By Megan Poinski
Maryland’s restaurateurs, bar and tavern owners, liquor store operators and point-of-sale system programmers have spent the last couple of weeks scrambling to get ready to collect the state’s new 9% tax on alcohol, which goes into effect on Friday.
Sellers of alcohol and industry affiliates say that they have been working hard to understand the ramifications and implications of the new law – introduced in the last days of the 2011 legislative session, and passed by both chambers hours before the legislature adjourned April 11. It raises the sales tax on alcohol products 50%.
However, the tax itself – which increases the sales tax on alcoholic beverages by three percentage points — has proved to be complex. Gov. Martin O’Malley signed the bill last month, giving those affected just over a month to prepare.
And the stakes of getting ready in time are high. July 1 – the bill’s effective date – is a summertime Friday, one of the busiest times for alcohol sales. On top of that, it’s the beginning of the long July 4th weekend, when thousands traditionally toast the nation’s independence with alcoholic beverages. Besides the fact that revelers will have to pay more for their drinks on a holiday weekend, the high volume of sales will make it so retailers have to have everything in place to properly impose the new tax – or end up absorbing some of their profits.
“You couldn’t pick a worse date to start,” said Jack Milani, the legislative co-chair of the Maryland State Licensed Beverage Association. “If you had to pick the worst date to do this, it would be July 1.”
What the law does
The new alcohol tax appears to be simple enough. It’s a 50% increase on the sales tax for alcoholic beverages, meaning that bars, restaurants and liquor stores will collect 3 more cents for every dollar spent on alcohol — 9 cents up from 6 cents.
However, that simplicity is deceptive.
“I’m pulling my hair out,” said Bill Herbst, owner of La Hacienda Mexican Food and Spirits in Ocean City.
Adding the extra tax on a beer is rather straightforward, said Melvin Thompson, senior vice president for government affairs and public policy for the Maryland Restaurant Association.
However, that’s not all the new tax applies to. He said that it also needs to be imposed on items related to the serving of alcohol, as well as on mandatory gratuities for large parties in restaurants. This is causing headaches for some of the state’s restaurants, he said.
For a restaurant that also serves as a catering company, Thompson said, it makes sense for them to charge the 9% tax on alcohol served by the bartender. But customers are also paying for a bartender and use of items included with the bar.
“What about the bartender’s service charge? That’s directly related to serving alcohol,” Thompson said. “And what about the bar glasses? Those are used for serving alcohol, but they’re also used for serving soft drinks. Do they need to keep track of which glasses are used for which drink?”
Barb Pastwa, owner of BME Business Systems in Smithsburg, said this will create accounting headaches. BME offers point-of-sale systems for tallying food and beverage purchases. For mixed drinks, she said, both the alcohol and the non-alcoholic mixer will be charged the 9% tax, and each ingredient recorded separately in the accounting system.
“There’s going to be taxes for Coca Cola as liquor and taxes for Coca Cola as food. But that doesn’t make sense; it’s the same Coca Cola,” she said. “It’s going to be a mess.”
Also, the state taxes mandatory restaurant gratuities — the automatic tips added to the bills for large parties. Starting on Friday, those gratuities will be taxed at two rates – 9% for alcohol and 6% for everything else, Thompson said. The restaurants will need to figure out what percentage of the bill was for alcohol, then what percentage of the added gratuity would represent alcohol, then tax that at 9%. Pastwa said that only the most up-to-date point-of-sale systems will be able to handle this calculation.
Thompson said he doesn’t believe the legislature intended for the tax to have so many ambiguities. However, because the legislation came in at the 11th hour of the session and flew through both houses at lightning speed, nobody from the industry was allowed to testify on how the bill as written would impact them. There was quite a lot of testimony on an unsuccessful proposal for an alcohol tax during the legislative session, but that was an excise tax that would have been implemented differently.
“This is one of those things where the legislature shot first and thought about it later,” Thompson said.
Getting ready for a new tax
O’Malley signed the tax into law on May 19.
The following day, the Comptroller’s Office published a bulletin on the tax and its implications. Spokesman Joe Shapiro said that it was sent to 125,000 taxpayer accounts that could be affected. And the Comptroller’s Office posted answers to frequently asked questions on its website.
Most of the time, Shapiro said, the most important thing the Comptroller’s Office has to do to prepare for a new tax is to let people know that the tax is coming. Since the alcohol tax has been high-profile and well-publicized, he said, that has not been a problem.
However, the office has been proactive in educating people exactly how the new tax is to be applied.
“As with any tax law, we’re ready to enforce it fairly and uphold the law as it was passed,” Shapiro said.
Thompson and Milani said that the Comptroller’s Office has been helpful to their organizations’ members. Now, the biggest challenge is reprogramming cash registers and point-of-sale systems.
Pastwa, who has about 175 customers in Maryland impacted by the change, said that her technicians have been slammed for the last couple weeks. For each system, some manual reprogramming has to be done. And then, when businesses open on Friday morning, BME technicians will be talking several of them through how to activate those updates.
The average customer needs about 45 minutes to an hour worth of reprogramming, costing the customer about $150. However, Pastwa said, there are customers whose systems need to be upgraded, so their bills will be higher. And she hopes that all customers will be willing to pay for their services. The last time machines needed to be reprogrammed for an increase in sales tax, Pastwa there were many who refused.
“Because this is something that the state has told them they have to do, there are customers who feel that this should be something they don’t have to pay for,” she said.
Pastwa also said that several customers were not aware of some of the requirements of the new law – like indicating how much the customer has paid in alcohol tax on the receipt. She said she’s been proactive in reaching out to make sure that they have it in place.
“If they don’t have the systems in place, they are going to have to eat the tax,” Pastwa said.”… Do you know what the margin of profit is in a restaurant? If they are making 3% to 4%, they are doing well.”
Milani said at the beginning of this week that many of his members were still waiting to get their systems reprogrammed.
Crossing state lines?
Another concern voiced by alcohol retailers is that people will start crossing state lines to buy alcohol once the tax is in place. Milani said that Delaware has been heavily advertising its lack of alcohol taxes to vacationers in just south of the state line in Ocean City.
“There’s no question we’re going to lose some business,” Herbst said.
Milani said that he was amazed at the revenue projections for the tax bill, which were estimated at $88 million. He thinks that the higher tax rates, coupled with the advertising to cross state lines for lower taxes at beach destinations near Delaware and Virginia, will reduce the state’s total alcohol sales this year.
“It will be curious to see at the end of the first year if production and sales are what they think they will be,” he said.