A restaurant is any establishment where:

(1) Product is prepared only for sale or service in meals or as entrees directly to individual consumers at such establishments;

(2) Only federally or State inspected and passed product or such product prepared at a retail store exempted under paragraph (d)(2)(iii) of this section is handled or used in the preparation of any product;

Now maybe the restaurant owner I talked to is just mistaken. Or possibly the local health dept requires usda