Well placed sources say that the Tennessee Legislature is seriously considering moving the responsibility for payment of liquor-by-the-drink taxes from restaurants and bars to wholesalers. Industry insiders see this as a more reliable means of ensuring that sales are honestly reported and taxes paid.
Governor Haslam's much touted TN Forward Top to Bottom Review recommends that wholesalers file monthly reports about sales to retailers, saying that that "some retail businesses under-report their sales."
"Under-reporting sales" is an understatement. With one of the highest combined tax rates on spirits sales in the U.S. - 24.5% on average - the temptation to cheat is huge.
The report does not recommend that wholesalers pay the tax for restaurants and bars, but recognizes an ongoing and relatively widespread problem with reporting and paying LBD taxes.
Liquor wholesalers have a significant vested interest in compliance with tax and ABC laws. Wholesalers have a lot to loose.
When Warren Buffett's company bought Horizon Wine & Spirits in 2010, the purchase price was rumored to exceed $100 million dollars. This is wild speculation, but anyone familiar with the industry knows that a liquor wholesaler is a hugely profitable business worth tens of millions.
Problem is, setting the tax rate that wholesalers would pay is nearly impossible. LBD taxes are assessed on the retail price charged by restaurants and bars. The mark up on retail prices is far from consistent - most restaurants have different mark ups on different alcoholic beverages. Mark ups vary widely from restaurant to restaurant.
For example, a bar may mark up well alcohol at twice cost, as a leader to lure customers. Better spirits may be marked up at 3 times cost.
In particular, wine margins vary at individual restaurants, and also between restaurants. What Red Lobster charges for wine may be completely different from what Sunset Grill charges for wine. Sunset may have a low mark up on an entry level glass of wine, but higher mark ups on other glasses.
To be cautious and not reduce tax revenue, the rate wholesalers pay should be on the high side of estimates. Legislators might call this a tax increase, making the legislation essentially dead on arrival. If the rate wholesalers pay falls short of existing tax revenue, the bill will be declared a cost to the state, also ensuring its death with tight budgets.
The change leads to another problem. The tax will create a significant difference between the price wholesalers charge for package stores and the price for restaurants and bars. This increases the chances of restaurants and bars buying liquor from package stores, since the retail price at package stores will be closer to the wholesale price for restaurants and bars.
Can you please explain why taxes on beverages vary so widely from one bar or restaurant to another? One establishment in particular charges 24.5% on drinks, and then add an additional sales tax to that total.
ReplyDeleteOther establishments are charging a 15% sales tax. I've not seen any consistency in Knoxville anywhere! What are the laws?
Suzanne
DeleteI think the confusion comes from there being two different taxes on wine and spirits at restaurants and bars. There is a 15% liquor tax, plus 9.25% sales tax in Knoxville (sales tax rates vary by city, but the liquor tax is 15% statewide).
The Tax Man's total tax on your toddy in Knoxville is 24.25%.
Here is the problem. Some menus and receipts show the total taxes for drinks. Others show the 15% tax, but then apply the 9.25% sales tax on the receipt with food. When lumped in with food, the sales tax on drinks is hidden, unless you do the math.
In other words, we suspect that you are paying 24.25% everywhere, but some restaurants show the total 24.25% tax on your drinks, while others separately show the 15% liquor tax and lump the sales tax on drinks with sales tax on food.
To complicate things, there is no liquor tax on beer. You only pay sales tax for beer at restaurants and bars.
Tennessee's tax on wine and spirits is not only confusing, it is terribly expensive. But don't look for any changes to the tax rate from the state. Tennessee is not likely to join a 12 step program to end its dependence on liquor taxes - the state is intoxicated by the huge revenue source.