The Tax Man May Change Tennessee Liquor Taxes

The Tax Man May Change Tennessee Liquor Taxes

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.

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