The term "tavern," as defined by the Liquor Control Board, means any establishment licensed to sell beer and wine. Persons under 21 years of age are not allowed on the premises. Nonalcoholic beverages and food may also be sold at these establishments.
Spirits, Beer and Wine Lounge
The term “Spirit, Beer and Wine Lounge” (Lounge) as defined by the Liquor Control Board, means any establishment licensed to sell beer, wind and spirits. Nonalcoholic beverages and food may also be sold at these establishments. Minors may be allowed in these establishments provided they meet requirements set forth by the Liquor Control Board.
A consumer is any person who uses tangible personal property or receives services defined as retail sales. Tangible personal property or services may be for personal use or for conducting business activities. It is important for sellers to know who the consumer is to correctly collect sales tax.
Deferred Sales Tax
This tax applies under conditions where a person acquired goods without paying sales tax when sales tax was due. Generally, deferred sales tax applies when someone uses a reseller permit to purchase goods that are used and not resold (without use). When reporting deferred sales tax, place the taxable amount on the use tax line of the excise tax return.
The term "gross amount," which appears at the top of Column One on the excise tax return, is a "catch-all" term for whichever of the following terms is applicable to your business: "gross proceeds of sale," or "gross income of the business." The gross amount includes all consideration received without deductions for the costs of doing business or other expenses.
Persons wishing to register a business with one or more state agencies must complete a Business License Application. Upon submitting a Business License Application, the person receives a Unified Business Identifier (UBI) number. The person then receives a Business License to post at the business location.
Effective January 1, 2010, reseller permits issued by the Department of Revenue, replaced resale certifcates. Reseller permits are free and are issued to businesses that make wholesale purchases. The permits allow businesses to purchase items or services for resale without paying retail sales tax.
Revised Code of Washington (RCW) is the compilation of all permanent laws (ie, statutes) currently in force.
UBI/Tax Registration Number
Sometimes called a registration, tax, "C," or resale number, the Unified Business Identifier (UBI) number is a nine-digit number used to identify registered businesses. The number is assigned when a person completes a Business License Application to register with or obtain a license from state agencies. The departments of Revenue, Licensing, Employment Security, Labor and Industries, and the Corporations Division of the Secretary of State are among the state agencies participating in the UBI program. In most cases, your UBI number will also be your tax registration number. Spouses who file separately and businesses that have multiple locations are assigned separate tax registration numbers as needed.
Washington Administrative Code codifies the rules (ie, regulations) of each state agency having rule-making authority.
Business and Occupation Tax (B&O Tax)
The B&O tax is a gross receipts tax; it applies to the gross income of the business. This means no deduction is allowed for labor, materials, or other costs of doing business.
The nature of the business activity determines appropriate B&O tax reporting. Different tax classifications with different rates apply for the various business activities. Businesses performing more than one activity may be subject to tax under one or more B&O tax classifications.
The state B&O tax is reported on the Department of Revenue's excise tax return. A business may file on a monthly, quarterly, or annual basis, depending on the estimated yearly tax due and the type of business.
Retail Sales Tax
A tax imposed on the buyer of goods and certain services. However, the seller is responsible for collecting the tax from the consumer and remitting the tax to the Department of Revenue. The sales tax is a combined state and local tax.
Overview of Taxes Applying to Taverns and Service Bars
Retailing Business and Occupation (B&O) Tax and Retail Sales Tax
All sales of meals and prepared food, beverages (alcoholic and nonalcoholic), cigarettes and miscellaneous items of tangible personal property are subject to Retailing B&O tax and, in most cases, retail sales tax. Included under these classifications is pool, billiards, foosball, shuffleboard, air-hockey and any other income from amusement devices considered to be a “participation activity” such as darts and ping pong.
Prepared and Unprepared Food
In most cases, 75% or more of a tavern’s and/or lounge’s total food sales fall into the prepared food classification. Therefore, all food sales, even if exempt from sales tax by statute, would be subject to retail sales tax. For further information see “Prepared Food Tax Changes” (pdf) or the Restaurants and Retailers of Prepared Food guide.
Vending Machine Sales
All sales of items from a vending machine owned and operated by the business whether exempt by statute or not would be subject to retail sales tax if the business’s sales of prepared food exceeds 75% of total food sales.
Tips or gratuities received under circumstances that are clearly voluntary are not part of the selling price and, therefore, are not subject to sales tax. However, if the tip or gratuity is added to the bill and is a mandatory charge for services, the charge becomes part of the selling price subject to tax.
A gratuity is not voluntary when the amount is agreed upon and the contract document states that a gratuity "will be added." For example, a tavern may have a policy of charging groups of five or more a mandatory 15 percent gratuity. When a gratuity is applied in this manner, the entire charge is subject to retail sales tax and the Retailing classification of the B&O tax.
Amounts charged for the beer, the keg, tap, etc., are subject to retail sales tax and retailing B&O tax. The retailer is not required to collect tax on any refundable deposit charge.
However, if the retailer ends up not refunding the deposit for whatever reason, the retailer must report the amount of the forfeited deposit under the retail sales tax and retailing B&O tax classifications. (The retailer would be able to back out the sales tax from the forfeited deposit in reporting this transaction.)
Effective July 1, 2011, complimentary meals that a restaurant provides to the employees of the restaurant are no longer subject to sales tax, B&O tax, or use tax. For purposes of this exemption, a tavern that provides free meals to employees of the tavern will qualify for this exemption.
Sales of meals to employees where there is a specific charge remain subject to sales tax and retailing B&O tax.
A “meal” means one or more items of prepared food or beverages other than alcoholic beverages.
References: SB 5501; RCW 82.04; RCW 82.08; RCW 82.12
Prior to July 1, 2011, meals provided by a restaurant/tavern to the employees of the restaurant/tavern were subject to tax as outlined below.
Retail sales tax and the Retailing B&O tax apply to meals provided to employees. The tax applies whether individual meals are sold, a flat charge is made, or whether meals are furnished as a part of the compensation for services rendered.
Retail sales tax applies to the selling price. Therefore, where a specific and reasonable charge is made to the employee, the measure of the tax is the selling price. Where no specific charge is made, the measure of the tax is the average cost per meal served to each employee based upon the actual cost of the food.
Where meals furnished to employees are not recorded as sales, the tavern or lounge may use an estimate to determine the meal count. The estimate must be based on the business’s actual policy regarding employee meals. For example, a tavern or lounge may have a policy that every employee working five hours receives a meal.
If the tavern or lounge does not have a written policy or a policy cannot be determined, the tax due shall be presumed to apply according to the following formula for determining meal count:
- Those employees working shifts up to five hours, one meal
- Employees working shifts of more than five hours, two meals
Since it is often impractical to collect the retail sales tax from employees on the sale of meals, the employer may, in lieu of collecting such tax from employees pay the tax directly to the Department of Revenue.
Local Sales Tax
In addition to the 6.5% state sales tax, persons making retail sales must collect the local rate of tax for their business location. This rate varies throughout the state so sellers must determine the appropriate rate of tax using one of the tables located in the section titled “Sales Tax Rates” on the Department of Revenue homepage. In these tables you will find the proper location code to use when filing your Excise Tax Return. For most sales this will be your business location. If, however, you deliver taxable items such as pizzas or kegs of beer to another location, the rate and location code to be used will be the place of delivery.
Sales Tax Included in the Price
Generally, if sales slips, sales invoices, or meal checks are given to the customer, the sales tax must be separately stated on the sales receipt. If not separately stated, it is presumed that retail sales tax was not collected and the tavern or lounge must report and pay sales tax on the gross receipts of the business.
Taverns or lounges may advertise and/or sell meals, beverages, or other items at prices including sales tax. However, when selling in this manner, the menu and other price information must clearly indicate that sales tax is included in the price.
If tax is included in the price, the amount of tax may be backed out of gross receipts to arrive at the amount subject to tax. For example: a pint of beer is sold for $2, which includes sales tax. Assuming an eight percent rate of tax, the gross amount subject to tax is $1.85 ($2.00 divided by 1.08).
A cover charge is generally a fee charged to allow guests entry for a specific event or activity. A cover charge that entitles guests to an opportunity to dance or to participate in a contest, such as karaoke, is subject to retail sales tax and the Retailing classification of the B&O tax. Sales tax may be included in the amount charged as a cover charge if it is properly posted that tax is included. See the Service and Other Activities section for times when cover charges are not subject to Retailing B&O tax and Retail Sales Tax.
Retailing and Retail Sales Tax Exemptions and Deductions
The net amount (before tax) of bad debts or dishonored (bad) checks may be deducted when actually charged off the books of account. A dishonored check is deductible to the extent it was taken as payment for goods or services on which business tax was previously reported and paid. A bad debt that was not previously reported may not be deducted. A deduction on the excise tax return is allowed under both the Retailing and Retail Sales tax classification. Any amounts subsequently recovered must be included in gross proceeds of sales. If sent to a collection company, the tavern may not deduct the fees charged by the collection company.
Overages and Shortages in Cash
Normally taverns and lounges count their cash taken in at the end of shifts or the end of the day. Any cash overages are considered to be additional sales and must be reported under the Retailing B&O tax and Retail Sales tax classifications. Cash shortages are considered a cost of doing business and cannot be “netted out” against overages.
Discount Coupons and Two-for-One Promotions
Selling meals or beverages on a "two-for-one" or similar basis is not giving away a free meal or beverage, but rather selling meals or beverages at a discounted price. The tax applies to the amount that is actually received by the seller. Therefore, both Retailing B&O and Retail Sales Tax should be calculated on the reduced price, the amount actually received by the tavern.
Example: A customer uses a two-for-one coupon to purchase two meals. The selling price of each meal is $10. Tax applies to $10, the actual amount charged for the two meals. If extra items are sold, such as beverages, tax applies to the $10 plus the amount charged for the beverages.
There may be times when a tavern or lounge sells products to a person or entity who will resell the item to a consumer. When that occurs, the seller must document the tax exempt status of the sale by requiring the buyer to provide a reseller permit.
Service and Other Activities
A cover charge is generally a fee charged to allow guests entry for a specific event or activity. In general, if the cover charge is for the privilege of listening to music or watching a pay-per-view show the income is subject to the Service and Other Activities B&O Tax. See the Retailing/Retail Sales Tax section for times when cover charges are subject to those taxes.
Banquet Room Rentals-With and Without Employees/Bartender
Taverns and lounges may provide meeting or banquet rooms in conjunction with providing meals or drinks. If the charge for the room is stated separately from all other charges, then the income from that is subject to the Service and Other Activities B&O Tax. If the charge for the room is combined with other charges subject to Retailing/Retail Sales Tax, the entire charge would be subject to those taxes.
Video Games/Amusement Devices
The income from machines or devices which permit a patron to see, hear, or read something of interest such as slot, pinball, poker, and electric dart machines is subject to the Service and Other Activities B&O Tax.
Lottery and Scratch Ticket Income
Some taverns and lounges sell lotto, lottery, and scratch tickets. The Lottery Commission pays the vendor a certain percentage of the gross sales of these tickets. This income is subject to the Service and Other Activities B&O Tax. Payouts made to winners are reimbursed by the Lottery Commission on a dollar for dollar basis and are not subject to any B&O or Retail Sales Tax.
The gross income from jukeboxes is subject to the Service and Other Activities B&O Tax.
Many taverns and lounges allow others to place video machines, jukeboxes, vending machines, and other devices on their premises for a fee or commission. In these cases, the tavern or lounge is not the owner of the machine and is not responsible for reporting the income generated by the machine. The amount paid to the tavern or lounge may be a flat fee or may be based on a percentage of the income generated by the device. The income from these commissions is subject to the Service and Other Activities B&O Tax.
It should be noted that if the tavern or lounge rents or leases the device or equipment they are considered the owner of it and must report the gross income under the appropriate tax classification(s).
The syrup tax is imposed on the wholesale or retail sale of syrups within this state. The tax is imposed on each gallon of product sold. Syrup is a concentrated liquid marketed by manufacturers to which the purchaser adds water and/or carbon dioxide, or, carbonated water to produce a carbonated beverage.
A wholesaler making a wholesale sale of syrup in this state must collect the tax from the buyer and report and pay it to the Department. A retailer making a retail sale of syrup purchased from a wholesaler who has not collected the tax must report and pay the tax directly to the Department.
The tax must be reported on a special line of the excise tax return designated "Syrup Tax."
Retailers that paid syrup tax either to vendors or directly to the Department of Revenue on or after July 1, 2006, a percentage of the syrup tax paid is allow as explained in the Special Notice Retailers of Fountain Drinks B&O Tax Credit for Syrup Tax Paid (pdf).
Litter tax is imposed on those industries whose products are reasonably related to the litter problem. The tax does not apply to the sale of food or beverages by retailers that are sold solely for immediate consumption indoors at the seller’s place of business or at a deck or patio at the seller’s place of business, or indoors at the at an eating area that is contiguous to the seller’s place of business. Therefore, items such as prepared or unprepared food, beer (kegs, bottles, cans), and wine to go would be items commonly sold by taverns and lounges that would be subject to the tax. It does not matter whether these items are sold at retail or wholesale.
Use tax is a tax imposed on the use of tangible personal property in Washington when sales tax has not been paid. It is computed at the same rate as the sales tax. Unless specifically exempt by law, all tangible personal property purchased or used in this state is subject to either the sales tax or use tax, but not both, regardless of where or from whom the property is purchased.
There are many instances where sales tax is not paid to the seller. The following are examples of transactions where sales tax may not be collected by the seller:
- Catalog purchases
- Internet purchases
- Inventory withdrawals
Purchases Subject to Sales or Use Tax
Tavern and lounge businesses must pay retail sales or use tax on purchases of retail services and items used and/or consumed by the business. In general, this includes items used in the tavern and lounge operations that are not for resale and do not become an ingredient of the meal. The following list represents some common items purchased for use by taverns that are subject to tax. Retail sales tax applies to the following:
- Chairs, tables, bar stools, booths and other furnishings
- Dishes, silverware, glassware, menus and linens
- Pest control
- Tap and vent cleaning
- Signs, lighted and unlighted advertising items and pictures
- Vending machines (purchased or rented)
- Matches, pens and magazine subscriptions
- Equipment, ovens, coffee makers, etc
- Repair parts and labor
- Supplies and other items used in the tavern operation that are not for resale
- Tangible personal property purchased as prizes for punchboard winners
- Punchboards and pull tabs
- Cash registers, computer equipment and maintenance contracts
- Leasehold or building improvements
- Inventory withdrawals (usually shirts and caps worn by employees)
This list is not all inclusive and there may be other items or services purchased that would be subject to either of these taxes.
Purchases for Resale - Not Subject to Tax
Sales or use tax does not apply to items purchased for resale to customers. A tavern or lounge business may use a reseller permit issued by the Department to purchase the following items:
- Beer, wine and spirits
- Soft drinks and soft drink syrup
- Paper plates, plastic eating utensils, plastic cups and paper napkins
- To go containers including paper bags
- T-Shirts, sweatshirts and caps sold to customers
Games, Gambling, and Contests of Chance
How does tax apply to games and gambling?
Many taverns offer entertainment in the form of games. The tavern may own the games or receive commission for allowing the games to be placed in the tavern.
Commissions: Income for allowing the placement of vending machines or games is subject to B&O tax under the Service and Other Activities classification.
Pool/Darts/Shuffleboard: These activities are retail sales. Gross receipts are subject to retail sales tax and the Retailing classification of the B&O tax.
Video games/Amusement devices: This includes slots, pinball, electronic darts, and other machines or devices that permit the patron to see, hear, or read something of interest. Gross receipts are subject to B&O tax under the Service and Other Activities classification.
Sales or use tax applies to the purchase of the machines.
Internet Access: Gross receipts for allowing customers access to the Internet is subject to B&O tax under the Service and Other Activities classification.
References: WAC 458-20-187
Gambling - Contests of Chance
“Contests of chance” means any contests, games, gaming schemes, or gaming devices, other than the state lottery as defined in RCW 67.70.010, in which the outcome depends upon an element of chance. The skill of the contestants may also be a factor in the outcome. “Contests of chance” include:
- social card games
- dice games
- punchboard games
(“Contests of chance” does not include race meets for which a license must be obtained from the Washington Horse Racing Commission or “amusement games” as defined in RCW 9.46.0201.)
Calculating Income to Determine B&O Tax Classification
Effective July 1, 2005, Chapter 369, Laws of 2005, added a new B&O tax classification “Gaming Contests of Chance ($50,000 a year or more)” for businesses grossing $50,000 or more of gaming income per calendar year. (Businesses with gaming contests of chance income of less than $50,000 per year are to report under the service and other activities B&O tax classification.)
The gross amount of gaming income is calculated by taking the total revenue generated by gaming activities and deducting the amount of payouts to the customers. “Payouts” include the monetary value or actual cost of any prizes that are awarded, amounts paid to players for winning wagers, accrual of prizes for progressive jackpot contests, or repayment of amounts used to seed guaranteed progressive jackpot prizes. In the case of donated merchandise, the operator may deduct the fair-market value of the merchandise. Costs of operating the game, including the amount paid for the purchase of the actual game (e.g., punchboards, pull tabs, etc), may not be deducted. If, after this calculation, the income is or will be $50,000 or more per calendar year, the business will report under the new “Gaming Contests of Chance ($50,000 a year or more)” B&O tax classification.
Income from amusement games should not be combined with income from contests of chance for purposes of determining if the “less than fifty thousand dollar” threshold is met.
It should be noted that operators of games of chance need to report the total receipts from gaming income under column 1 of the excise tax return, record the amount of payouts on the deduction detail and place this amount in column 2 of the return, and calculate and pay the appropriate amount of B&O tax applied against the taxable amount (column 1 minus column 2) in column 3.
The following examples identify a number of facts and then state a conclusion. These examples should be used only a general guide. The tax results of other situations must be determined after a review of all facts and circumstances.
Example 1 - Sam’s Place has total gaming income of $70,000 per calendar year and $25,000 in payouts for the same period. Sam’s would report all of its gaming income under the Service and Other B&O classification because its “gross income” for threshold purposes is $45,000 ($70,000 minus $25,000).
Example 2 - J&M Grill has total gaming income of $120,000 in 2006 and $40,000 in payouts during the same period. J&M will be taxable on all of its income from contests of chance under the Gambling Contests of Chance ($50,000 a year or greater) B&O tax classification because its “gross income” for threshold purposes is greater than $50,000 ($120,000 minus $40,000 = $80,000).
Example 3 - Doug’s Cafe is a new business which opened in March and estimated that the “gross income” for threshold purposes would be less than $50,000 per year. At the end of July of the same year the total gaming income was $75,000 for March through July and total payouts for the same period of time was $22,000. Doug’s must report the taxable income for July under the Gambling Contest of Chance ($50,000 a year or greater) B&O tax classification because its “gross income” for threshold purposes $53,000 ($75,000 minus $22,000). Additionally, Doug’s must also reclassify, by filing amended excise tax returns for March, April, May and June, all gaming income reported for this period under the Service and Other Activities B&O classification to Gambling Contests of Chance ($50,000 a year or greater) B&O tax classification.