A New World Of Alcohol Taxation In Texas
Law360, New York (October 31, 2013, 5:45 PM ET) — If a consumer walks into a restaurant and orders a beer or wine, will the consumer be required to pay tax on that beer or wine?
Admittedly, it’s a bit of a trick question. Studies have shown most consumers believe that they do. The correct answer though is “maybe so, maybe not,” as it depends on the type of Texas Alcoholic Beverage Commission permit the restaurant holds. Starting in 2014, this will change and the overwhelming odds suggest the answer to the question is “yes.”
Today, if you walk into a hotel, restaurant, bar or other similar venue that holds a mixed-beverage permit from the TABC and order an alcoholic drink, you are not paying taxes on that drink. The reason for this is that the current mixed-beverage gross receipts tax is effectively an excise tax paid by the holder of the TABC permit selling you that drink.
This tax requires mixed-beverage permit holders to pay a 14 percent tax on the gross receipts of each beer, mixed drink or wine they sell. There is no sales tax on such a drink. Traditionally, these permit holders have calculated the cost of this tax into the cost of the drink.
Places that have only beer and/or wine licenses/permits rather than mixed-beverage permits are not subject to the mixed-beverage gross receipts tax and instead, charge sales tax on the beer and/or wine. Thus, the costs of the sales tax are not calculated into the cost of the drink for these licensees/permittees, as is the case with many other consumer goods.
This difference also extends to liquor stores where if a consumer buys a bottle of wine or liquor, the consumer pays sales tax on that wine/liquor. Yet, if a consumer buys a bottle of wine or liquor at a location holding a mixed-beverage permit, the consumer will not pay tax on the bottle, as the responsibility of paying the mixed-beverage gross receipts tax falls solely on the permittee. This discrepancy will change in 2014.
Effective Jan. 1, 2014, with the passage of House Bill 3572 during the Texas Legislature’s 83rd regular session, the mixed-beverage gross receipts tax will change from the 14 percent tax paid exclusively by mixed-beverage permit holders to a 6.7 percent gross receipts tax paid by the mixed-beverage permit holder coupled with a 8.25 percent mixed-beverage sales tax that is passed through (most likely) to the consumer.
This change was lauded by many hotels, restaurants, bars and other similar venues as it will potentially add to their bottom line. As before, the mixed-beverage gross receipts tax on each drink is paid by the mixed-beverage permit holder, but the mixed-beverage sales tax portion can be added to the listed drink price on the receipt and passed along to the consumer.
This can add up to higher net earnings by the establishment for each mixed drink sold, while the gross receipts revenue of such a business is likely to be lower (the 8.25 percent sales tax will not go on the books of the establishment).
To illustrate this difference, currently, a $5 drink nets a mixed-beverage permit holder $4.30 because of the 70 cent mixed-beverage gross receipts tax remitted to the Texas Comptroller of Public Accounts. Starting next year, assuming the drink price remains the same, with the 6.7 percent mixed-beverage gross receipts tax included and the mixed-beverage sales tax passed on to the consumer, the permit holder would net $4.67 (rounding up), an increase of 37 cents per drink.
It should be noted that in such an instance, the consumer would pay $5.43 instead of the $5 for the drink. Alternatively, the hotel, restaurant, bar or other similar venue could decide to keep the drink prices the same, while footing the mixed-beverage gross receipts tax and mixed-beverage sales tax as before, or it could decrease drink prices proportionally while passing the mixed-beverage sales tax on to the consumer such that the end price paid by the consumer is still $5.
Most mixed-beverage permit holders will likely choose to keep drink prices the same and pass on the sales tax portion of the mixed-beverage taxes to the consumer. But these increased net revenues from the sales of alcoholic drinks are not the only benefit to mixed-beverage permit holders that will result from this change in tax law. There are also significant savings on the franchise tax side for these businesses as well.
Starting in 2006, when the Texas Legislature changed the business franchise tax, payments for mixed-beverage gross receipts tax were not considered to be deductible expenses. As a result, the 14 percent mixed-beverage gross receipts tax paid to the comptroller was taxed again by the half-percent franchise tax. In the near future, only 6.7 percent of the tax is subject to the franchise tax.
Further, many of these businesses will see savings in the form of lower liquor liability insurance premiums, lower rent payments and other fees as many of these premiums, rents and fees are calculated based upon the gross revenues of their business.
For those astute readers out there, you may have noted that the total tax of 14 percent will be effectively increased to 14.95 percent. It is based upon this that the state has estimated that this tax change will result in an increase of $21.3 million to the state in fiscal 2014-2015, with cities and counties gaining $6.1 million over the same period, assuming consumption remains the same.
While this is likely to be the case as most establishments will pass the tax on to consumers leading to an effective tax increase, this tax change could lead to an effective tax decrease.
As in our above example, let’s say a drink costs $5 and is sold with the 8.25 percent sales tax and 6.7 percent gross receipts tax already included. This means that the drink price is actually $4.62 and is then subject to tax. Following this out, the $4.62 drink is then hit with the 8.25 percent and 6.7 percent taxes. These combine to equal 69 cents in taxes collected. Under the old law, the $5 drink would have included the 14 percent gross receipts tax, which resulted 70 cents in taxes.
Opponents of the tax change have generally noted that consumers are likely to see an increase in what they pay for a drink due to mixed-beverage permit holders being unlikely to reduce the sales price of the drink while passing on the mixed-beverage sales tax on to the consumer.
On the other side, proponents of the tax change have stated that the change in tax will promote transparency and equity in alcohol taxes. As consumers will be made aware of the tax and see the tax on their bills, transparency is increased. Equity is promoted in that mixed-beverage permittees will be able to pass on the same sales tax to consumers as beer and/or wine licenses/permittees and package store permittees.
As for these mixed-beverage permit holders, how these businesses decide whether to pass on the sales tax to consumers or pay for it themselves can depend upon a number of factors. If a business believes that consumers will be averse to the passing on of the sales tax on to the consumer, then the business may elect to pay the sales tax itself in the hope that lower drink prices will drive more business.
But if the business believes the price elasticity of alcohol is low (i.e., an increase in price will result in a relatively smaller change in demand), then the business is likely to pass on to the consumer. And if you are a business owner and just want the state to collect fewer taxes, then you should not increase prices and include the sales tax in the price of the drink, resulting in fewer taxes overall.
The bottom line is that with the introduction of a sales tax for mixed beverages, mixed-beverage permit holders are likely to benefit as either their net revenue increases (due to passing on the sales tax to the consumer) or their expenses decrease (liquor liability insurance premiums, rents and fees based on gross receipts). As for the consumer and the state, only time will tell.
–By Dewey A. Brackin, Gardere Wynne Sewell LLP
Dewey Brackin is a partner in the firm’s Austin, Texas, office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
