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Liquor-by-the-drink Tax

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1. How do I register my business for liquor-by-the-drink tax?

The first step is to submit an application for registration to the Department of Revenue for sales tax, business tax and any additional taxes that may apply. The second step is to apply for a license with the Alcoholic Beverage Commission (ABC). Once the application has been submitted to the ABC, the next step is to provide the Department of Revenue with a $10,000 security bond. The bond may be a corporate surety indemnity bond, certificate of deposit or cash bond. Once the bond has been secured, the Department will notify the ABC that the license may be issued.

2. Will my bond with the Department always be $10,000?

No. The Department does annual bond reviews, and the bond amount may be lower or higher, based on the bond requirements. The bond requirement, after the initial year, is four times the average monthly tax liability for a 12-month period. The Department will notify you about any increases or decreases.

3. What liquors do I include in my inventory values?

Inventoried liquors should include alcohol, wine and high-gravity beer. For purposes of completing lines one and two on the alcoholic beverages for consumption on the premises (liquor-by-the-drink tax) tax return, include the total inventory for all three types of alcohol.

4. How do I measure and determine my inventory values?

Values are determined based on the remaining liquor at the end of the month. Each full bottle is valued at its original cost. (Original cost means the amount you paid to purchase the liquor, wine or high-gravity beer.) Partial bottles are measured using percentages to determine how much liquor is left in the bottle. For example, if a bottle of Jack Daniel's has 70 percent of the bottle remaining and its original cost is $20, the inventory value is $14 ($20 x 0.7).

5. The tax return asks for my beginning and ending inventory for each month. What if the inventory is performed monthly but not necessarily on the first and last day of the month?

An inventory should be conducted on a monthly basis. If for any reason you are unable to conduct inventory on the last day of the month, an inventory should be performed as soon as possible. Note the actual date the inventory values were determined, and maintain written documentation of those dates and amounts in your files.

6. What if I don't have the exact inventory value at the time of filing my tax return?

Estimate the value that it should have been as of the end of the month. If the inventory amount is later determined, an amended return should be filed. In order to comply with the applicable rules and regulations, the following month's inventory should be performed on the last day of the month. To read more about this, please see TENN. COMP. RULES & REGULATIONS 1320-4-2-.06(2)(d).

7. How do I calculate my gross sales?

Gross sales are the total of all of the sales for the month reported on the return.

The "sales price" of an alcoholic beverage is the total price for which the drink is sold and includes the alcoholic beverage tax, applicable sales tax (both state and local) and the cost of any services required to process the beverage for sale without any deductions for the cost of the beverage, the cost of the materials used, losses or any other expenses. To read more about this, please see TENN. COMP. RULES & REGULATIONS 1320-4-2-.01 (7).

Both sales tax and liquor tax must be included on line three (gross sales) of the alcoholic beverages for the consumption on the premises (liquor-by-the-drink tax) return, in order to avoid understating the liquor tax due.

8. What if we don't perform an inventory on a monthly basis? What if it's quarterly or annually?

Any business that holds a liquor-by-the-drink license is required to conduct a monthly inventory. See TENN. COMP. RULES & REGULATIONS 1320-4-2-.06(2)(d).

This is not a new requirement. In order to maintain good internal controls, an inventory should be performed on a monthly basis. The Department has added a place for monthly inventory amounts to the liquor-by-the-drink tax return, not only to ensure compliance with the applicable regulations, but also to help taxpayers. A lack of inventory records is a primary reason for liquor-by-the-drink tax audit assessments.

9. How do I account for spillage, breakage and theft?

A taxpayer may reduce his or her inventory by the amount of alcoholic beverages lost due to theft, breakage or acts of nature, but proof of loss must be provided to the Department. To read more about what is necessary to show proof of loss, please read TENN. COMP. RULES & REGULATIONS 1320-4-2-.04(2).