This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
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Restaurants and Bars Get Break on Spilled and Spoiled Liquor
By Dan Weisman

SAN MARCOS - Rather than crying over spilled liquor and state tax liquor audits that don't adjust adequately for those losses, North County restaurant owners got the word Tuesday that the state overpour and spillage tax allowance had doubled, potentially saving local operations tens of thousands of dollars.

"The single largest tax compliance issue faced by restaurant and bar owners is the allowance for loss of product," said John Dunlap, president and chief executive officer of the 15,000-member California Restaurant Association that pushed hard for the changes.

Restaurants are big, big business in San Diego County, with 5,957 restaurants in 2000 employing 76,800 workers and accounting for about $2.7 billion in annual sales, the restaurant association says.

Local restaurants generated $209 million in sales tax revenue in 2000. During the last fiscal year, state tax officials audited 176 restaurants, determining that $3.4 million in taxes were underpaid. The rule change should return about half of that to restaurant operators, officials said.

Restaurants audited by the State Board of Equalization had been allowed to account for overpours and spillage of alcohol, wine and beer through a formula that said 8 percent could be written off for liquor, 3 percent for wine, 3 percent for draft beer and nothing for bottled beer.

'A certain percentage'
What is the reason for the adjustments, in place for at least two decades?

"Every restaurant that serves alcohol has a certain percentage of its total alcohol inventory that is subject to over-spilling, employee theft, spoiled, and free drinks that are given despite bar policy against them," Mr. Dunlap said.

The change that went into effect January 1 raised the allowance to 16 percent for liquor, 10 percent for wine, 14 percent for draft beer and 5 percent for bottled beer.

And it started with an outcry from North County restaurateurs, restaurant association leaders said.

"The tax auditors weren't accounting for sloppy pouring; two-for-one drink service or the way different people poured wine," said Jot Condie, California Restaurant Association government affairs director who led the lobbying efforts to change the audit rules.

"It all started for us in San Diego," Mr. Condie said. "A lot of restaurants in San Diego were complaining about the Board of Equalization and the audits that were being heavily implemented in San Diego County. We thought it may have been related to the treatment of San Diego County restaurants but then realized it was occurring all over the state."

MaryAnn Baloian, a business tech specialist with the Board of Equalization, said the audit rules change was part of an overall revamping of the agency's audit manual for bars and restaurants.

"The manual was developed in 1979 and hadn't been revamped since then," Ms. Baloian said. "The Board of Equalization had good rapport with the industry - the California Restaurant Association and the California Taxpayers' Association - so we were able to put in something more workable."

Not widely known
As for local restaurants and the state tax man, a brief jaunt through Old Restaurant Row with 18 dining establishments on San Marcos Boulevard found many restaurant managers and accountants either weren't familiar with the spillage laws or hadn't used them.

"I've never even heard of that," said Mike Nelson, general manager for The Gentleman's Choice, a prime rib and seafood restaurant also serving cocktails since 1978. "We do clean our lines a lot in running six tap beers that is just put into our costs."

Stephanie Yount, a manager at Rockin' Baja Lobster Bar and Grill, said the spillage rules were "pretty new to me," adding, "the only things I see are drinks made wrong or if a customer changes their mind. Then we replace the drinks."

Santo Messina, the accountant for Bruno's Authentic Italian Restaurant and Pizzeria, said the effect of the change would be felt more by larger chains or franchises, some of which do large sales volumes and are audited on a schedule by state tax officials.

"The application of shrinkage or loss to the amount of inventory would affect the profit," Mr. Messina said. "Typically, this would be a larger chain or franchise and not have the same effect for us."