The Break Even Calculation

So in all the discussions about the Dewhurst bill is the issue of a restaurant or "club" and the tax rates that are applied to various licenses. We always envisioned owning a place where people could dine on fine wine or spirits with well prepared, delicious food. Top level service was also important, and we've kept our tradition of white tablecloths and a fresh red rose on each table. But best of all, we've managed over the years to keep our prices as low as we possibly can, and we constantly are comparing our wines prices to other establishments to enforce this.

But serving spirits has a cost, besides just the licensing necessary for a Mixed Beverage permit. Once a Mixed Beverage permit is obtained, 14% of all liquor, beer and wine sold is remitted to the state by the owner. So if a martini is $10, you are charged $10, the state gets $1.40 and the owner gets $8.60. Some restaurants have found it more profitable to do away with the "hard stuff" and downgrade to a Beer/Wine permit. This allows them to charge a sales tax in lieu of the gross receipts tax, so if a glass of wine is $10, you are charged $10.82 and the owner gets $10. For every $100,000 in beer and wine sales this saves the owner $14,000 in taxes - unknown is how much business would be lost by losing the ability to serve cocktails.

But it is possible to quantify the mathematical point at which the cost of the gross receipts tax exceeds the income benefits of selling liquor. And as a service to those who may one day have to consider this point when thinking about opening their own little neighborhood joint, here it is using hypothetical numbers to illustrate.

Cost of liquor raw product (26%)
Total liquor, beer and wine sales ($50,000)

Cost of liquor raw product (26%) + Gross receipts tax (14%) = Cost of goods post-tax (40%), or a Gross Profit of (60%).

Multiply Total LBW sales ($50,000) * Gross Receipts Tax (14%) = Total Tax Paid ($7,000)

Divide Total Tax Paid ($7,000) / Gross Profit (60%) = Break Even Sales on Liquor ($11,667)

So if you project liquor sales greater than $11,667 your sales would justify paying the 14% tax on Total sales. If you project liquor sales below $11,667 you may want to consider if hard alcohol is a necessary part of your plan and save everyone the taxes.

And again, it is very difficult in these days to quantify the amount of business you might lose by not offering a cocktail before a meal. Just as difficult as it is to calculate the amount of business you might lose by having to cover the higher taxes.