In our first beer blog in April we gave brewers an overview of how California’s sales and use tax applies to the beer brewing industry. In this beer blog we do a quick overview of some sales and use tax basics and then we share some more helpful tips so your tax reporting is as clean and crisp as your beer.
Sales and Use Tax Basics
As you know, the basics of beer are water, yeast, hops and malt; the basics of sales and use tax are about the sell and purchase of tangible personal property (“TPP”). TPP is property that can be touched, felt or tasted; tasted like a freshly brewed IPA. In California, the sellers of TPP owe sales tax – they collect the tax from their customers and pay it to the state. California purchasers of TPP owe use tax if they haven’t paid the sales tax. A couple ways that purchasers owe use tax are when they purchase TPP that they are going to use from an out of state vendor that hasn’t charged tax or when the purchasers give their vendors resale certificates.
First Tip – Use Tax for Comped Beer
A lot of brewers and beer sellers give their customers samples of their beer – if the customers like what they’ve tried then they’ll buy more. Sometimes it’s just an ounce or two in a glass or it’s a whole bottle of beer or a can. Brewers need to know that comps can be subject to use tax – the rules are a bit complicated so we’ll share some of the basics in this blog. Let’s start with how the use tax applies to brewers that make their own beer – what’s taxable and what’s not? If you make the beer then you know that the beer is made from food products: water, yeast, hops and malt – food products aren’t taxable so you don’t owe use tax when you comp beer that you’ve brewed. If the comps are packaged in bottles or cans then the brewer will owe use tax on the bottles, labels, caps, cans and if they were boxed then the cardboard is taxable, too. This is because the bottles, etc. are not exempt like the food products. The brewers owe use tax on the purchase price of these items so they will want to keep track of how much they give away. If the beer seller purchases beer from other brewers or distributors then they owe use tax on both the containers and the beer – alcohol is not a food product.
Second Tip – Use Tax for Equipment and Supply Purchases
Brewers may also owe use tax on equipment and supplies, especially when these items are purchased from an out of state vendor that has not charged tax on the TPP. So, brewers need to look closely at their purchase invoices – if tax isn’t on the invoice then it needs to be reported on the sales and use tax return. We know the California auditors will be looking at these equipment and supplier invoices.
Third Tip – Sales Tax on Beer and Everything Else
In California, once you are a seller then everything you sell is taxable – that means, beer, baseball caps, t-shirts, growlers, and even your old brewing equipment that you sell to upgrade to bigger and better equipment. But if you do not charge tax then you will need to support your exempt sales with exemption certificates. An example would be the sale of kegs of beers to other retailers.
Final Tip for this Beer Blog
Brewers know how important cleaning is for making good beer. Miles Consulting Group knows how important good recordkeeping is for brewers and beer sellers to correctly report their sales and use taxes. Clean brewing equipment results in good beer and good records results in clean sales and use tax audits. Here are some tips to get a clean audit result:
- Prepare, prepare and prepare – this means ensuring that all your sales are recorded and reported timely and that tax is paid on all your equipment and supplies, including those taxable comps.
- Careful, consistent tracking and reviews of inventory, cost of sales and markups will ensure that your sales are reported properly and correctly.
- Periodic self-audits will ensure that you are staying on track and not missing anything. We can help – remember “an ounce of prevention is worth a pound of cure.”
How Can we Help?
Your focus should be on creating that perfect bottle of beer. Our team can make sure you are paying no more or no less California sales tax (or other state tax) than what is due. It all begins with a conversation. If you think your company might benefit from having a better understanding of California sales and use tax, please reach out to us at info@milesconsultinggroup.com to start the conversation.
