Does a nightclub or bar owe mixed beverage gross receipts tax or limited sales tax on the cover charges it collects from customers?

Subject

Cover Charges By Nightclub/Bar — Mixed Beverage Tax Due If Charge Is In Lieu Of Free/Reduced Mixed Drinks — Otherwise Sales Tax Is Due

Plain-English summary

The Comptroller's Tax Policy Division reviewed how a nightclub/bar (referred to here as "Corporation A," a Texas Alcoholic Beverage Commission mixed beverage permit holder) should tax the cover charges it collects from customers, and split the answer by who is being charged and when.

• Cover charges from customers under age 21 are subject to limited sales tax.
• All cover charges collected after 11:00 p.m. are subject to limited sales tax.
• Cover charges collected between 8:00 p.m. and 11:00 p.m. are subject to mixed beverage gross receipts tax instead, because they are tied to reduced drink prices during that window.

The reasoning for the 8:00-11:00 p.m. window rests on TABC Rule 45.103(c)(6): a cover charge is treated as related to reduced drink prices when it coincides with a lower drink price promotion. In other words, when the cover charge is effectively the price of admission to a period of discounted drinks, it's taxed like the drinks themselves (mixed beverage gross receipts tax) rather than as a general admission fee (limited sales tax).

The letter notes that a copy of the underlying analysis was also sent to the TABC's Director of Compliance, informing that agency of the cover charges collected by Corporation A.

What this means for you

Nightclub and bar owners

How you tax a cover charge depends on the circumstances under which it's collected, not just that it's labeled a "cover charge." If your cover charge is charged during a period when you're also offering reduced drink prices (here, 8:00-11:00 p.m.), it's taxed as part of your mixed beverage gross receipts, not as a separate taxable sale. Cover charges collected from underage patrons, or collected later in the night (after 11:00 p.m.) outside any drink-price promotion, are instead subject to limited sales tax.

Accountants and tax professionals

When advising a client that operates a mixed-beverage permit business, check whether cover charges line up with a discounted-drink period. TABC Rule 45.103(c)(6) is the operative test for whether a cover charge "relates to" reduced drink prices. Because the tax treatment (mixed beverage gross receipts tax vs. limited sales tax) turns on time of collection and the age of the patron, a single venue may need to track and tax cover-charge revenue differently depending on when and from whom it's collected.

Compliance and audit staff

This letter was addressed to a Comptroller field audit office (Fort Worth Audit), so it illustrates how this issue is resolved in an audit context: cover charges are not uniformly one tax or the other, and the correct treatment must be determined charge-by-charge based on the patron's age and the time of collection relative to any drink-price promotion.

Common questions

Q: Is a cover charge at a bar or nightclub always subject to sales tax?
A: No. It depends on the circumstances. Cover charges collected from customers under 21, or collected after 11:00 p.m., are subject to limited sales tax. Cover charges collected between 8:00 p.m. and 11:00 p.m. are instead subject to mixed beverage gross receipts tax because they relate to reduced drink prices during that window.

Q: Why would a cover charge be taxed as a mixed beverage receipt instead of a regular sale?
A: Because under TABC Rule 45.103(c)(6), a cover charge that coincides with a lower drink price promotion is treated as related to those reduced drink prices, so it's folded into mixed beverage gross receipts tax rather than taxed as a stand-alone admission charge.

Q: Does the age of the customer matter?
A: Yes. Cover charges collected from customers under the age of 21 are subject to limited sales tax, regardless of the time of collection.

Q: Who else was informed about this analysis?
A: The Comptroller's Tax Policy Division sent a copy of its memo to the Director of Compliance at the Texas Alcoholic Beverage Commission (TABC), notifying that agency of the cover charges collected by the taxpayer.

Citations and references

Rules:

• Texas Alcoholic Beverage Commission (TABC) Rule 45.103(c)(6) (cover charge related to reduced drink prices)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9607001L

Original ruling text

NOTE: This document is also indexed as a Mixed Beverage Tax document under STAR 9607L1429E10.

Date: July 12, 1996

TO: John DeLuna

Fort Worth Audit

FROM: Kirk Davenport

Tax Policy Division

SUBJECT: Taxability of Cover Charges

RE: CORPORATION A

ID No. ****

Mixed Beverage permit No. ****

I have reviewed the information that you provided Larry Koenig concerning

the cover charges collected by the taxpayer referenced above.

Cover charges collected from customers under the age of 21 are subject to

limited sales tax. All cover charges collected after 11:00 p.m. are subject

to limited sales tax. The cover charges collected between 8:00 p.m. and

11:00 p.m. would be subject to mixed beverage gross receipts tax because

they related to reduced drink prices. According to Texas Alcoholic Beverage

Commission (TABC) Rule 45.103(c)(6), a cover charge is related to reduced

drink prices if they coincide with the lower drink price promotion.

Attached is copy of the memo I sent to Tom Byrd, Director of Compliance,

TABC, informing him of the cover charges collected by CORPORATION A

If you have any questions, please do not hesitate to call me at 463-3849.