It has been said that Mixed Beverage audits can be compared to a professional boxing match. They can be brutal and you never want to walk into the ring unprepared. The referee’s final admonition before a fight is also true in an audit: “Gentlemen, protect yourselves at all times!”
How do you protect yourself in an audit? Understanding all the elements and data points used in a Mixed Beverage audit and ensuring that appropriate documentation is always considered is a good place to start. Simplistically, some refer to the data points as “The Four P’s”. Price, Pour, Purchase and Proof. It’s a little more involved than that but remembering the four P’s will definitely help you keep tax in mind when making operational decisions for your bar or restaurant.
A depletion analysis essentially takes the amount of liquor, beer and wine that you purchased during the audit period, times the services per container, less any spills (by unit), times the average selling price, less comps (in dollars) to determine what you should have reported in gross sales and compares that with what you actually reported. The remainder is taxable.
The elements and data points used in the ABDA are:
- Average Selling Price (ASP)
- Verified Allowances (VA)
- Services Per Container (SPC)
The Proof part of the four P’s is imbedded in all of the above. You must document and be able to prove what happened during the audit period for each and every one of the data points.
Average Selling Price (ASP)
The auditor will request a PMIX report from your POS system and will use that report to determine the average selling price of each category (distilled spirits, beer and wine). In some cases, it’s as easy at dividing the total dollar sales by the total quantity sold but in many cases, the auditor needs to take a much deeper look into what makes up the amounts and the quantities and make adjustments before performing the calculation.
The PMIX needs to be analyzed and adjusted for the following:
- Bottles versus Glasses of Wine
- Virgin drinks included in liquor category
- Wine dinners
- Wine flights
- Buckets of beer
- Beer specials
- Beer or wine with mixed drink
- Larger pours on certain nights for same price as smaller pour
- Memberships that allow patrons larger beers for the price of a smaller pour
To appropriately document each of these situations usually requires that the POS system be programmed accordingly.
- Bottles versus glasses of wine should have separate buttons.
- Upcharges and Modifiers should be clearly marked as such so that they are easily identified on the PMIX.
- Virgin drinks included in the liquor category are fine but should be clearly marked as such or programmed into the non-alcoholic beverage category.
- Document any wine dinners or wine flights very well in a menu or bartender manual as well as separate programming in the POS.
- Buckets of beer or any multiple beer sales should be programmed separately and clearly marked as such (e.g. 5 beer bucket, 6 beer bucket, etc.).
- Any beer specials, a beer or wine with mixed drink special, larger pours on certain nights or beer memberships that serve a larger pour to members should all be programmed separately in the POS. Proving that you sold 23 ounce beers on Tuesday nights will be very hard to prove if you normally sell beer in 16 ounce mugs for the same price and all are rung up using the same button. Auditors will always protect the State’s interest and use the measurement that benefits the State. Without proof, you cannot overturn the auditor’s calculations.
Verified Allowances (VA)
Most auditors tend to view “verified allowances” as comps only but the amount indicated as Verified Allowances can contain several different items including:
- Beer line cleanings
- Waste from machine malfunction
- Liquor, beer or wine used in cooking
- Charitable contributions
Care should be taken to always document comps, spills or any other non-sale use of liquor, beer and wine. Programming the POS to accommodate this is the most efficient method. Each verified allowance (comp, spill, cooking, etc) button programmed should be programmed by category. In other words, don’t just program one button for spilled LBW as the VAs for each category is required in the ABDA to arrive at the appropriate gross sales for each category.
For those items that can’t necessarily be programmed or shouldn’t (e.g. line cleanings, machine malfunction, etc.) other methods are desirable.
- Beer vendors typically clean the lines every two weeks and the length and diameter of the lines determines the amount of beer wasted during the cleaning. Normally, beer vendors leave a small receipt at each cleaning with the amount of beer wasted. Keep these receipts! It is the best documentation available in the audit. If you do not keep them, you may be able to get a report from the vendor at the time of the audit. However, many of them won’t cooperate, say they can’t get that information for you or charge you to provide the information. The auditor can calculate the beer wasted using the number of lines, length and diameter of the lines but auditors can also refuse to do that and insist that you provide documentation from the vendor (receipts or report). It’s just easier to keep the receipts.
- Waste from machine malfunctions. A log should be kept that bartenders or managers are required to fill out when machines malfunction or a keg is wasted because it got warm, etc. Any odd occurrence that isn’t a common occurrence (spills, comps, etc.) should be documented and signed by a manager. This provides the best offense to prove that you had occurrences that resulted in liquor, beer or wine that was not available for sale.
- Occasionally, I’ll run into a client who has hosted charity events where the beer is donated. It’s vitally important that this is documented very well. Those purchases will show up in your HB11 or RITS data. If you choose to comp it through your POS, that’s fine but make sure to have other documentation to prove the occurrence. An auditor may question the very large increase in comps and may disallow it without further documentation.
Servings Per Container (SPC)
The services per container is made up of two parts, the pour and the weighted average pour. Again, a concerted analysis of the PMIX report should be done to insure that the right weighted average pour is attained.
The pour is the amount of distilled spirits poured in a mixed drink, the amount of beer in a mug or pitcher and the amount of wine poured. Unfortunately, this is one of the biggest points of contention in most audits and if done incorrectly can be the downfall of an audit and impossible to overturn. Auditors can conduct two different kinds of pour tests and in some cases do both. Bartenders need to be alerted and trained that these types of tests do happen and they should not be nervous and they should pour exactly what they always pour.
- Surveillance – this is an unannounced pour test. Usually, there are two auditors for a surveillance. They will not tell you they are auditors with the State and they will normally order two or three neat and cleans of some sort. They will then take them to a table or area of the bar where they can measure the drinks with a beaker or scale. There is a surveillance form they are required to complete – the reason for two auditors, to keep them honest. Just FYI, that isn’t always the case and the form isn’t always completed. If you receive an audit notice, the first question should be “have you conducted a pour test or surveillance”. If the answer is yes, you should request their documentation regarding either or both.
- Pour Test – this is an announced test. They will announce who they are, they will provide you with Texas Comptroller of Public Accounts business cards. They will request to go behind the bar and check stamps on bottles. They may rummage through your trash looking for bottles without mutilated stamps, they may write down stamp numbers (to confirm later that you did in fact, purchase that bottle of liquor). They may begin questioning bartenders for what the pour policy is and they may ask that the auditor pour drinks to measure. My recommendation is that no bartenders submit to this, EVER. The bartender should kindly tell the auditor(s) that they want their manager present for the pour test and ask that they reschedule a return date to conduct the pour test. Do not let them bully you into this. The outcome of the pour test can be devastating to an audit.
So how do you know if this is Comptroller or TABC? Ask for a card. If it’s TABC, the card will say TABC and not Comptroller. I’ve had clients who told me that the auditors represented themselves as TABC. That could have been true or it could have been a really nervous bartender who thought he heard TABC when in fact, they said Comptroller.
The most important thing that bartenders should remember at this point is “be honest”. If you normally pour 1.5 oz in a mixed drink, pour that. Don’t try to pour light because you think you’ll get in trouble. The auditor isn’t testing you, they are testing your pour and if you pour light, you will cost your boss money and in some cases, the bar and your job. Be honest, pour what you normally pour even if it’s more than you think you should be pouring.
The weighted average pour is determined through an analysis of the PMIX report.
- Distilled Spirits – Often bars have a varied pour depending on the type of drink and the quality of the liquor. For example, well drinks may be 1.5 oz pours, while martinis are four ounces and premium drinks are two ounces. An appropriate analysis of the PMIX report will determine the percentage of each type of drink sold in comparison to all mixed drinks sold.
Batch and frozen drinks that are prepared in dispensing machines should be analyzed and scheduled in the ABDA separately from the regular mixed drinks. To properly analyze the effect of batch drinks on the overall services per container, the auditor must have the total volume of the batch, the number of ounces served of the batch drink, the amount of primary distilled spirits used in the batch.
- Beer – Beer is served from either packages (cans / bottles) or draft. Consider that you sell beer in 16 oz mugs, 22 oz mugs and 60 oz pitchers. The PMIX should be analyzed to determine the percentage of each sold as a comparison to the total amount of beer sold.
Virtually all draft beer is served with foam or “head” so the mugs / glasses or pitchers do not contain the full liquid volume of the glass or pitcher. To provide an allowance for draft beer spilled or poured out by the bartender due to excessive foam, the services per container is calculated using the size of the glass / mug or pitcher. If there is excessive foaming, this should be noted in the spill logs to ensure the data is considered in the ABDA.
- Wine and champagne are served by the bottle, carafe, or glass and in many cases, the pour differs for reds versus whites. The PMIX should be analyzed to determine the amount of pour for each type of wine and bottle sales should be converted to its equivalent pours by glass (e.g. 4.23 glasses per 750 ml bottle if assuming a 6 ounce pour).
After using all available resources to obtain an accurate pour amount including the weighted average pour, a one-tenth (1/10) of an ounce is added as a pouring allowance. This one-tenth of an ounce is added to the pour amount to make an accommodation for bartender over-pouring, spillage and irregular pours.
Most auditors don’t consider beginning and ending inventories at all in a Mixed Beverage audit and in many cases, that’s okay. It’s assumed that if the bar or restaurant was in business for a significant amount of time before the start of the audit period, the inventory at the start of the audit would not vary that much from the inventory from the end of the audit period.
If, however, the start of the audit period coincides with the opening of your bar or restaurant, you should definitely take a look at the impact the beginning and ending inventories will have on the ABDA. You typically spend the first few months of operation building up an inventory and it shouldn’t be assumed that you’ve sold everything that you purchased during the audit period.
House Bill 11 took effect on September 1, 2011 and requires all brewers, manufacturers, wholesalers, and distributors to report to the Comptroller sales of alcoholic beverages to package stores, bars and restaurants. HB 11 also requires package stores to report to the Comptroller sales of alcoholic beverages to bars and restaurants. Very often, the reports are inaccurate yet the auditors rely on this information to complete the ABDA. A comparison of the actual purchase invoices to the HB11 data should be conducted to insure that the data being used is correct.
As part of the analysis of the purchases, you will also need to properly identify the secondary liquors purchased and ensure they are removed from the analysis in determining the estimated gross sales. Secondary liquors are any liquor in a drink that is not the primary liquor. As an example, in a margarita, tequila is the primary liquor and Cointreau or Triple Sec may be the secondary. All secondary liquors should be identified as such in the purchases in the ABDA. Most auditors won’t ask you about your secondaries and they will make the judgment call themselves. In many cases, what could be a secondary for you will get overlooked and considered a primary by the auditor thereby increasing the amount of liquor purchased that must have been sold and therefore subject to tax. Some examples of secondaries that may get overlooked are amaretto, or flavored liquors. Most auditors, if asked will say that because they can be sold as a primary or even a shot, they should remain as primaries. While it may be true that they can be sold as a primary or a shot, that doesn’t mean they always are. Care should be taken to determine appropriate documentation procedures to determine the percentage of some liquors that are both a primary and a secondary and the purchases adjusted accordingly.
It is unfortunate but true that a Mixed Beverage audit has nothing to do with what happened during the audit period and everything to do with what you can prove happened during the audit period. You must document and support all the variables and data points the auditor uses to estimate your gross sales for the period.
Given the nature of the estimation procedures used by the audit division, you must protect yourself through documentation. You can’t beat the policy so the best thing you can do is play along with it. The best defense for these types of audits is a good offense. Be proactive and document, document, document. If you are in doubt if you should document, document!