Alcohol taxes can drive you to drink – Wacky Tax Wednesday
Taxes on alcoholic beverages are often bigger and better (i.e., higher) than run-of-the-mill, general sales and use taxes. This may or may not discourage consumption — but it definitely complicates tax compliance.
In Maryland, the general rate of sales and use tax is 6%, but the rate for alcoholic beverages is 9%. As in most states with a special rate for alcohol, invoices must separately state charges subject to the higher rate, so that the proper tax rate can be applied to each subtotal. That’s the easy part.
Flat rate vs. bracketed rate
Calculating the different rates is more complicated. The general sales and use tax rate is imposed on a bracketed basis, meaning the rate is “determined by the sale price in relation to the statutorily imposed brackets.” For example, when the taxable price exceeds $1.00, the tax is 6 cents on each dollar plus:
- 1 cent if the excess over an exact dollar is at least 1 cent but less than 17 cents
- 2 cents if the excess over an exact dollar is at least 17 cents but less than 34 cents
And so on.
However, in Maryland, sales and use tax on alcoholic beverages is a flat rate: 9% of the total sale price, with computation carried out to the third decimal place. For calculation purposes, the taxable price is rounded down when the third decimal place is 4 or less, and rounded up when the third decimal is 5 or more.
Sellers must first separate charges for the different types of products and then determine the tax using the proper method of calculation. Getting any part of the process wrong opens them up to negative audit findings.
Of course, it isn’t always easy to separate the charges. Consider the gift basket.
Most consumers don’t judge a gift basket by the taxability of its contents, but gift basket sellers and their accountants need to do just that, because the contents determine the rate of tax. If a gift basket contains only tangible personal property, the sale price is subject to the general 6% rate. But if a basket contains goods subject to a variety of rates (0%, 6%, 9%), the seller has two choices: categorize the contents and allocate sales tax accordingly, or price it as a lump sum and apply one rate.
Allocating the tax rate ensures that each item is taxed at the rate that would apply if it were sold alone, but it also entails more work and time. Charging a lump sum for a basket and taxing it as such is less complicated for sellers, but it means applying the highest applicable rate. If a basket contains three exempt items, three tangible personal products, and one bottle of wine, the 9% rate applies to the lump sum.
Apportioning the sales tax on mandatory gratuities was even more complicated in Maryland from July 1, 2011 through June 30, 2012. During that brief window of time, which must have seemed interminable to Maryland business owners and their bookkeepers, a mandatory gratuity had to be apportioned between two categories (general sales and sales of alcoholic beverages) in order to accurately calculate the gratuity tax.
For example: imagine a bill of $300, with sales of food and non-alcoholic beverages totaling $200 and sales of alcohol totaling $100. Instead of calculating the mandatory 15% tip on the $300 final sale, it was necessary to calculate a gratuity for each portion:
- $30 for the $200 portion
- $15 for the $100 portion
The $30 tip on food and non-alcoholic beverage sales was then taxed at a rate of 6% (on a bracketed basis) and the $15 tip on alcohol sales was taxed at 9% (a flat rate).
To the undoubted relief of restauranteurs throughout Maryland, this practice was discontinued as of July 1, 2012. The entire mandatory gratuity is now subject to the 6% tax, even when alcohol sales are involved.
A similar complicated system was in place for inbound freight charges. Prior to July 1, 2012, invoices needed to separately state inbound freight charges for alcoholic beverages; the 9% rate applied to inbound freight charges for alcohol and the 6% rate applied to other inbound freight charges. Beginning July 1, 2012, the 6% rate applies to all inbound freight charges, even when alcohol is part of the shipment.
Determining the proper amount of sales tax due is always complicated when alcohol is involved. When sellers do business in multiple states, tax compliance becomes even more complicated. For example:
- A bottle of bitters is taxed at 9% in Maryland but is exempt in Pennsylvania.
- In downtown Minneapolis, if an establishment has an intoxicating liquor license, club license, or wine license, a 3% downtown liquor tax applies to retail on-sales of alcoholic beverages, including wine and 3.2 beer. But if the establishment has a 3.2% malt liquor license or a set-up license, the 3% downtown liquor tax doesn’t apply.
- West Virginia labels certain beer “nonintoxicating” for tax purposes. Nonintoxicating beer, with alcohol rates ranging from 0.5% to 12%, is taxed at a lower rate than non-nonintoxicating beer.
Turn to tax automation, not the bottle
The crazy-complicated world of alcohol tax can drive you to drink, especially if you handle it manually. Sales tax software-as-a-service simplifies tax compliance, keeping you on the wagon. Learn more.
The 2021 sales tax changes report: midyear update
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