Sevy’s co-owner Amy Severson refers to herself as a numbers-chewing-pit bull-with lipstick. She is a brilliant accountant and she stays on top of all the legislation that affects the Texas restaurant business. On Monday, Amy attended a tax seminar hosted by the Texas Restaurant Association during the recent 2012 Southwest Foodservice Expo. Below you will find her report on some important state tax issues facing the restaurant and hospitality industry in the upcoming legislative session. If you don’t like reading about taxes, she urges you to move along, but if you own or plan to own a restaurant, bar, or hotel, you might want to read this. Agree, disagree, or shed some light, please..
First, I’d like to point out that nothing written here should be construed as tax advice. You should discuss these matters with a good CPA who is familiar with the peculiarities of your business and the Texas Alcoholic Beverage Code. There are too many people out there who give out tax advice without being certified, trained tax professionals. The sad thing is that many people take free advice and, without knowing better, end up taking illegal tax deductions.
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When I learned that the Texas Restaurant Association was hosting a Mixed Beverage Gross Receipts (MBGR) tax update seminar at the 2012 Southwest Foodservice Expo, I couldn’t wait to get there. I’m kind of obsessed with these kinds of opportunities. Plus, as always, I had questions and I looked forward to listening to and potential speaking with Rep. Harvey Hilderbran (Kerrville), chairman of the House Ways and Means Committee. The seminar would give me the chance to walk up and ask him directly. However, I was informed the week before that Rep. Hilderbran could not make the Expo for reasons unexplained by his staff, so the session was hosted by TRA Secretary/Treasurer Jerry Morales, restaurateur Randy DeWitt, and Richie Jackson TRA CEO.
For the most part Monday’s discussion was informative, and very important: during the last session of the Texas Legislature, the Texas Restaurant Association passed a bill allowing for the disclosure of the mixed beverage tax on a customer’s receipt. While it’s debatable if this disclosure helps, the TRA is working to change the incident of the tax from the seller to the purchaser, making the tax a sales tax.
The primary issue facing Texas restaurants involves the double taxation restaurants face on the MBGR and Franchise taxes. Mr. Jackson opened with a brief synopsis of the “history” of the Mixed Beverage tax. To summarize his explanation: post-prohibition, Texans were fearful that the return of poured drinks would result in too many saloons, so the law was written such that people could not purchase hard alcohol in the form of a cocktail at a restaurant or hotel, only in bottles from retail outlets.
After a state-wide vote in the early 1970s, this law was amended to allow poured alcohol in certain areas of the state. But to stifle demand, lawmakers assessed a 14% gross receipts tax on the liquor, beer, and wine sales by restaurants that sold poured (or on-premise) “hard” liquor. Consumers don’t see the tax on their guest check and most people don’t know that businesses pay these taxes. Per Mr. Jackson, the legislature intentionally hid the “burden” because taxpayers would object to paying such a high tax on liquor.
In 2006, the state legislature changed the business franchise tax. The intent was to open up the income-based tax to thousands of entities who were previously exempt. However, not only did the expanded tax fall billions short of its expected revenue, it created confusion about what constituted allowable deductions for all Texas businesses, not just restaurants. In 2011 the Tax Foundation, a non-partisan non-profit that follows taxation in the United States, went so far as to state: “With the Texas margin tax collecting far less in revenue than expected, causing significant confusion and compliance costs, resulting in significant litigation and controversy over ‘cost of goods sold’ definitions, and facing calls for substantial overhaul and even repeal, it should not be used as a model tax reform for any other state.”
While TRA lobbyists assisted in the wording of the tax (in regard to the restaurant industry), the Comptroller’s office later “read” the letter of the law differently, and revised their definition of deductible expenses. And it’s really their definition that counts. Thus, the 14% MBGR tax expense restaurants hand over to the state becomes taxed again by the ½% franchise tax. The TRA originally posted incorrect information on their website regarding the treatment of the MBGR tax. It has since been corrected. To give the TRA credit, they seem honestly concerned about this finding and are absolutely committed to remedy it next year.
While some taxpayers paid the extra tax, others (with or without the TRA’s advice) could have easily found the complex wording of the bill confusing, and ended up deducting the expense instead. At the seminar, the three panelists exuded confidence that the Comptroller’s Office would not penalize taxpayers who erroneously deducted, but they confessed there was nothing “in writing” which could confirm this. As I mentioned previously, if this affects you, please discuss the issue in detail with your CPA. Because if you are ever audited, your CPA will be your best friend.
So what is being done to change this tax-on-a-tax? Well, the TRA has explored the possibility of converting the MBGR tax (which comes out of the sales price of a drink) to a sales tax-type tax, where the 14% is added to the sales price. And (again, not in writing) the association has received word from the Comptroller that this change would not result in any loss of income to the state. Therefore the rate would not need to be increased to make it an economic wash.
Changing the calculation method would alleviate many problems restaurants face with the MBGR tax. It would allow equalization of product pricing with restaurants who have a beer/wine-only license (they don’t pay MBGR tax and are allowed to charge an 8.25% sales tax) and allow sellers to reflect a “truer” sales price, exclusive of tax. Not only would it remove the expense amount from franchise tax calculation, but also from a restaurant tenant’s percentage rents that are based on gross sales. They cited several other states that charge on-premise consumption taxes: Kansas (10%), Minnesota (9%), North Dakota (7%), and Washington DC (10%).**
If this transpires, it will be good news for the restaurant industry. But it’s not the TRA’s responsibility alone, everyone affected needs to be proactive. Especially since some of the other ideas that were discussed in the last legislative session–raising the MBGR tax to 16% in an effort to close a $10 billion state budget gap–might be revived And then there’s the matter of the 25% MBGR and Sales tax prepayment in August 2013. While House Ways & Means Chairman Hilderbran missed the show, and the talk, you might just send him an email to let him know you care.
** You may have noticed that the states listed have much lower on-premise alcohol tax rates. In Texas a minority of alcohol sales bear the burden of the “sin” tax charges. Packaged store sellers are exempt, as are businesses that sell poured wine and beer only. Every one of the sample states listed have a packaged alcohol sales tax surcharge of between 2-4%, sharing the cost burden with all people who chose to consume.