How Does the Comptroller Use Pour-Cost and Depletion Analysis to Estimate Unreported Sales?

Published Read 4 min read

On this page

A depletion analysis starts from what a permittee bought, not what it reported. The Comptroller converts the liquor, beer, and wine purchased into drinks, prices those drinks, and compares the result with reported sales. Its rule presumes that all alcohol purchased was disposed of in a taxable way until the business proves otherwise and, without records or evidence to the contrary, allows average pours of 1.25 ounces for liquor, 16 ounces for beer, and 6 ounces for wine. A business rebuts the estimate with its own records.

The rule behind the method

The Comptroller’s rule for the mixed beverage gross receipts tax, 34 Texas Administrative Code Section 3.1001, sets three pieces:

  • A presumption. The Comptroller “presumes that the disposition of all alcoholic beverages purchased by the permittee is taxable until established otherwise,” and if records are not made available, “will presume all alcohol purchased was sold.”
  • Authority to estimate. If a permittee has not kept or produced the required records, the Comptroller may compute the liability from any available source or records and make estimates for the periods without records.
  • Default pours. “In the absence of records or evidence to the contrary,” the Comptroller may use an average pour size of 1.25 ounces for liquor, 16 ounces for a malt beverage, and 6 ounces for wine.

How the numbers are built

The Comptroller’s Mixed Beverage Gross Receipts and Sales Tax Manual (April 2017), written for its auditors, sets out the alcoholic beverage depletion analysis. Liquor, beer, and wine are each calculated separately:

  1. Containers available. Opening inventory plus purchases minus closing inventory. Purchase data comes from wholesalers, distributors, and others who report their sales to retailers to the Comptroller.
  2. Servings available. Containers multiplied by what the manual calls “services per container,” which is container size divided by serving size. For distilled spirits, the serving size is the pour plus a one-tenth-ounce pouring allowance, and the result is rounded down to a whole drink. A 750-milliliter bottle holds 25.36 ounces, so a 1.25-ounce pour becomes a 1.35-ounce serving and 18 services per container.
  3. Net servings. Servings minus verified allowances, such as documented complimentary drinks and spills.
  4. Calculated sales. Net servings multiplied by the average selling price, which the auditor derives from the business’s point-of-sale reports or register tapes, or, if no sales information exists, from comparable businesses in the area or menu prices posted online.
  5. The gap. Calculated sales minus the audited taxable sales from the business’s records gives additional taxable sales, expressed as an error percentage.
  6. The 5 percent allowance. The error percentage is multiplied by 95 percent, an allowance for pilferage, inventory shrinkage, and errors in recording complimentary drinks. The manual states the allowance is for audit purposes only and cannot be used by a taxpayer in reporting.
  7. Tax. The adjusted error percentage is applied to audited sales, and the tax rate to the result.

The manual treats any adjustment produced this way as an estimated audit.

The pour size has an outsized effect. A business that actually poured 1.5 ounces of liquor per drink got fewer drinks per bottle than a 1.25-ounce assumption predicts, so the default would overstate its sales.

A worked example (hypothetical)

The figures below are invented to show the manual’s arithmetic; they describe no real business. Assume 120 bottles of liquor, 750 milliliters each, left the bar’s inventory during the audit period, the business documented 40 complimentary drinks and spills, the average selling price is $9 a drink, and the business’s records support $15,000 in audited liquor sales.

Step Default 1.25-ounce pour Documented 1.5-ounce pour
Services per container (25.36 ounces ÷ pour plus 0.10, rounded down) 18 15
Servings available (120 bottles) 2,160 1,800
Net of 40 documented allowances 2,120 1,760
Calculated sales at $9 $19,080 $15,840
Additional taxable sales (minus $15,000 audited) $4,080 $840
Error percentage (additional ÷ audited) 27.20% 5.60%
After the 95 percent factor 25.84% 5.32%
Adjusted additional taxable sales (× $15,000) $3,876 $798

The only change between the columns is the pour size, backed by the recipes and pour-control records the business can show. That one input cuts the adjusted additional taxable sales by roughly four-fifths before any tax, penalty, or interest is computed.

Where the estimate can be challenged

The rule applies its defaults only “in the absence of records or evidence to the contrary,” which is where a business’s records do their work:

  • Actual pour sizes. Recipes, pour-control data, and bar procedures showing the drinks actually served.
  • Non-sale dispositions. Complimentary drinks, breakage and spillage, theft, disaster losses, product lost cleaning draft lines, and alcohol used in cooking count as verified allowances only when documented the way the Comptroller’s rule requires; an undocumented loss is still presumed sold.
  • Product mix and prices. Evidence that the menu prices or drink mix used in the estimate do not match what the business actually sold.
  • Inventory counts. Beginning and ending counts that correct the purchase volume attributed to the audit period.

Keeping a depletion analysis in check

A business that runs its own purchase-to-sales comparison each month, using its actual pours and documented losses, can see a gap before an auditor does and fix the reporting or the recordkeeping that caused it.

This article is general information about Texas alcoholic beverage law, not legal advice, and reading it does not create an attorney-client relationship. Statutes and TABC rules change; confirm current requirements with the Texas Alcoholic Beverage Commission, the relevant city or county, or a licensed Texas attorney before acting.

Related posts:

  1. What a “Death Penalty” Sanction Is, and How a Single Sale Can Cost a Business Its Permit The "death penalty" is cancellation of the license or permit. The Alcoholic Beverage Code puts cancellation within reach on a first offense for a sale to a minor: under Section......
  2. How Does a Comptroller Mixed Beverage Tax Audit Actually Work, Step by Step? A mixed beverage tax audit follows the Texas Comptroller's standard audit process: selection, a notice by mail, a review of the account, an initial conference, a request for records, fieldwork......
  3. Why the Texas Comptroller Can Block an L-Cert Over an Officer’s Delinquent Taxes From an Unrelated Entity, and How That Hold Is Cleared The Comptroller's signature on TABC's Required Certifications form states that "none of the persons making this application are indebted to the State of Texas." A tax debt of another company......
  4. How the City, County, and Comptroller Signing Sequence Works, and Why Collecting These Signatures Takes the Longest Part of Licensing The three signatures on a TABC application come from offices that do not work together: the county clerk and, inside city limits, the city secretary certify the location's wet or......
  5. Which TABC Permit Fits a Restaurant, and How Does the Alcohol-to-Food Sales Ratio Drive That Choice? Texas has no single restaurant permit. A restaurant that pours spirits needs a Mixed Beverage Permit (MB); one that serves only wine and beer can operate on a Wine and......
  6. What Is the Mixed Beverage Gross Receipts Tax, and How Does It Differ from the Mixed Beverage Sales Tax? Texas taxes drinks sold under a mixed beverage permit twice. The mixed beverage gross receipts tax is 6.7 percent of the permittee's receipts from alcoholic drinks and the ice and......
  7. How does an FB certificate enable to-go and delivery alcohol sales alongside food? For a restaurant or bar holding a Mixed Beverage Permit (MB), the Food and Beverage Certificate (FB) is the condition that unlocks to-go and delivery alcohol. Section 28.1001 of the......
  8. What Is a Distiller’s and Rectifier’s Permit, and What On-Site Sales Are Texas Distilleries Allowed? Three kinds of on-site sales are open to a Texas distillery, and each has its own ceiling: samples of up to half an ounce; drinks for consumption at the distillery,......
  9. How Sales-to-Minors Violations Arise, and What Defenses Are Available A sale to a minor is a crime for the person who makes it and a separate administrative case against the business's permit. Under Section 106.03 of the Alcoholic Beverage......
  10. How Sales-to-Intoxicated-Person Violations Arise, and How They Are Contested Selling alcohol to an intoxicated person is a crime under Section 101.63 of the Alcoholic Beverage Code when the seller acts with criminal negligence, and the same sale is a......
  11. How can an FB certificate remove the 51% firearms sign-posting requirement depending on the alcohol sales ratio? A Food and Beverage Certificate (FB) removes the 51% sign requirement outright. The statute that requires the sign, Section 411.204 of the Texas Government Code, says in its own words......
  12. What Hours-of-Sale Rules, Including Sunday Sales, Govern Different Permit Types? Texas sale hours depend on what is being sold and under which permit. Bars and restaurants serving mixed drinks may sell from 7 a.m. to midnight Monday through Saturday and......
  13. What is a Late Hours Permit (LH) and how does it extend alcohol service toward 2:00 AM? Serving until 2 a.m. takes an add-on to the main permit: the retailer late hours certificate, which TABC abbreviates LH. With it, a bar, club, or restaurant keeps selling the......
  14. What Is the Safe Harbor Defense, and What Documentation Does a Business Need to Invoke It? Safe harbor protects a business's license or permit when an employee sells or serves alcohol to a minor or an intoxicated person. Under Section 106.14 of the Alcoholic Beverage Code,......
  15. What Conduct Surety Bonds and Performance Bonds Does TABC Require, and Who Is Exempt? TABC requires three kinds of bonds. A conduct surety bond of $5,000, or $10,000 near a public school, applies to most on-premise retailers and to some off-premise retailers near schools.......

Leave a comment

Your email address will not be published. Required fields are marked *