- Maryland Sales and Use Tax on Sales of Alcoholic Beverages
- June 27, 2011 | Authors: Christopher A. Davis; James W. Dawson; Jeffrey A. Markowitz
- Law Firms: Miles & Stockbridge P.C. - Baltimore Office ; Miles & Stockbridge P.C. - Rockville Office ; Miles & Stockbridge P.C. - Baltimore Office
Last month, Governor Martin O’Malley signed into law an increase in the sales tax on alcoholic beverages. This is the first major tax increase on the sales of alcoholic beverages in several decades. Effective July 1, 2011, the sales tax on alcoholic beverages will increase from 6% to 9%, a tax increase which is expected to generate $85,000,000 annually in additional revenue.
Under current law, Maryland imposes both an excise tax and a sales tax (also known as a “sales and use tax”) on alcoholic beverages. Excise tax rates for alcoholic beverages in Maryland are not changed by the new sales tax law and remain $1.50 per gallon for distilled spirits, 40 cents per gallon for wine, and 9 cents per gallon for beer. The sales tax, however, will be imposed at a 9% rate on the taxable price of alcoholic beverages. The new 9% rate replaces the 6% rate and is not in addition to that rate.
The 9% sales and use tax is a flat tax rate, and applies only to sales of “alcoholic beverages” as defined in Maryland Code, Tax-General Article §5-101(b). Alcoholic beverages include beer, distilled spirits, and wine, as well as any beverage or cocktail that may contain a mixture of both alcoholic and non-alcoholic components, such as alcoholic mixed drinks, frozen alcoholic cocktails, alcoholic coffee drinks, etc. Accordingly, mixed drinks that contain both alcoholic and non-alcoholic components are generally subject to the new 9% tax rate. However, in order to be taxable the drink must be intended for beverage purposes and contain one-half of 1% or more of alcohol by volume. Other products not intended for beverage purposes such as cooking wine and cooking sherry, as well as vanilla and rum extracts and similar items, are not subject to the 9% tax.
Sales tax must be separately calculated on sales of alcoholic beverages at the 9% rate and on sales of food, non-alcoholic beverages, and other merchandise at the 6% rate. The 9% tax amount must be listed separately from the 6% tax amount on the bill of sale. If charges for alcoholic beverages and non-alcoholic beverages are not separately stated, the entire charge may be subject to the 9% tax rate. In addition, if alcoholic beverages are provided free of charge, the retail establishment providing such beverages is considered to be the consumer of the alcoholic beverages and must pay any applicable sales taxes. Finally, certain industries (such as caterers, wineries, and those subject to the admissions and amusement tax) are subject to special rules.
For example, a special rule applies to caterers who provide their clients with itemized bills for food, beverages, and equipment, supplies, servers and bartenders. Under the new law, these caterers must determine which of these charges are related to sales of alcoholic beverages. Itemized charges for equipment, supplies, and labor that are “directly and predominantly” related to the sales of alcoholic beverages will be taxed at the 9% rate, while itemized charges for equipment, supplies and labor that are directly and predominantly related to the sales of food and non-alcoholic beverages will be taxed at the 6% rate. If a caterer does not itemize its bill in this manner, and instead elects to bill a lump-sum charge for either the entire bill or per-person, it must charge the higher 9% tax rate on the entire bill.
For restaurants or other retail establishments that impose mandatory gratuities for certain groups, additional complications arise. If the sales on which mandatory gratuities are imposed include alcoholic beverages as well as other items, the retail establishment must apportion the charge for the mandatory gratuity between the two categories. For example, if the total charge amounts to $300, and, of that amount, $200 is for the sale of food and non-alcoholic beverages and $100 is for the sale of alcoholic beverages, then 2/3 of the amount of the gratuity is subject to the 6% tax rate and 1/3 is subject to the 9% tax rate. In In this example, if the gratuity charged is $45, the 6% rate on the gratuity would be $1.80 (2/3 times $45 times 6% = $1.80) and the 9% rate on the gratuity would be $1.35 (1/3 times $45 times 9% = $1.35). The bill, therefore, would reflect total tax at 6% in the amount of $13.80 ($230 times 6%) and total tax at 9% in the amount of $10.35 ($115 times 9%).
Except for Delaware, all of Maryland’s surrounding states and the District of Columbia impose a sales tax on alcoholic beverages. The tax rate in Maryland (9%) is second only to the District of Columbia (which imposes a 10% sales tax on certain sales of alcoholic beverages, but only on sales made at package goods stores). Other states, including Pennsylvania (6% statewide, an additional 2% in some local jurisdictions), Virginia (5%), West Virginia (6%), and Delaware (0%) have lower sales tax rates on the sale of alcoholic beverages.
The increased sales tax on alcoholic beverages could potentially create significant expense and compliance burdens for businesses. To learn more about calculating, reporting, and complying with the new tax rules, please visit the Maryland Comptroller’s website at http://business.marylandtaxes.com/taxinfo/sut&under;faq.asp or contact any member of the tax group at Miles & Stockbridge P.C.