Retail Industry ATG - Chapter 4: Examination Techniques for the Food and Beverages Industries (Mobile Food Vendors)
NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
Mobile food vendors can be observed on many street corners, outside warehouse stores, courthouses or any high volume industrial center. They appear to operate strictly in cash and have no forms of internal controls, so the potential for unreported income is great.
There are two types of catering trucks: hot trucks, such as Mobile Food Preparation Vehicles (MFPV), which allow food to be prepared as customers order; and cold trucks, such as Industrial Catering Vehicles (ICV), which sell only prepackaged foods. The hot trucks have at least a driver (which is usually the taxpayer), and a cook, who may be a family member. The cold trucks only need a driver in most instances, since it is a self-service vehicle; however, they are not limited to just the driver.
This type of business will be largely cash intensive, since most individuals purchasing items from a mobile vendor pay in cash. Accordingly, gross receipts will be the main focus for the examination. The examiner will expect to see large cash deposits to the business bank account. To verify all cash is deposited or accounted for the examiner must analyze the markup percentage. The examiner should expect to see a consistent markup percentage of about 100% on cold foods sold and about 200% on hot foods sold. For example, if an item is purchased for $0.50, it will generally sell for $1 or more.
If bank deposits are used by the taxpayer to determine gross receipts or by the examiner to test gross receipts, care must be taken to make sure any cash paid out for business and personal expenses is added back to the analysis.
Estimating gross income of mobile food vendors can be accomplished with the investment of relatively few examination hours, and can result in a very accurate estimate of the gross income actually earned from the operation. If an indirect method is necessary, the examiner must obtain sufficient testimony from the taxpayer in the interview to evaluate the credibility of the testimony and to corroborate the calculations. Additionally, the examiner and taxpayer must be able to verify the cost of goods sold with some reliability.
The markup is generally consistent for most products sold by mobile vendors, so the percentage on cost of goods sold can be calculated as follows:
Total Sales - Cost of Goods Sold ÷ Cost of Goods Sold = Markup Percentage
Then, Cost of Goods Sold * 100 + Markup = Gross Receipts appropriately marked up for Sale.
Cost of Goods Sold
Inventories are seldom reported and may not be material in nature, since food must be sold or discarded soon after purchase and there is usually no space to maintain additional stores.
Expenses may often be paid in cash, so the examiner must ensure that all cost of goods sold are included. This is especially important if income will be estimated, since additional cost of goods sold using a markup percentage of 100-200% will produce substantial gross receipts.
Some driver/owners of food trucks are linked to specific commissaries that stock and store their trucks overnight. The commissary is a wholesale supermarket where the drivers are able to buy food and supplies in bulk. Most trucks assigned to a commissary are required to park their vehicles there overnight for washing, unloading, and morning loading of food.
The examiner may encounter the following types of expenses:
Vehicle Expense - There is little question that some transportation expenses are incurred by most mobile vendors. Both food and supply items are often picked up by the vendors, rather than being shipped or delivered. The examiner should be alert for overstated business miles without any consideration for commuting.
In some areas mobile vendors use the services of “strikers” to wash and load trucks. These “strikers” work at the large catering wholesalers and are usually paid in cash. As always, the taxpayer must be able to identify individuals paid, provide the individual’s SSN and perform the required information reporting. If these steps are not taken, if would be difficult for the taxpayer to prove a bona fide business expense exists, since he did not treat it in a business-like manner. It would be equally difficult to prove an expense was paid, especially if it was allegedly paid in cash.
Penalties, Fines, Tickets - The examiner should be cognizant of possible violations of the health code, which may be deducted as a business expense. Some common health code violations include improper food temperatures, unsanitary conditions, infestations, sale of home prepared foods and operating without a valid health permit or business license. Costs incurred to remedy the situation, such as a repair to the heating device, would be a deductible business expense. Fines, penalties or tickets are not deductible.
Cold Truck Catering trucks which sell pre-packaged food such as cold sandwiches, for example, self-service industrial catering vehicle.
Commissary Wholesale supermarket where catering truck drivers purchase food in bulk.
Fleet Operator Person(s) who own a number of catering trucks and hire individuals to drive their trucks.
Food Sales An industry which is designed to manufacture or purchase food products for sale to wholesalers or the public.
Hot Trucks Catering trucks which prepare and serve hot food such as full breakfast, hamburgers, burritos, tacos, etc., for example, mobile food preparation unit.