Did Texas assess tax on liquor and mixer ingredients lost when restaurant employees or customers spilled drinks or broke bottles?

Plain-English summary

The Texas Comptroller distinguished mixed-drink ingredients lost through the restaurant's employees from replacements made after a customer spilled a drink.

Tax would not be assessed on ingredients lost through spillage or bottle breakage by the taxpayer's personnel. Ingredients used to replace a patron-spilled drink were taxable because the policy committee treated the replacement like a complimentary drink.

The restaurant had to substantiate to the auditor's satisfaction which losses were attributable to patrons and which to employees. Without that proof, no adjustment would be allowed. The letter also directed the auditor to investigate employee and owner consumption but did not state the result of that investigation.

What this means for you

Detailed point-of-sale and observation records mattered. The ruling did not grant a blanket allowance for all spilled liquor; it required evidence separating employee losses from patron-caused replacements.

Common questions

Were ingredients lost through employee spillage taxable in the audit? No.

Were ingredients in a replacement for a patron-spilled drink taxable? Yes.

What proof was required? Records satisfactory to the auditor distinguishing patron losses from employee losses.

Did the letter decide employee or owner consumption? No. It directed the auditor to investigate.

Citations and references

• The letter cited no numbered statute or Comptroller rule in its answer.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8701L0784F14

Original ruling text

January 5, 1987

Dear ***:

Thank you for your letter concerning the taxability of spilled drinks issue
raised in your current audit. I will restate your facts and comments with my
answer immediately following.

FACTS: The taxpayer is a restaurant and night club serving mixed beverages and
on-premises food items. The taxpayer pays the gross receipts tax applicable to
the sale of mixed beverages. The taxpayer occasionally provides complimentary
drinks to special guests, customers and during promotions. The taxpayer pays
tax on its costs of these complimentary drinks. The taxpayer's personnel
occasionally spill drinks after they've been mixed and break full or partially
full bottles of liquor. In order to provide information for the Texas
Alcoholic Beverage Commission as well as for management, the taxpayer has
developed a sophisticated computerized point of sale accounting system. Under
such system, not only are drink sales recorded, but additionally separately
recorded are the retail value of complimentary drinks and spills.

In addition to this accounting system, taxpayer's management routinely observe
and have others observe the actions of employees to insure as much as is
possible that sales are recorded as sales, complimentary drinks are recorded
as complimentary drinks and spills are recorded as spills. The checks and
cross-checks of the taxpayer's accounting system and observation procedures
not only are for its own management purposes but also recommended by the Texas
Alcoholic Beverage Commission in order to properly account for and pay taxes
on liquor used in its business.

ISSUE: Is the cost of liquor and mixers lost due to spills subject to the
remitted sales and use tax?

COMMENTS: Texas sales and used taxes under the Texas Tax Code are generally
applicable to sales or purchases where these is a transfer of possession and/or
title to tangible personal property. The spilling of a mixed beverage or the
breaking of a bottle of liquor is hardly a transfer of possession or title. If
anything it is the wasting of an asset, shrinkage of inventory or a part of
the cost of mixed drinks actually sold, as explained below.

Furthermore, since 1963, tangible personal property that is used or consumed in
the manufacturing, processing, or fabricating of products for ultimate sale
have been exempt from the sales and use tax. Analyzing the scenario of a
spill: A customer orders a mixed beverage, the bartender mixes the beverage,
and then the bartender, server or customer spills the beverage; thereafter a
second beverage is prepared to replace the spilled beverage. Recognizing that
there will always be some spillage, this is part of the cost of the beverages
ultimately sold and taxed under the Gross Receipts Tax of the Texas Alcoholic
Beverage Commission and therefore exempt from the sales and use tax. When one
considers the spills as part of the cost of the mixed beverages that are sold,
the application of the sales or use tax to the cost of spills would then amount
to double taxation, since the gross receipts tax is imposed upon the sold
beverages. Continuing the comparison of the manufacturing process to the
preparation and sale of mixed beverages, the cost of ingredients and items
wasted, lost, or inadvertently consumed in the manufacturer of goods for resale
are not made subject to tax just because they don't directly become part of the
finished product. Nor should the cost of spilled beverages.

From a practical standpoint, spills themselves, unlike a mixed beverage that
is sold or given away which either generates revenue or goodwill for the
establishment, generate no revenue nor goodwill for the taxpayer. A spill is
an additional cost to the taxpayer: There is the direct out-of-pocket cost of
the ingredients of the spilled beverage, the cost of labor in cleaning up the
spill, the damage to carpet, woodwork, uniforms, glasses, or other property of
the taxpayer which may result from the spill. To add to all these costs and
inconveniences to the taxpayer, a tax on the careless, unintended act of an
employee or patron would be blatantly unfair and uncalled for.

ANSWER: I have discussed this issue with our policy committee and have come to
the following conclusions. We will not assess tax on the component ingredients
lost due to spillage and breakage by your clients' personnel. However, tax must
be assessed on the ingredient cost for drinks where the patron spills the
drink. We feel this replacement is the same as a complimentary drink. Your
client must be able to substantiate to our auditor's satisfaction all spillage
and breakage attributable to patrons versus employees; otherwise, no adjustment
will be allowed.

Also, I will be asking the auditor to investigate employee and owner
consumption to determine if any adjustments are needed in this area.

This opinion is based upon the facts you presented. If there are additional
or different facts, this opinion may change.

Please feel free to contact us if you have additional questions. You may write
us, call toll free 1-800-252-5555, from anywhere in Texas or phone
512-463-4600.

Sincerely,

Tax Policy Section
Tax Administration Division