South Carolina Tax Revenue Impacts of Shifting On-Premise Liquor Distribution from Mini-Bottles
South Carolina Tax Revenue Impacts of Shifting On-Premise Liquor Distribution from Mini-Bottles to National Restaurant Standards
An Analysis of State Tax Revenue Impacts to the Year 2020
Report by:
Steve Morse, Ph.D.
Economist
School of Hotel, Restaurant and Tourism Management
College of Hospitality, Retail and Sport Management
University of South Carolina
Columbia, SC
January 2003
South Carolina Tax Revenue Impacts of Shifting
On-Premise Liquor Distribution from Mini-Bottles
to National Restaurant Standards
Table of Contents
Executive Summary 3
I. Purpose of the Study 4
II. Methodology 4
A. Current Mini-bottle Tax Structure 4
B. Converting Current Mini-bottle Taxes to per
Liter Bottle Taxes 5
C. Convert Current Off-Premise Retail per Case Taxes
Per Liter Taxes 6
D. Tax Revenue Impacts of 1998 Mini-Bottle Demand 8
E. Tax Revenue Impacts of 1998 Mini-Bottle Demand
Taxed at Retail Bottle Tax Rates 8
III. Comparison of Tax Revenues Generated by Mini-Bottle
Taxes vs. Retail Per Liter Taxes 9
IV. Replacing the $14 Million Liquor Tax
Revenue Shortfall 9
V. Tax Revenues Automatically Increase With Inflation 10
VI. Conclusions 13
VII. References 13
VIII. About the Author 15
South Carolina Tax Revenue Impacts of Shifting
On-Premise Liquor Distribution from
Mini-Bottles to National Restaurant Standards
Executive Summary
Ø The purpose of this study is to examine the tax revenue impacts of shifting the current on-premise liquor distribution system from mini-bottles to a system consistent to national restaurant standards.
Ø Under the current tax system for liquor, on-premise mini-bottle sales are taxed at a rate equal to $5.94 per liter, while off-premise retail bottles are taxed at a rate equal to $1.42 per liter.
Ø The analysis shows that if mini-bottles were replaced with national restaurant standards of liquor distribution, a 5% liquor sales tax and current per liter sales tax would generate higher tax revenue than the current system of mini-bottle taxation.
Ø Twenty-year projections to the year 2021 show that South Carolina liquor tax revenues generated over the 20-year period will more than double under the new 5% liquor sales tax and current $1.42 per liter taxes.
Ø Thus, the new tax system will automatically increase liquor tax revenues generated as inflation increases over time with no required increase in liquor consumption.
South Carolina Tax Revenue Impacts of Shifting On-Premise Liquor Distribution From
Mini-Bottles to National Restaurant Standards
I. Purpose of the Study
The purpose of this study is to examine the tax revenue impacts of changing the current on-premise mini-bottle liquor distribution system in South Carolina to a system equal to national restaurant standards of liquor distribution. The specific objectives of the study are to: 1) review the current tax structure associated with mini-bottle sales distribution, 2) examine the tax structure of shifting existing mini-bottle taxes to per liter and per drink taxes, 3) estimate the level of tax structures on bottles that would equal current mini-bottle taxes with the criteria of being tax revenue neutral, and 4) estimate liquor tax revenues generated as a result of inflation.
II. Methodology
To achieve the objectives of this study, the current mini-bottle tax structure will be examined and a per liter equivalent tax structure will be analyzed. In particular, the study seeks to examine the tax structure on liter bottles and unit sales that could replace the current mini-bottle tax structure and remain tax revenue neutral.
A. Current Mini-bottle Tax Structure
The current tax structure on mini-bottles in South Carolina is a mix of five different taxes at various levels of the distribution system. Table 1 shows the current mix of five taxes on the mini-bottle sales distribution system.
Table 1. Current South Carolina Tax Rates on Mini-bottles
Tax No. / Tax Type and Rate / Tax Sales Units1 / Wholesalers Tax = $1.81 / Per case of mini-bottles a
2 / Retailers Tax = $2.99 /
Per case of mini-bottles a
3 / Mini-bottle Tax = $0.25 / Per mini-bottle b4 / Additional Case Tax = $0.56 /
Per case of mini-bottles a
5 / Surtax = 9% / [Sum of Tax No.1+2+3+4] X .09Total Mini-bottle Taxes
/ Sum of Tax No.1+2+3+4+5Notes:
a 1 case of mini-bottles = 240 mini-bottles;
b 1 mini-bottle = 50 ml.
Source: S.C. Department of Revenue, Liquor Wholesalers Monthly Report, Form L-101, Schedule A-1, p. 3, (copy enclosed).
B. Converting Current Mini-bottle Taxes to Per
Liter Bottle Taxes
Step 1. Calculate total taxes per case of mini-bottles
a) Convert $0.25 tax per mini-bottle tax to per case equivalent tax.
Since one case of mini-bottles equal 240 mini-bottles, the existing tax of $0.25 per mini-bottle would be equivalent to $60 tax per case. [Derived by $0.25 (X) 240 = $60]
b) Sum other per case taxes from Table 1.
Per Case Tax No.1 ($1.81) + Per Case Tax No. 2 ($2.99) + Per Case Tax No. 4 ($0.56) = $5.36.
c) Find case tax equivalent of Tax No. 1 + Tax No. 2 + Tax No. 3 + Tax No. 4.
Sum per case taxes from Step 1a ($60) + per case tax from Step 1b ($5.36) = $65.36. Thus, total mini-bottle per case tax = $65.36.
d) Add 9% sur-tax to tax in part (c) above.
The 9% sur-tax = $65.36 (X) .09 = $5.89.
e) Find total taxes per case of mini-bottles.
Sum taxes from parts (c) + part (d) = total taxes per case of mini-bottles. $65.36 + $5.89 = $71.25 total tax per case of mini-bottles.
Step 2. Convert $71.25 tax per case of mini-bottles to equivalent tax per liter
f) First, convert one case of mini-bottles to liters. Since one case = 240 mini-bottles, and one mini-bottle = 50 ml, and 1 liter = 1000 ml, the conversion from mini-bottles to liters is [240 (X) 50] / 1000 = 12 liters. Thus, one case of mini- bottles = 12 liters.
g) Second, convert $71.25 tax per case of mini-bottles to equivalent tax per liter. Since 1 case of mini-bottles = 12 liters, the equivalent tax per liter is $71.25/12 = $5.9375 or $5.94 tax per liter.
h) Conclusion is that current mini-bottle tax rate, when converted to a tax rate per liter, is equivalent to a tax rate of $5.94 per liter.
C. Convert Current Off-Premise Retail per Case Taxes to per Liter Taxes
a) Convert the current off-premise license excise tax and per case tax rate on retail liquor shown in Table 2, to a per liter tax rate. The current taxes on retail liquor are based on per case tax rates and as shown in Table 2, where there is not one standard case size. Four per case tax rates are constant across different case volume sizes, thus when converted to tax per liter, the tax rate is different on each case. As shown in Table 2, when tax rates are converted to tax per liter, tax rates range from $1.44 per liter to $1.28 per liter. Since a large majority of cases in the distribution system are in the 12 liter case size, the weighted average tax per liter of all cases sold is $1.42 tax per liter. (South Carolina Department of Revenue, Liquor Tax Revenue Study, Fall 1998)
Table 2. Current South Carolina Tax Rates For
Off-Premise Retail LiquorTax Type
/Case Size & Volume
48/200 ml. bottles(total case volume
= 9.6 liters) / 24/500 ml. or
12/1 liter bottles
(total case volume = 12 liters) / 24/375 ml. or 12/750 ml. bottles
(total case volume
= 9 liters) / 6/1.75 liter bottles
(total case volume = 10.5 liters)
License Excise
Tax / $6.895 per case
($0.72 per liter) / $8.619 per case
($0.72 per liter) / $6.465 per case
($0.72 per liter) / $7.542 per case
($0.72 per liter)
Retailers Case
Tax / $2.99 per case
($0.31 per liter) / $2.99 per case
($0.25 per liter) / $2.99 per case
($0.33 per liter) / $2.99 per case
($0.28 per liter)
Wholesalers
Tax / $1.81 per case
($0.19 per liter) / $1.81 per case
($0.15 per liter) / $1.81 per case
($0.21 per liter) / $1.81 per case
($0.17 per liter)
Additional Case Tax / $0.56 per case
($0.06 per liter) / $0.56 per case
($0.05 per liter) / $.56 per case
($0.06 per liter) / $0.56 per case
($0.05 per liter)
9% Sur-tax on Excise & Case Tax / $0.12 per liter / $0.11 per liter / $0.12 per liter / $0.11 per liter
Total Tax per liter / $1.40 tax
per liter / $1.28 tax
per liter / $1.44 tax
per liter / $1.33 tax
per liter
Weighted Average Total Tax per liter = $1.42 per liter a
Note:a Weighted average tax per liter weighted by percent of each type cases sold
Source: S.C. Department of Revenue, Liquor Wholesalers Monthly Report, Form L-101, Schedule A, p. 2, (copy enclosed.)
D. Tax Revenue Impacts of 1998 Mini-Bottle
Demand
a) Using 1998 mini-bottle demand as an example, convert 1998 mini-bottle demand to equivalent liters. One mini-bottle equals 50 ml., and 1998 demand was 62,113,904 mini-bottles. To find the equivalent liters the 1998 mini-bottle demand represents, use the following conversion: [62,113,904 mini-bottles (X) 50 ml.] / 1000 ml. = 3,105,695 liters. This conversion means that in terms of liters, 1998 mini-bottle demand equaled 3,105,695 liters.
b) Calculate liquor tax revenues from 1998 mini-bottle demand. From Table 1, it was found that mini-bottle taxes were the equivalent of $5.94 per liter. Given the 1998 mini-bottle demand was the equivalent of 3,105,695 liters, the liquor taxes generated equal: 3,105,695 liters (X) $5.94 per liter = $18,447,828.
c) Conclusion: 1998 mini-bottle demand generated $18,447,828 in liquor taxes.
E. Tax Revenue Impacts of 1998 Mini-Bottle
Demand Taxed at Retail Bottle Tax Rates
a) What would be the impact on liquor tax revenues if 1998 mini-bottle demand were taxed at the retail bottle tax rate of $1.42 per liter? 1998 mini-bottle demand was the equivalent of 3,105,695 liters. At the current retail tax rate of $1.42 per liter, tax revenue generated would be: 3,105,695 (X) $1.42 = $4,410,086.
b) Thus, if 1998 mini-bottles were taxed at the retail tax rate per liter, this tax rate would generate $4,410,086.
III. Comparison of Tax Revenues Generated by
Mini-Bottle vs. Retail Per Liter Tax Rates
a) From above, it was found that 1998 mini-bottle demand taxed at the mini-bottle, per liter equivalent rate of $5.94 per liter, would generate $18,447,828. Also, it was found that if 1998 mini-bottle demand were taxed at the retail per liter rate of $1.42 per liter, this would generate $4,410,086. Thus the difference in tax plans is: (mini-bottle taxes $18,447,828 – mini-bottles taxed at retail bottle taxes $4,410,086) = $14,037,742 in revenue shortfall.
b) Thus, taxing 1998 mini-bottle demand at retail bottle tax rates would generate a $14,037,742 (or $14 million) liquor tax revenue shortfall.
IV. Replacing the $14 Million Liquor Tax
Revenue Shortfall
a) Convert mini-bottle unit sales to new unit sales with equivalent liquor per ounce. One mini-bottle unit at 1.7 ounce per unit is the same as 1.36 mini-bottle sales units at 1.25 ounces. It is assumed that new ounces per unit with using liter bottles will be 1.25 ounces. Thus, converting 1998 mini-bottle units to new units using liter bottles would be the equivalent of 62,113,904 mini-bottle units (X) 1.36 = 84,474,909 sales units. Industry standards on amount of liquor per unit sales are varied. Although national corporations like Marriott and others use 1.0 ounce per unit in automated dispensing machines, others in the industry use an amount as high as 1.5 ounces per unit as the industry standard. Thus, the average of both these two industry values is 1.25 ounces per unit, and is used in this analysis.
b) What percent liquor sales tax would generate the $14,037,742 tax revenue shortfall? At an average price of $3.91 per unit and a per unit tax of 5%, total liquor tax revenue generated would be $16,514,844 and would more than cover the revenue shortfall. Although there are no published national, regional or state averages for on-premise liquor unit prices, according to industry experts in South Carolina, an average price per unit of $3.91 is a conservative estimate of average prices statewide and does not overstate average prices.
V. Tax Revenues Automatically Increase With Inflation
a) As Table 3 shows, projections of liquor tax revenues generated are made to year 2021. The projections are made using the following assumptions: (1) price per unit increases 3.5% each year, (2) demand is constant over the period (at 84,474,909 units), (3) per liter tax is constant at $1.42 per liter over the period. Below is an explanation of why these assumptions are considered very conservative assumptions.
b) Assumption (1): The price per unit (inflation) increases by 3.5% each year. This assumption concerns the increasing price level of sales units or liquor unit inflation each year. In South Carolina, the service economy now (2000) employs more workers than the state’s manufacturing economy. Projections over the period 1996-2006 by the South Carolina Employment Security Commission and the U.S. Department of Labor’s Bureau of Labor Statistics estimate a 28% increase in the demand for employees in the state’s food and beverage sector of the economy, compared to a smaller 16% increase in the demand for all South Carolina workers. Increased demand for food and beverage workers in the state will put upward pressure on labor rates, especially in labor-intensive food and beverage sectors of the economy. Higher labor rates put upward pressure on consumer prices and are partially passed on to the consumer as the National Restaurant Association projects wage rates of employees in the food and beverage industry to increase 4.5% in 2000. Thus, over a twenty-year period to 2021, an average inflation rate each year of 3.5% is considered a conservative estimate.