Combating Bar Sales Tax Audits

A state sales tax audit can be a devastating process that could potentially bankrupt your bar business - even if you have honestly paid all your taxes. That's because the audit calculates tax owing on all the alcohol purchased including drinks you didn't even sell (ie: stolen and over-poured drinks).

The cards are stacked against the bar owner so what can an honest operator do about fighting bar sales tax audits? I counsel my clients to follow these basic guidelines to avoid tax trouble:

Eliminate over pouring and theft. Don’t assume that your bar is problem-free. Most operators have shrinkage rates that are higher than the state allows. An independent auditor can uncover hidden losses and give you the tools to eliminate them using liquor inventory control software.

Develop detailed recipes for all drinks sold in the bar and ensure that the bartenders adhere to them

Avoid "over-pouring" by training employees to accurately pour your specified amounts of alcohol. This is as important for draft beer and wine as for liquor

If you are audited, be very careful when you fill out the required “Bar Fact Sheet.” You will be asked to list pour sizes, pricing, and other information. Make sure that you list all of your pour sizes: for shots, multiple-ingredient drinks, martinis, margaritas, and so forth. If your pour sizes are all different, you should make sure that the state takes that into account.

Remember that the tax auditor is just doing their job. If you treat them with respect they will have a better attitude. That can only help your case in the event that the auditor has to make any judgment calls.

Don’t be intimidated by the state auditor. I have helped a number of Bevinco clients appeal their tax assessment. In fact, all of them have won their case. The surprising, even shocking, fact is that many state auditors don’t even know their own regulations. Several have told me that they aren’t allowed to account for more than a 1.5-ounce pour size – which is utter nonsense. In California, for example, there are no state regulations on how much alcohol can be poured in a drink and even the state’s own audit manual recognizes this fact. The bottom-line: if you are audited, get expert advice and appeal the assessment.

Buy a decent cash register system. At a minimum, your equipment should be able to separate sales into spirits, wine, and beer categories and also track happy hour and other promotions. In fact, the more detailed the sales report generated by your system, the better you are able to provide evidence that the tax auditor will accept.

Keep detailed notes on promotions, changes in glassware, spotter’s reports, spillage, kitchen use, and so on - for at least three years. Most bars do not keep detailed records of promotions and other activities. For example, when a bar has a two-for-one drink promotion or donates a keg of beer to the local fire department, the income loss is usually not recorded. Without supporting documentation, the usage on these items will be converted to potential retail sales and taxed.

The California State Board of Equalization suggests that “implementing strong internal controls is the best way” to avoid tax liability problems. They even specifically note that “reports from inventory control companies or similar service firms” will be accepted as evidence. In fact, an independent inventory-control service, like Bevinco bar control and inventory service from Sculpture Hospitality, will pay for themselves even if your bar is never audited.

To learn more about your potential exposure and how you can protect yourself from a sales tax audit at your bar, schedule a consultation with your local Bevinco bar inventory expert.