Kentucky Restaurant Tax: Rates, Filing, and Penalties

The Kentucky restaurant tax is a local levy of up to 3% on prepared food and beverage sales, charged only in cities that were classified as fourth or fifth class before the state’s 2014 municipal reclassification. Every dollar collected goes to the local tourist and convention commission, not the city’s general fund. More than 50 Kentucky cities currently impose it, and most charge the full 3%.

Which Cities Can Charge the Tax

Authority to impose the tax comes from KRS 91A.400, and it is not open to every city. The statute limits it to “authorized cities,” meaning those on a registry maintained by the Department for Local Government. That registry was frozen to cities classified as fourth or fifth class as of January 1, 2014.¹ When Kentucky moved all cities to a home-rule structure later that year, eligibility for this tax stayed tied to the old classifications. A city that wasn’t fourth or fifth class on that date cannot adopt the tax now, no matter how much it has grown or how much tourism it draws.

In cities that qualify, the local legislative body sets the rate, capped at 3% of retail sales by all restaurants inside city limits. Most levy the full 3%; some charge 1% or 2%. All revenue must be turned over to the tourist and convention commission established under KRS 91A.345 through 91A.394, where it funds tourism marketing, attractions, and related infrastructure.¹

What Sales Are Taxable

The tax applies to retail sales of prepared food and beverages. That covers dine-in meals, carryout, and catering, and it reaches entrées, sides, fountain drinks, coffee, smoothies, and other ready-to-eat items. Food trucks, concession stands, and hotel restaurants operating in an authorized city are subject to it too.

The line runs between prepared food and unprepared groceries. A grocery store selling uncooked chicken is not charging the restaurant tax. A deli counter in the same store selling hot rotisserie chicken may be, depending on how the local ordinance defines “restaurant.”

Gratuities and Service Charges

Mandatory gratuities and service charges are taxable. Under 103 KAR 27:220, any charge the restaurant adds to the price of prepared food, including mandatory gratuities, surcharges, and fees itemized on the ticket, counts as part of the selling price.² The automatic 18% gratuity added for a large party gets taxed.

Voluntary tips are not taxable. A tip qualifies as voluntary only when the restaurant did not require it and the customer added it themselves.²

Employee and Complimentary Meals

Employees who buy meals at a discount from the employer owe tax on whatever they actually pay. Free employee meals work differently: if the restaurant bought the ingredients tax-free using a resale certificate and then gave the meals away, tax is owed on the restaurant’s purchase price of those ingredients.² Owners frequently miss this, and auditors do not. Food donated to charity is not subject to tax.

How It Stacks with the 6% State Sales Tax

Kentucky imposes a statewide 6% sales tax on most goods and services, prepared food included. There are no local sales taxes in Kentucky.³ The restaurant tax under KRS 91A.400 is technically a license tax, not a sales tax, and that classification creates an unusual stacking effect.

When a restaurant passes the tax through as a line item on the customer’s bill, that amount becomes part of the restaurant’s gross receipts, which are then subject to the state’s 6% sales tax.² On a $100 meal in a city with the full 3% rate, the customer pays $3 in restaurant tax, and the 6% state sales tax applies to $103 rather than $100. The extra pennies per ticket are small; over a year of sales, they are not.

The two taxes run on separate rails. State sales tax is administered by the Kentucky Department of Revenue and filed through its online portal. The restaurant tax is collected and remitted locally, with each city setting its own procedures and deadlines.

Exemptions to Watch For

Nonprofit exemptions are narrower than many operators assume. KRS 139.495 says the state’s sales and use taxes apply to nonprofit educational, charitable, and religious institutions that qualify under Section 501(c)(3), then carves out only a short list of exceptions:⁴

Sales of food to students in school cafeterias or lunchrooms.
Sales at nonprofit fundraising events, which does not extend to ongoing retail operations like thrift stores.
Textbooks and sales by school-sponsored clubs, excluding athletic event tickets.

All other nonprofit sales are taxable, and the tax may be passed on to the purchaser.⁴ A church running a weekly public dinner would likely owe both the state sales tax and the local restaurant tax on those sales; the fundraising exemption covers distinct events, not routine food service that competes with for-profit restaurants.

KRS 139.470 lists other exempt transactions for state sales tax purposes, including certain institutional food sales, but state-level exemptions do not automatically carry over to the local restaurant tax. Confirm with your local tax administrator whether a given transaction is exempt in your city.

Registering and Filing

Restaurants in an authorized city must register with the local tax authority, separately from state registration. State sales tax registration runs through the Department of Revenue’s online portal at MyTaxes.ky.gov.⁵ For the restaurant tax, contact the city directly, because each municipality handles its own registration, collection, and enforcement.

Filing schedules vary. Most cities require monthly or quarterly returns, accompanied by reports showing total sales, taxable sales, and the calculated tax. Some cities require electronic filing; others still accept paper. A restaurant operating in more than one authorized city can face different rates, forms, and deadlines in each.

Record-Keeping Requirements

Local ordinances typically require restaurants to keep records for three to five years. At a minimum, keep daily sales reports, tax returns, bank deposit records, and any exemption certificates for non-taxable transactions. Track taxable and non-taxable sales separately, and treat mandatory gratuities and service charges as part of the taxable base.

Local tax authorities can audit, and thin documentation almost always results in additional tax being assessed. Accounting software that separates the restaurant tax from the state sales tax in real time makes filing simpler and produces a cleaner audit trail. For operators in multiple authorized cities, a system that tracks each jurisdiction separately pays for itself quickly.

Penalties for Noncompliance

Because the tax is locally administered, penalties depend on the city’s ordinance. Some cities set a flat minimum, such as 10% of the tax due for late filing, plus interest that accrues until the balance is paid. Your city’s ordinance or tax administrator’s office has the specifics.

Persistent noncompliance can move past fines. A city may revoke a business license or place a tax lien that blocks a sale or ownership transfer. In serious cases, deliberately underreporting sales or writing bad checks for tax payments can bring charges under KRS 514.040, Kentucky’s theft by deception statute, with the offense class rising by the dollar amount involved.⁶ Criminal prosecution is uncommon, but the option gives local authorities meaningful leverage against a business that consistently fails to remit what it has collected.

1
Justia. Kentucky Revised Statutes 91A.400 – Restaurant Tax in Authorized Cities
2
Kentucky Legislative Research Commission. Kentucky Administrative Regulations Title 103 Chapter 27 Regulation 220
3
Kentucky Department of Revenue. Sales and Use Tax
4
Justia. Kentucky Revised Statutes 139.495 – Application of Taxes to Resident Nonprofit Institutions and to Certain Limited Liability Companies, Exemptions, Refund
5
Kentucky Department of Revenue. Business Registration
6
Kentucky Legislative Research Commission. Kentucky Code 514.040 – Theft by Deception