Currently, hotels, restaurants and bars that hold a Texas mixed-drink permit, pay a 14 percent mixed-beverage gross receipts tax on each beer, mixed drink or wine they sell. This tax is in effect an excise tax, paid by the permit holder. The tax was traditionally calculated into the cost of the beverage as part of the total cost of the drink. Establishments with only beer and/or beer and wine permits (not mixed-beverage permits) do not charge this tax, and it is not added to the cost of the beverage. Instead, such locations charge customers a sales tax on these beverages, paid by the consumer.
Effective Jan. 1, 2014, with the passage of HB 3572, the mixed-beverage gross receipts tax will change from a 14 percent tax paid exclusively by mixed-drink permit holders to a 6.7 percent gross receipts tax paid by the mixed-drink permit holder coupled with a 8.25 percent mixed-beverage sales tax paid by the consumer. This creates a savings for hotels, restaurants and bars, assuming drink prices remain the same, because 8.25 percent of the price can be added to the listed drink price and passed along to the consumer, with a lower percentage of 6.7 percent gross receipts tax paid by the mixed-drink permit holder. Thus, earnings of 8.25 percent are able to be immediately retained and added to the mixed-beverage permittee's bottom line, assuming the sales tax component is passed along. Another advantage is that 8.25 percent of the current mixed-beverage sales tax will no longer be counted as income, potentially saving money on fees, premiums, rents and taxes that may be calculated based on the gross revenues of the retailer.
As an example, prior to the change, a $5.00 drink would net the permit holder $4.30 because of the $.70 mixed-beverage gross receipts tax remitted to the Texas State Comptroller. After the change, assuming the drink price remains the same, with the 6.7 percent gross receipts tax included and passing the mixed-beverage sales tax on to the customer, the permit holder would net $4.67 (rounding up), an increase of $.37 per drink, but the customer would pay $5.43 instead of $5.00. Alternatively, the hotel, restaurant or bar could decide to keep the drink prices the same, while footing the gross receipts tax and mixed-beverage tax as before, or it could decrease drink prices proportionally while passing the mixed-beverage sales tax on to the customer such that the end drink price paid by the customer is still $5.00.
Opponents of the tax change point out that customers are likely to see an increase in what they pay for a drink due to permit holders being unlikely to reduce the sales price of the drink while passing on the mixed-beverage sales tax on to the consumer. Proponents of the bill have stated that the change in tax will promote transparency (customers are now made aware of the tax and see the tax) and equity (mixed-beverage permittees can now pass on the same sales tax as beer and beer and wine permittees) in alcohol taxes. The State has estimated that this tax change will result in an increase of $21.3 million to the State in fiscal 2014-15, with cities and counties gaining $6.1 million over the same period.
If you have any questions regarding the substance or application of this tax law change, do not hesitate to contact Gardere Partner Dewey A. Brackin (email@example.com or 512.542.7025) or another Hospitality Industry Team member.