on Schedule C line 1 are what the business received, which is why collection sheets and deposits matter more than a Form 1099-K total.

Which records do I keep, and for how long?

Keep the records behind each item until the period of limitations for that return runs out, generally 3 years after filing (a return filed early counts as filed on the due date). Machine records last longer: keep them until the period runs out for the year the machine is sold (Publication 583). The longer periods and exceptions are in how long to keep business records.

For a route, keep collection sheets and the spoilage log; deposit slips, bank statements and processor statements, including Forms 1099-K; supplier invoices and stock counts; location agreements, Forms W-9 and any 1099s filed; machine invoices with serial numbers and in-service dates; the mileage log, permits and sales tax returns.

A state may ask for more, and insurers and lenders may want records longer than the IRS does. See record keeping for the self-employed.

Example

These examples are illustrative. Figures are in US dollars.

Twenty machines and one monthly tie-out

A route has 20 machines that each collect about $300 a month in cash: $6,000 a month, $72,000 a year. The May collection sheets total $6,000, and the May deposits total $5,880. The $120 gap needs an answer before the books close. The sheets by machine show whether one count is short, a deposit was missed or change float was kept back, and the reason is written beside the month.

What the route earns

The 20-machine route has $72,000 of sales. Product costs $30,000, location shares $7,200, and truck, repairs, card fees and permits $9,000. Profit before machine costs is $25,800. The machine deduction lowers it, and self-employment tax and estimated payments follow the profit.

A used machine bought mid-year

An owner buys a used machine for $4,000 from an unrelated seller and puts it in service in July. The books record the invoice, the in-service date, the serial number and the seller. On the return, the machine may qualify for bonus depreciation, which applies unless the owner elects out. The owner may instead elect Section 179 (capped by income from active businesses and wages for the year, with any excess carried forward), or elect out of bonus depreciation for the class and depreciate over the recovery period. The records support any of them.

A location that takes a share

A business hosts machines that sell $6,000 a month. Assume it and a second location are US sole proprietors, paid directly by check, with no backup withholding and no sales tax included in the stated sales. The route pays that business 10% of sales: $600 a month, $7,200 a year, which is above the $2,000 threshold. The books show $6,000 of sales and $600 of location expense each month, not $5,400 of sales. On those assumptions, the agreement decides whether the $7,200 is reported as rent (Form 1099-MISC, box 1) or as a fee for services (Form 1099-NEC, box 1a). The second location's share is $100 a month, or $1,200 a year, below the threshold, so the amount alone does not require a form for that payee. Backup withholding is a separate rule.

Different for you?

• Machines in more than one county or state: each place may have its own permit, rate and return, and a route in another state can also owe that state's income or franchise tax. Start with when you must collect sales tax and sales tax nexus versus income tax nexus. Bookkeeping help is for routes whose books are not kept by location.
• Locations take a percentage and the agreement is unclear: the 1099 form and the Schedule C line follow the answer. See which contractors get a tax form. Books that show each location's sales and share separately are the base for that answer; bookkeeping help is for routes where they are not.
• Cash counts do not match deposits: start with cash sales records. If months are off, see catching up on overdue books and rebuilding books from bank statements, or get bookkeeping help if each machine's sheets still do not match the deposits.
• The first return is due and machines were bought during the year: compare the methods in writing off equipment in the first year, and get bookkeeping help if the asset records are incomplete.
• Sales tax may have gone uncollected in a state: see catching up on uncollected sales tax, then bookkeeping help if it is unclear which months and states are affected.
• Partners or a corporation own the route: the books follow the entity, and an LLC's S or corporate election is a deemed transfer of its assets with its own deadline (see books after an S corporation election). See setting up books for a new LLC and S corporation bookkeeping, or bookkeeping help if books were not kept by owner.