Views Are Mixed on Beverage Sales Tax Hike

Editor's note: This story has been corrected to clarify the taxes paid by restaurants and their customers on various types of beverage sales. 

Starting next year, you'll be paying more in taxes for the margarita you order to wash down those enchiladas at your favorite taqueria while the restaurant saves a bundle on liquor taxes under a new law the Legislature approved this year. 

A bill passed during the regular legislative session reduces the tax restaurants pay on liquor from 14 percent to 6.7 percent. At the same time, the bill increases the sales tax that customers pay on mixed drinks from nothing to 8.25 percent. Restaurant and bar owners say the new tax scheme means more transparency and equity. But critics of the change say it will mean more expensive drinks for consumers while business owners pocket their tax savings.

Currently, customers of restaurants that sells only beer and wine pay an 8.25 percent sales tax on those beverages. But customers at restaurants that also sell mixed drinks aren't required to pay the 8.25 percent sales tax; instead, those restaurants hold mixed beverage permits and pay a 14 percent tax to the state.

“This created a disparate price position between someone who can sell margaritas and beer and someone just selling beer in terms of price points,” said Richie Jackson, CEO of the Texas Restaurant Association. “The [new] tax creates opportunity for equity if you sell both products with a similar tax.”

The association also argues, based on surveys conducted in Houston, that most consumers already believe they are paying sales tax on mixed drinks in restaurants, Jackson said.

State Rep. Harvey Hilderbran, R-Kerville, the author of the legislation, said the measure was part of an overall effort to address tax relief and tax reform in the regular legislative session.

“It’s a big step forward in terms of making the alcohol beverage taxes consistent,” Hilderbran said. “It doesn’t do it completely, but it’s a substantial step in that direction.”

John Gesner, counsel for Front Burner Restaurants, said changes to the tax code will benefit retailers and business owners who have been forced to incorporate a full bar in their restaurants to keep up with competitors.

“More retailers are moving to mixed drinks and discover to their horror they have to pay 14 percent on their sales,” Gesner said.

Proponents of the bill, including the Texas Bar and Nightclub Alliance and the Texas Hotel and Lodging Association, argue the added sales tax increases transparency in billing for mixed beverages.

Last year, the food industry spent more than $813,000 on lobbying legislators, including Hilderbran, according to campaign finance records.

The tax changes are expected to bring in more than $21 million in general revenue for the state in the 2014-15 fiscal year, according to a fiscal analysis of the bill. And local municipalities and counties are expected to gain $6.1 million.

But while restaurant bank accounts and the state tax coffers may see more money, consumers' wallets likely won't, critics of the bill say. Restaurants and bars aren't likely to pass on their tax savings to the customers, so it will likely mean more expensive cocktails for their patrons, said tax attorney Amanda Traphagan.

“Restaurants won’t have an incentive to cut [prices],” she said. “It will make it possible for a restaurant to pocket the difference and the customer wouldn’t notice.”