Wednesday, January 26, 2022 Jan 26, 2022
47° F Dallas, TX
Restaurant Business

Death, Taxes, and Senate Bill 1: Texas Legislative Restaurant Update

By  |

Sevy’s co-owner Amy Severson makes this claim: “A full-service, lunch-and-dinner- liquor-serving business generates more taxes per-square-foot than most industries.” Below she wonders why the Texas State Legislature continues to penalize small to mid-sized restaurant owners. Hear her roar.

Imagine if you were sitting down for coffee with Uncle Sam, and the conversation started like this:

Uncle Sam: “Hey, we’re having a little budget problem and we’re going to collect your next month’s taxes out of your next paycheck.”

You: “But I might not have a job next month, and this month I have a mortgage that needs to be paid, utilities, car payment, kids in college [the list goes on]. How can I pay you ahead of time if I haven’t earned the money yet?”

Uncle Sam: “Whatever.”

Certainly this scene would not be appetizing to any taxpayer – individual or business – especially in a state that touts its tax friendliness. So it was a surprise to read in the 2011 Legislative Update issued by Susan Combs Comptroller of Public Accounts, that the State of Texas has cooked their books with a recipe for disaster for small restaurants. They’ve added Senate Bill 1, an “advance tax payment” plan to balance their biannual budget.  This follows a revised state franchise tax that burdens restaurants with a very high effective-net-income rate. They are literally trying to kill us.

Gory details below.

I used the example above  because for most small to mid-sized restaurant owners their business income is their personal income.  They have landlords, employees, insurance, and vendors to pay. Few have access to any other kinds of business credit lines. If there is anything left over after the loan payments or investor withdrawals, they pay themselves wages for their blood, sweat and tears. If this advanced payment hits the industry at what is typically one of the slowest sales months of the year – it would be like asking an individual for a loan on December 15. Ho, Ho, Ho.

But there it is, in black and white. Senate Bill 1 requires remitters of sales tax and mixed beverage taxes to add an additional 25% of the tax due as a “prepayment” to their July 2013 tax bills (payable in August). Conveniently, the state’s fiscal year end is August 31. Credit is given for the advance in September, but for even the smallest of those in the industry who pay both taxes this would total in the thousands of dollars. The question is where will they get it from?

The Legislator’s previous effort to fix the state budget resulted in the revised Franchise Tax. Though not technically an “income tax,” it certainly is an income-based tax. Certain costs of business (costs that are positive for Texas and the economy in general) are penalized because they are not allowed to be deducted from the tax. Yet these expenses bring down the restaurants income – labor (waiters, hostesses and bussers), rent, insurance, marketing, and taxes are considered taxable. Yes, taxes are taxable. While 14% of every drink sale is sent to the state for Mixed Beverage taxes, it is not considered deductible from state Franchise tax calculation. Neither is a significant portion of property taxes paid to local governments, nor payroll taxes. Restaurants, while appearing to benefit from a lower rate of .5 percent, can end up with a franchise tax due equal to 100% or higher of their actual net income.

In an industry well known for its high rate of failures, an often overlooked fact is what strong tax generators successful restaurants are. A full-service, lunch-and-dinner, liquor-serving business generates more taxes per-square-foot than most industries. Payroll tax, mixed beverage tax, property tax, franchise tax, while very beneficial to the government, all carve away at an already slim margin for the business owner. Sales tax is collected from the guest and passed on to the state as well. It’s not an expense like the others, but definitely a byproduct of the restaurant’s hard work and efforts that goes back to taxpayers.

Typically the more high tax generators a city has, the stronger its budget (Addison hasn’t been complaining of any shortfalls lately), and the same is true for our state. Perhaps it was because of this successful generation of taxes that the Legislature felt compelled to double down on leveraging the restaurant industry. After all, the larger the numbers, the less effort it takes to make their budget balance. In the meantime we can only hope this recipe doesn’t become part of their regular political diet.