Senior Manager, State and Local Tax Department Clark Nuber
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Hospitality State and Local Taxes: Where Every Taxman Wants to Know Your Name

Jun 20th 2016
Senior Manager, State and Local Tax Department Clark Nuber
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So, your client walks into a bar … and then buys it.

This isn’t just the beginning of a bad joke; for tax professionals familiar with the nature of entrepreneurial clients, it’s business as usual. The purchase of a favorite watering hole may be the result of careful planning and strategic analysis, or it may be the granddaddy of all impulse buys. In either case, there are additional significant state and local tax-compliance obligations on sales of spirits or liquor that do not fall on sellers of more conventional goods and services.

Even for those of us not directly advising hospitality clients, we can all recognize the taxation of liquor intended for on-premises consumption is a unique niche. We intuitively understand the specific rules and levies related to the sale of intoxicating beverages, including limits on when (blue laws), where (zoning rules), and to whom (age requirements) sales may occur. The collection of taxation revenue on these sales also relies on specific rules that serve to complicate tax compliance for vendors and their advisors.

Besides the obvious income and property tax implications of any acquisition, here is some sales and local tax (SALT) information to help you ask the right questions of the next client who has fallen in love with his or her local establishment. Of course, past compliance may be just as important as future compliance for a going concern, too.

State and local retail sales taxes. Virtually all the states subject sales of ready-to-consume alcoholic beverages (on-premises) to sales tax. In a few states, such as Kansas and Hawaii, sales are exempt from state sales tax only to be subject to a special state liquor tax (see more on this below).

Some states allow local governments to design their own sales and use tax regime, but in the case of liquor, the general rule always seems to apply: Sales of alcohol for on-premises consumption is subject to retail sales tax.

Like all retailers, bars and taverns are required to register as sales tax vendors, as well as calculate, report, and remit sales tax, likely on a monthly basis. These taxes are usually passed on to the customer directly. Note: Some states allow the inclusion of tax in the final price for alcohol retailers, even when regular retailers must display the actual tax collected. It makes life easier for bartenders, at least back in the day when they got paid in cash.

State spirits and liquor taxes. Most states apply a statewide specific tax on sales of alcoholic beverages. This scheme requires a separate registration and filing obligation. These taxes may be based on sales revenue or they may be due based on volume of purchases by a retailer. In most states, this level tax is in addition to the retail sales tax. For example, even though sales of on-premises drinks are subject to retail sales tax in Washington state, an on-premises vendor pays 13.7 percent tax and a $2.4408 per liter on their purchases for resale.

State and local special licensing fees. Many licensing authorities employ a steeper business licensing fee schedule for on-premises vendors. This fee may be expressed as a percentage of revenue or a flat fee schedule – or both. Special spirits and liquor taxes or additional license fees are not typically passed directly to the retail customer.

State business excise taxes. More than a handful of states impose a gross receipts-style tax on the revenues of all businesses, including bars and taverns. In those states where a business excise tax is employed, beverage or food vendors are often classified at a higher tax rate than regular retail vendors. Taxes like these are not usually passed on to the customer directly.

City or county business excise taxes. If your clients operate their dream pub inside a city’s borders, then they need to keep an eye out for city-level business excise taxes directed at on-premises vendors. Cities often justify these levies in the name of public safety or custodial requirements for on-premises facilities. But whatever the reason behind them, they are an important compliance requirement.

Local tourism district taxes. There are lots of acronyms behind these sorts of local improvement districts. The core purpose is typically economic development and facilities improvements for a concentrated area. Often, these districts are found in cities or other areas that rely heavily on tourism or other transient commerce. These taxes may be based on revenues, square footage, or volumetric measures and are often expressed as an annual “levy” or “contribution.”

The localized nature of these sorts of districts means they are often administered by a local commission or board. Tax compliance can be complicated when the collecting authority is not a full-time organization or lacks specialized tax-compliance experience. These taxes are not typically passed directly to the customer.

Finally, note there isn’t much cover from unique tax obligations for producers either. Breweries, distilleries, and wine-making operations are often subject to specific tax levies by state and local governments.

Tip a glass to the barkeep (and their advisors) who can keep these tax obligations straight – the ones who know your name and are still always glad you came.

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