Restaurant Sales and Mixed Beverage Tax Audits in Texas 

Texas Tax Audit

Restaurants are some of the most difficult businesses to operate. They have high closure rates, significant labor demands, and many other challenges. When you run a restaurant, it can also be complicated to keep track of all your tax obligations. In the Lone Star State, matters can get even more complicated if your restaurant sells and serves alcohol to customers.

In addition to the sales tax on your food sales, your Texas restaurant may also have to collect and pay mixed beverage gross receipts and sales tax on alcohol sales. Because of how intertwined these taxes are, making a mistake with one can often lead to a problem with the other. If you’re not careful, you can find yourself subject to a tax audit from the Texas Comptroller of Public Accounts. These audits are not only a major headache but could lead to additional tax liability and penalties.

The following guide is designed to provide a broad yet detailed look at the sales and mixed beverage tax audit process in Texas. However, to better understand this audit process, we need to first examine how restaurants should collect, file, and pay Texas sales and mixed beverage taxes.

An Overview of the Texas Sales Tax for Restaurants 

Restaurants in Texas have sales tax collection requirements similar to those of restaurants in many other states. As a general rule, the meals and drinks (non-alcoholic) served by restaurants for dine-in or take-out consumption are subject to the general state sales tax, which is 6.25%. Then, the local taxing authorities (like cities and counties) may impose up to a 2% sales tax on top of the 6.25% for a total of up to 8.25%.

There is no sales tax on the non-reusable items that typically accompany a meal, such as straws, napkins, and disposable utensils. Restaurants can usually purchase these without paying a sales tax by having the appropriate resale certificate.

No sales tax needs to be collected for complimentary drinks and meals. In a buy-one-get-one-free promotion, the sales tax only applies to the food the customer actually pays for, not the free food.

Sales tax returns must be filed (and taxes paid) to the Texas Comptroller’s office by the 20th of the month following the applicable tax period (monthly or quarterly). For instance, if you're a monthly filer, your January sales tax is due February 20th. There is a $50 penalty for late filings, and a 5% penalty applies for taxes that are one to 30 days late. This rises to 10% if the sales tax is more than 30 days late. Interest begins to accrue starting 61 days after the due date. 

Understanding Texas Mixed Beverage Taxes

If your restaurant serves spiritous alcohol, you will have two additional sales-related taxes to collect. The first is the mixed beverage gross receipts tax, and the second is the mixed beverage sales tax. Despite their names, these taxes apply to practically any alcoholic beverage your restaurant might serve, including distilled spirits, beer, wine, and ale.

You must also apply this tax to the price of any non-alcoholic drinks you mix with alcohol. For instance, say you charge $5 for a shot of vodka and $1 for a club soda. If someone orders a vodka soda, you would apply the mixed beverage tax to the $6 total. 

Note that this tax only applies to restaurants that have a mixed beverage permit. If you only have a beer and wine permit, then, you are not required to collect the mixed beverage tax on your beer and wine sales. In this case, you only worry about sales tax on beer and wine sales.

Mixed Beverage Gross Receipts Tax 

This is a tax that you collect and pay; the customer does not pay it. The current rate is 6.7% of gross receipts on applicable alcoholic beverage sales. This tax must be reported and paid monthly, with a due date that’s the 20th of each month for the prior month’s sales.

Late filings and tax payments result in the same penalties and interest charges as the general state sales tax. The exact reporting and payment method depends on the amount of taxes you paid in the prior fiscal year. 

Mixed Beverage Sales Tax

This is an 8.25% tax you collect for the sale of alcoholic beverages. Unlike the gross receipts tax, you may pass this sales tax to your customer by adding a line item to the customer bill or including it in the sales price. One thing to note about this sales tax is that it doesn’t combine with the regular sales tax. 

In other words, a sale subject to the mixed beverage sales tax is exempt from the normal sales tax. You also file separate forms for these taxes. You will file one form for Texas sales tax, another form for your mixed beverage sales tax, and a third form for your mixed beverage gross receipts tax. 

Another thing to remember is that your restaurant must collect the mixed beverage sales tax in addition to the mixed beverage gross receipts tax. So before calculating the mixed beverage gross receipts tax, you should deduct the mixed beverage sales tax from the amount received.

For example, say that you sell $100 in mixed beverages. You should charge your customer $108.25. That covers your $100 sale plus the 8.25% sales tax. Then, when you file your gross receipts return, you will report $100 in mixed beverage sales, and you'll pay $6.70 in gross receipts tax. 

The mixed beverage sales tax is also due on the 20th of each month following the end of the reporting period. If you're late, the penalties and interest are the same as the mixed beverage gross receipts tax. Reporting method and payment also depend on the amount of taxes you paid in the prior fiscal year. 


The Reason for Sales Tax Audits in Texas 

The Audit Division of the Texas Comptroller’s Office oversees the mixed beverage and sales tax audits that your restaurants might have to endure. They conduct these audits to ensure Texas’ tax laws are fairly applied, to deter tax evasion, to encourage taxpayers to pay their taxes, and to educate taxpayers about their tax filing and payment responsibilities. 

The Tax Audit Process 

The audit process in Texas has many similarities to the audit process in many other states, but it has two notable differences. One, there’s an option for a managed audit, where taxpayers essentially audit themselves under the supervision of the Comptroller’s office (this will be discussed later in this guide).

Two, there are audits conducted not by the Comptroller’s office, but by third parties hired by the Comptroller’s office to perform tax compliance examinations. All that being said, no matter who conducts the audits, a Texas Comptroller tax audit may consist of up to 12 steps. 

Step 1: Notice of Audit 

The auditor will mail you an audit notice, along with Form 00-740, Audit Questionnaire. You have two weeks to fill this out and return it to the auditor so they can become more familiar with your business and tax situation. If you don’t return the questionnaire, the auditor will contact you after 30 days. After the auditor receives Form 00-740, they will schedule an entrance conference with you.

If you ignore the questionnaire form and audit notice, the auditor will use the information available to estimate your tax liability for you. As you can imagine, you do not want this to happen as auditors are not going to create an estimate that does you any favors.

Step 1 is when you should start preparing for the tax audit. If you’re confused about what’s happening and why, strongly think about hiring a tax pro. Audits are problems that can become worse if not handled carefully, especially if you overshare your financial information with the auditor.

This is in no way an implication that you should lie or give misleading information during an audit. However, revealing more information than required can lead to an audit that is more invasive and requires more work for you. A tax professional will help you avoid providing information not requested. This can make the audit go faster and save you the hassle of digging up documents you don’t need. 

Step 2: Pre-Audit Research and Review

There’s nothing you need to do here, as this is when the auditor reviews your tax account and history with the Comptroller’s office. If you were audited before, the auditor will review notes and records to see what happened in the earlier audits. The auditor will then create a preliminary plan for the current audit’s objectives. 

Step 3: Taxpayer Contact 

This is the first substantive communication between you and the auditor. The earlier contact was to inform you of the audit and ask some basic questions about your restaurant business. Step 3 is where the auditor asks more probing and pointed questions so they may identify what documents they want you to produce. Types of documents you can expect to produce include:

  • Lists of sales made by your restaurant
  • Copies of resale and exemption certificates
  • Purchase invoices
  • Sales receipts
  • Federal income tax returns
  • General business ledgers
  • Bank statements
  • Accounting data and documents used to prepare your tax filings

After the auditor decides what documents they want to review, they’ll schedule an appointment to start the audit. 

Step 4: Entrance Conference 

Here, you (or your tax representative) will talk to the auditor to finalize the audit plan and figure out what exactly your audit process will entail. 

Step 5: Examination of Records 

Also known as the fieldwork portion of the audit, this is the most substantive part of the audit and is where the auditor reviews the documents they requested from you. In some audits, the auditor will just review a sample of your available records to find any problems or errors.

Assuming none are found, and you produce all requested documentation and information to substantiate the information on your tax return, then the document examination portion of the audit might conclude. However, if the auditor finds one or more errors or problems after this abbreviated review of records, they will continue the audit in three possible ways.

First, if there are a lot of records to review, your auditor may use the sampling method. The sampling method involves a review of a portion of available documents, and then projecting out the results over a longer period of time. While this can work for some restaurants and bars, it's very inaccurate for businesses with a lot of seasonal variances.

For instance, if the audit involves reviewing four years’ worth of alcohol sales, the auditor may just look at six months’ worth of sales and then multiply whatever deficiencies are found by eight. If the auditor finds that you underpaid your sales tax by $5,000 over six months, then the auditor will assume your total sales tax liability for the four years is $40,000 ($5,000 x 8). The assumption is that any tax deficiencies or mistakes will be relatively consistent so the auditor can save everyone time and effort by not reviewing all documents.

Second, if your records are incomplete or you don’t provide them, your auditor will use the information available to estimate your tax liability. You want to avoid this as much as possible, given how auditors will likely fill in any missing information with upper-end estimates that increase your tax liability.

Third, your auditor may complete a detailed audit and review every single record for the entire audit period. If you run a busy restaurant that serves alcohol, the amount of records you have over four years would be immense. Needless to say, your auditor probably won’t be using the detailed audit method.

After completing the review of your tax documents and records, the auditor will prepare schedules that outline any taxes you still owe or refunds you are due. 

Step 6: Exit Conference 

During this meeting, the auditor explains what they found and what additional taxes you might owe, plus any applicable penalties and interest. If you disagree with the auditor, you can request a reconciliation conference and/or independent audit review conference. 

Step 7: Reconciliation Conference 

This is a meeting between you, the auditor, and the auditor’s manager or supervisor to discuss your disagreement with the audit. These meetings can be held at the audit office or your location. If the disagreement can’t be resolved during the reconciliation conference, an independent audit review conference can be held. 

Step 8: Independent Audit Review (IAR) Conference 

This is a conference between you, the auditor, and a third party to meet and discuss the audit dispute. This third party won’t be an independent, third-party reviewer, but they will be someone from outside the Audit Division of the Comptroller’s office. 

Step 9: Finalization 

Assuming a reconciliation and/or IAR conference takes place, the auditor will finalize their findings and organize them into audit schedules. 

Step 10: Review 

The auditor’s supervisor will review the auditor’s findings. Once approved, the results get mailed to you in an audit notification letter. 

Step 11: Redetermination 

If you disagree with the audit’s results, you can further challenge them by mailing a Statement of Grounds to the Comptroller to request a redetermination hearing. This document outlines your disagreements and the basis for those disagreements. The Comptroller must receive this document by the deadline located in the audit notification letter. 

Step 12: Amendment 

If the redetermination hearing results in any changes (and you agree with them), the Comptroller will prepare an in-house amendment reflecting those changes. If you disagree with the changes (or no changes follow the determination hearing), you can ask for an Administrative Hearing for another chance to review the audit. 

What If You Fail the Restaurant Audit

If the state determines that you didn't report and pay your restaurant sales tax, mixed beverage sales, or mixed beverage gross receipts tax, you may incur penalties. The state can assess a 10% penalty for filing late. Additionally, if fraud or evasion is involved, the Comptroller may assess a 50% penalty. 

The penalty is based on the amount of unstated tax. For instance, if you get audited and the state discovers that you failed to pay $10,000 in mixed beverage tax, you may face a $5,000 penalty if the understatement was due to fraud or evasion. 

Tax Audit Alternatives 

In certain cases, you can avoid a traditional audit. If you’ve already been notified of the audit, you can ask for a managed audit. A managed audit is like a regular audit, except the fieldwork portion (Step 5) is completed by you, under the auditor’s supervision.

You have 60 days after receiving the Audit Notification letter to request a managed audit. This request must be in writing and sent to the field office manager. A managed audit request will be considered if you had a prior audit that took more than 120 hours to complete or if you can show that a managed audit will save the Comptroller’s office time and effort and you can do a thorough job. Concerning this last point, you will need to show that you (or someone working on your behalf) have sufficient knowledge of Texas tax law to properly review your documents.

If you haven’t been officially notified of an audit, but you think one is coming because you didn’t properly pay your sales taxes, you can consider the Voluntary Disclosure Program. If eligible, you can voluntarily pay any unpaid or underpaid taxes to the Comptroller’s office and avoid any penalties. In most cases, you can also avoid having to pay interest. 

Common Problems Found During a Mixed Beverage Tax Audits 

A mixed beverage and sales tax audit of your restaurant could result in any number of errors that result in an unexpected tax bill, plus penalties and interest. However, a common problem that comes up during audits is not having complete records.

For example, you may have collected the mixed beverage sales tax when you sold a glass of wine to a customer, but your records of the transaction may not indicate that the mixed beverage sales tax was included in the price the customer paid. If you can’t produce documents to prove you did collect the mixed beverage sales tax, you should expect the auditor to conclude you did not collect the necessary alcohol sales tax. 

How to Avoid a Mixed Beverage or Sales Tax Audit 

The exact steps to avoid a tax audit are unknown. After all, if taxpayers knew exactly what triggered an audit, it would make it easier for them to engage in tax evasion. Despite the secrecy behind what the Texas Comptroller’s office looks for when deciding to audit a business, some factors can make it more likely that a tax return will get audited. Some of these characteristics include:

  • Being among the largest taxpayers in Texas.
  • Having been subject to a prior audit that found a tax liability of $25,000 or more.
  • Being a cash business.
  • Filing tax returns that are inconsistent with each other (such as sales tax returns representing gross sales that do not match up with a restaurant’s business income tax return).
  • Not filing necessary returns (sales and use tax returns must be filed, even if no tax is due).

Even if none of these traits apply to your restaurant, you could still face a sales tax audit because of computer-based random selection. Therefore, the best strategy is to take a preventative approach, yet make sure you’re prepared for the audit you hope never comes. 

Here are some tips that may not only reduce the chance of a sales tax audit but also help you get through one as quickly as possible if you do get audited:

  • Keep accurate and complete records of all transactions, not just sales to customers.
  • Have copies of all applicable resale or sales tax exemption certificates.
  • File all required tax returns on time.
  • Pay careful attention to cash transactions and keep good records of them.
  • Periodically reconcile cash registers.
  • Only take deductions and tax credits you’re confident you’re entitled to.
  • When in doubt, assume a transaction is taxable.
  • Don’t use round numbers on the sales tax return.

In a situation where you believe you may have failed to pay taxes owed and feel an audit might be possible in the near future, you can consider taking advantage of the Voluntary Disclosure Program. This program lets you come forward voluntarily before the state contacts you, and in exchange, the state limits the penalties you face for the previous periods of noncompliance.

Finally, if you haven’t already done so, consider hiring a tax professional. They can provide additional tips to avoid an audit and offer advice on changing tax laws and regulations that may affect your restaurant. 

Texas Restaurant Sales and Mixed Beverage Tax Audit FAQs 

How Far Back Will I Need to Produce Records for the Auditor?

Most audits only look at the prior four years’ worth of records. This is because that’s the statute of limitations for the collection of unpaid taxes. In other words, if an unpaid tax bill is more than four years old, the state of Texas can’t collect it. 

But before you get too excited, there are a few exceptions that allow the Comptroller’s office to assess a tax over any time period:

  • You filed a fraudulent return to evade a tax you had to pay;
  • There was a major mistake with a filed return that would increase the taxes you owe by 25% or more; or
  • You did not file a required tax return. 

How Long Do Audits Last? 

It’s hard to say for certain, as an audit’s length depends on how busy the auditor is, how quickly you comply with the auditor’s requests for information, and how complex your audit is. However, auditors are told to avoid any period of more than 30 days when nothing substantive occurs with your audit.

This means that you’ll usually have at least 30 days to comply with any document request, although up to two 30-day extensions are possible. The first 30-day extension is usually granted upon request, but the second 30-day extension will only be granted if you have a hardship that’s beyond your control. If you take both extensions, you'll have a total of 90 days to prepare. 

If there’s a major disagreement between you and the auditor, it can dramatically lengthen the amount of time it takes to complete the audit. If these disagreements have to be resolved by Administrative Hearings and/or court litigation, it can potentially take years for audits to complete. 

How Do I Request an Audit Extension? 

There’s no formal method of asking for an extension, but they should be made to the auditor and always in writing. Making your request by letter or email will help avoid any misunderstandings or confusion later. 

What Are My Rights During the Tax Audit?

The Texas Comptroller of Public Accounts has the “Texas Taxpayer Bill of Rights” which outlines your basic rights as a taxpayer. Some of the rights applicable during the audit process are:

  • Your taxpayer information is confidential.
  • You can have someone represent you during the audit process.
  • If you disagree with an audit’s findings, you have the right to contest them.
  • If the audit results in penalties, you have the right to ask for a penalty waiver (this is automatically done if your audit results in you having to pay penalties for unpaid taxes). 

What If There’s a Major Disagreement in the Middle of the Audit? 

If the disagreement with the auditor relates to a tax question, you have two options. First, you can wait until the audit is completed to ask for a reconciliation conference or an IAR conference. Second, you can ask the Tax Policy Division of the Comptroller’s office to issue tax guidance on the disagreement.

To make this request, you and the auditor must consult with each other to prepare a document that identifies the issue and applicable facts. The Tax Policy Division will only accept guidance requests when you and the auditor can agree on the underlying facts.

After preparing the document, your auditor will submit it to the Tax Policy Division through the Audit Headquarters. After a decision is made, it gets sent to the auditor who then explains the results to you during the audit. 

Get Help With Texas Sales and Mixed Beverage Tax Audits 

Texas sales tax and mixed beverage taxes can be confusing at times, especially when it comes to how sales tax exemptions apply. Then there’s the issue of doing the right thing by collecting and paying the appropriate sales taxes, but not having the records to prove you did what the law requires.

If you receive notice from the Comptroller’s office informing you of an audit of your restaurant, you need to think about getting professional tax assistance. TaxCure can help you find the right Texas sales tax pros in your area. These tax professionals can help you prepare for an audit, as well as represent you during all steps in the audit process. They can also give you guidance on what to do to avoid an audit or apply for the Voluntary Disclosure Program. 

Many of these professionals offer free consultations, so you have nothing to lose by getting in touch to ask questions about your sales and mixed beverage taxes.

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