Do bars and restaurants owe use tax on liquor, beer, or wine given away free with a fixed-price meal or Happy Hour drink special?

Plain-English summary

An accountant asked whether restaurants and bars owe use tax on the liquor, beer, or wine they buy when they give a free drink to a customer along with a fixed-price meal or another drink -- for example, a complimentary after-dinner cordial with a prix-fixe dinner, or a "buy one, get one free" Happy Hour deal. Normally, a restaurant or bar can buy alcohol tax-free for resale, since it's reselling the drinks to customers. The question was whether giving a drink away "for free" breaks that resale chain and turns the restaurant's own purchase into a taxable one.

The Department applied the same cost-recovery test it uses for other promotional giveaways (drawn from a Tax Appeals Tribunal case about discounted retail catalogs): a purchase stays tax-free for resale as long as the seller recovers at least 100% of its combined costs -- for the property, the free extra, and the labor to prepare and serve everything -- in the price the customer actually pays. Since these establishments typically price their fixed meals and drink specials well above their total cost even after throwing in something free, the free drink is treated as bought for resale, not as a taxable retail purchase by the restaurant or bar itself. And regardless of how the free item is treated internally, the customer's sales tax is calculated only on what they actually paid for the combined purchase, not on any "value" attributed to the free item.

What this means for you

Restaurants and bars running fixed-price meals, Happy Hour, or bundled drink promotions

You don't automatically owe use tax just because you're calling something "free." As long as your fixed price for the meal or drinks (including whatever you throw in for free) still covers your full combined cost of the food, drink, and labor involved, the whole purchase stays in the tax-free resale chain, and your customer is taxed only on the price they actually pay.

Businesses considering loss-leader or below-cost drink promotions

If a promotion is priced so low that the total charge doesn't cover your combined costs for everything provided, this cost-recovery test can flip, and you may owe use tax on your own purchase of the giveaway item -- run the math on your specific pricing before assuming a promotion is automatically resale-exempt.

Accountants and tax professionals

This opinion extends the promotional-giveaway cost-recovery framework from a retail-catalog case (the Tax Appeals Tribunal's J.C. Penney decision analyzing 20 NYCRR § 526.6(c)(4)) into the restaurant/bar food-and-drink context under Tax Law § 1105(d), even though that regulation doesn't directly address alcohol sold with meals -- a useful cross-industry citation for any "is this really a sale for resale" giveaway question.

Common questions

Q: Does a restaurant owe tax on liquor it gives away for free with a fixed-price dinner?
A: Generally no, as long as the price charged for the meal covers the restaurant's combined costs for the food, the free drink, and the labor to prepare and serve both.

Q: How is sales tax computed when a drink is given away with a purchased drink or meal?
A: Tax is computed on the actual total amount the customer pays for everything, not on any value assigned to the "free" item.

Q: What if the promotion is priced so low it doesn't cover the restaurant's costs?
A: Then the free item may not qualify as a purchase for resale, and the restaurant or bar could owe use tax on its own cost of that item.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(3) (definition of "receipt")
• Tax Law § 1101(b)(4)(i) (definition of "retail sale")
• Tax Law § 1105(a), (d)(i) (tangible personal property; restaurant/bar food and drink)
• Tax Law § 1110 (compensating use tax)
• 20 NYCRR § 526.5 (receipts)
• 20 NYCRR § 526.6(c) (resale exclusion; promotional giveaways)
• 20 NYCRR § 531.3(a)(2) (withdrawal of resale inventory for other use)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_8s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(8)S
Sales Tax
January 28, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S980730A

On July 30, 1998, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Jeffrey J. Coren, CPA, P.C., 225 West 34th Street, Suite 2015, New York, NY 10122.
The issue raised by Petitioner, Jeffrey J. Coren, CPA, P.C., is whether purchases of liquor,
beer or wine by bars and/or restaurants are subject to compensating use tax when such liquor, beer
or wine is provided, at no extra charge, to their customers in conjunction with the sale of fixed-price
meals or other drinks.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Certain restaurants and bars may have both advertised and unadvertised policies to offer
customers a free alcoholic beverage, by the drink or by the bottle, when the customer purchases a
meal or other drinks for a fixed price. For example, an after dinner cordial or a bottle of wine will
be provided at no extra charge to the customer when a restaurant meal is purchased for a fixed price.
Another example is when a restaurant or bar has a Happy Hour or other provision which offers
customers, for the price of one or more drinks, an additional drink at no extra charge. The total price
paid by the customer for the food and/or drinks is a lesser amount than the sum of the charges for
the items as displayed or separately stated on the menu. The price paid by the customer for the total
meal and/or beverages is, however, usually significantly greater than the cost of the total meal and/or
drinks, including the free drinks, to the restaurant or bar.
Applicable Law and Regulations
Section 1101(b)(4)(i) defines retail sale, in part, as:
A sale of tangible personal property to any person for any purpose, other than
(A) for resale as such. . . .
Section 1105(a) of the Tax Law imposes sales tax upon "[t]he receipts from every retail sale
of tangible personal property, except as otherwise provided in this article."
Section 1105(d)(i) of the Tax Law imposes a tax on "[t]he receipts from every sale of beer,
wine or other alcoholic beverages or any other drink of any nature, or from every sale of food and
drink of any nature or of food alone, when sold in or by restaurants, taverns or other establishments
in this state. . . ."

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TSB-A-99(8)S
Sales Tax
January 28, 1999

Section 1110 of the Tax Law provides, in part:
(a) Except to the extent that property or services have already been or will be
subject to the sales tax under this article, there is hereby imposed on every person a
use tax for the use within this state on and after June first, nineteen hundred seventy­
one except as otherwise exempted under this article, (A) of any tangible personal
property purchased at retail. . . .
With respect to the resale exclusion, Section 526.6(c) of the Sales and Use Tax Regulations
provides, in part:
(1) Where a person, in the course of his business operations, purchases
tangible personal property or services which he intends to sell, either in the form in
which purchased, or as a component part of other property or services, the property
or services which he has purchased will be considered as purchased for resale, and
therefore not subject to tax until he has transferred the property to his customer.
*

*

*

(4)(i) Tangible personal property which is purchased and given away without
charge, for promotion or advertising purposes is not purchased for resale. It is a
retail sale to the purchaser thereof, and is not a sale to the recipient of the property.
(ii) Tangible personal property which is purchased for promotional or
advertising purposes and sold for a minimal charge which does not reflect its true
cost, or which is not ordinarily sold by that person in the operation of his business,
is a retail sale to the purchaser thereof, and not a sale to the recipient of the property.
(iii) A resale certificate may not be used by the person making the purchases
described in subparagraphs (i) and (ii) of this paragraph for such purchases.
Example three:

A vendor purchases catalogs and distributes them to his
potential customers for a minimal charge, which does not
reflect the cost to him. He is the retail purchaser of the
catalog, and is required to pay the tax thereon. He cannot
charge his customer tax on the charge for the catalog.

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TSB-A-99(8)S
Sales Tax
January 28, 1999

Opinion
The businesses referred to by Petitioner conform to the classification of "restaurants, taverns
or other establishments" whose sales of food and drink fall within the purview of Section 1105(d)
of the Tax Law. Therefore, receipts from their sales of such food and drink are subject to sales tax.
Provided such establishments are registered for sales tax purposes, they are not required to
pay sales tax on their purchases of liquor, wine or beer for resale. In order for the resale rule to
apply, the property to be resold must be purchased for the sole purpose of resale (see John B. Pike
and Son, Inc., Adv. Op Comm. T.F., July 26, 1985, TSB-A-85(29)S. The withdrawal of such liquor,
wine or beer for any other reason would subject the purchase to sales or use tax, since it is then
deemed a retail sale to the purchaser thereof, i.e., the restaurant or bar. See Section 531.3(a)(2) of
the Sales and Use Tax Regulations.
In J.C. Penney Co., Inc., Dec Tx App. Trib., June 30, 1988, TSB-D-89(25)S, the Tribunal
analyzed Section 526.6(c)(4)(ii) of the Sales and Use Tax Regulations to resolve the issue of whether
the sale of catalogs to a retailer that are subsequently transferred to its customers for less than the
catalogs’ cost is a sale for resale or a retail sale subject to tax under Section 1105(a) of the Tax Law.
While Section 526.6(c)(4) does not specifically apply to the sale of free drinks taxable under Section
1105(d) of the Tax Law, the analysis set forth therein suggests a methodology to analyze whether
the liquor, beer and wine purchased by a restaurant or bar are purchased exclusively for resale, or
whether the restaurant or bar is the retail purchaser of these items when providing a "free" drink in
conjunction with the sale of other fixed-price drinks or a meal at no extra charge.
The Tribunal opined in J.C. Penney that a retail sale of promotional materials occurs where
the advertiser recovers at least 100% of its cost of the property it is selling. Under Section 1105(d)
of the Tax Law, a vendor sells a hybrid of property and service when it sells food or drink (the
tangible personal property) prepared and served on the premises (the service). See Matter of Burger
King v. State Tax Commn., 51 NY2d 614. The vendor has costs for both the property and for the
service, which it must recover in order to find that its purchase of the property was for resale, and
therefore not taxable to the vendor. In this case, Petitioner indicated that the price paid by a
customer for the total meal and/or beverages is usually significantly greater than the cost of the total
meal and/or beverages, including the extra drink, to the restaurant or bar. Accordingly, the purchase
of liquor, beer or wine by a restaurant or bar for use in providing a "free" drink in conjunction with
the sale of other fixed-price drinks and/or meals at no extra charge would be exempt from tax as a
purchase for resale, provided that the charge to the customer for the meal or drink(s), including the
free drink or bottle of wine, is greater than the restaurant/bar’s combined costs for the property (food
and/or drink) used to make the meal or drinks being sold, plus the restaurant/bar’s costs for the "free"
drink, plus the restaurant/bar’s costs for the labor to prepare and serve them.

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TSB-A-99(8)S
Sales Tax
January 28, 1999

It is noted that when a restaurant or bar provides a drink in conjunction with the sale of a
meal or another drink at no extra charge, the sales tax is to be computed on the actual amount paid
by the customer for the two items. See Section 1101(b)(3) of the Tax Law and Section 526.5 of the
Sales and Use Tax Regulations.

DATED: January 28, 1999

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.