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How It Works: Alcohol Tax Collection

Alcohol tax collection is actually quite straightforward, but there are a few challenges if it isn’t something a city has focused on in a while. In this post, we cover the basics of alcohol tax collection, explain how an alcohol tax audit works, and offer some tips to help make this process go as smoothly as possible in the long-term.
 

How a GMA Alcohol Tax Audit Works

 
  1. Collect the last 36 months of wholesaler alcohol tax records.
    The city needs to provide GMA with the last 36 months of Distilled Spirits / Wine Excise Tax Reports from each distilled spirits / wine wholesaler. Wholesalers provide these reports to the city on a monthly basis. Expect reports from about 6-8 distributors, with the majority of the product sold by about 4 or 5.
  2. Collect the last 36 months of licensee alcohol tax records.
    The city needs to organize the last 36 months of Mixed Drink Tax Returns from each of its domiciled pouring licensees. These returns are provided by licensees on a monthly basis, so the amount of returns will be 36 (months) times the number of licensees in your city.
  3. Provide pour size affidavits to licensees.
    The pour size is the amount of alcohol poured per drink when it is served at restaurants, bars, and other establishments. That is how sales per drink are measured (as opposed to package sales, such as selling a case of beer). During the audit, GMA provides the city with affidavits for the alcohol licensees to complete that detail their pour sizes.
  4. Document any missing returns.
    As the city organizes this information, it’s helpful to document any missing returns or reports for particular months. If a return is missing, the city needs to check its accounts receivable records to see if they received a payment from that wholesaler or licensee. If a city cannot find a check or return, GMA assumes that the wholesaler or licensee didn’t pay during that month. That information will become part of GMA’s findings.
  5. Build a database with all of the above information.
    Once GMA has all wholesaler and licensee information, GMA builds a database of the city’s licensee returns and wholesaler reports. If the city has not done a thorough job in steps 1-4, then they will still need to fill in any missing data. This delays the audit, requires more work, and costs the city more money and time.
  6. Compare how much product was purchased versus the tax paid to the city.
    Once the two databases for licensee returns and wholesaler reports are completed, GMA compares how much product was purchased and how much tax the wholesalers and licensees paid the city.
  7. Share findings and send letters to licensees.
    Once the city receives the findings, they will send both letters of commendation and letters explaining deficiencies to all licensees and wholesalers. (GMA provides all letters for the city to print, on the city’s letterhead.)
  8. Collect any unpaid taxes and manage appeals.
    While in most cases licensees will pay their deficient taxes, some might want to appeal. In those cases, you will go through an appeals process. GMA provides assistance and guidance with this appeals process.
The alcohol tax audit process is detail-oriented and time-consuming. GMA encourages cities to thoroughly submit all information required in steps 1-4. Since the review is limited to the past 36 months, missing information or delays in responding to GMA with any needed information result in lost time and higher costs.
 
To make the project as successful as possible, here are a few tips to keep in mind:
 
  • Make sure your alcohol ordinance is up-to-date.
    It’s good to review your ordinance from time to time, especially if you haven’t reviewed it in a while. Your current ordinance may have potential weaknesses that could be exploited. As part of our service, GMA reviews your ordinance and provides a model ordinance for you to adopt. When updating your ordinance, make sure you also have your city staff and city attorney review it.
  • An alcohol license is a privileged license.
    Alcohol licenses require much more regulatory oversight than typical licenses. Background checks and other serious procedures are involved. Remember, your city can revoke a business’s local alcohol license if the business is not abiding by the law. 
  • Reward the businesses that pay, not the ones that don’t.
    Just like you would not condone a licensee that sold alcohol to people who are underage, you should not condone a business that isn’t paying its alcohol tax to the city. Some cities are lenient toward such businesses, but those cities are actually financially punishing the businesses that do pay. Don’t financially penalize businesses who pay a tax, and financially reward those who don’t.
  • Enforcing an alcohol tax also enforces a compliance ethic.
    If businesses know you’re monitoring the alcohol product they purchase from wholesalers and use the information to verify the taxes paid, you may experience a greater compliance ethic in the payment of alcohol taxes. 
  • The sooner you collect the tax, the less problems and hassle.
    Having a sound alcohol tax collection process allows you to find deficiencies quicker, contact the licensees, and resolve the issue. Going back 36 months is a long time. The ownership or financial situation of a business can change a lot during that time. Better to collect when it’s due.
  • Don’t forget the wholesalers.
    Although most of your focus will be on the licensees, audits often uncover inaccurate jurisdictional reporting by the wholesalers. For example, you may find that wholesalers are paying alcohol taxes to a neighboring county or city that are legally owed to you. Such identification of inaccurate reporting to package licensees can yield substantive, additional revenue to your city.
  • Your city needs this money.
    Cities need as many financial resources to fund critical services. You cannot afford to let any revenue go uncollected. Establish a compliance ethic with licensees to ensure the accurate and timely collection of all your legally owed revenue.
If you don’t have the staff to keep up on these details after GMA completes the initial audit, even just establishing a process to ensure that a return and payment is received from each licensee will help build a compliance ethic, especially if your process includes following up when payments are not received. Once GMA completes your initial audit, you can track and periodically check up on your alcohol tax collection information using spreadsheets that we provide you. By tracking and checking up on this information, your city may avoid another audit because your information is now accurately maintained.
TAKE THE NEXT STEP

To learn more about GMA's Alcoholic Beverage Excise Tax Compliance service, you can reach out to:

WHY GMA?
As your municipal advocate, GMA created this service when we learned that many municipalities typically did not receive the entire alcoholic beverage excise taxes owed them from mixed drink licensees. Knowing that cities critically need all of their owed revenues in tough economic times, we got to work and provided expertise, professional reviews, and seminars for both city employees and retail pouring licensees to help you collect those taxes.