How alcohol taxes influence restaurant expansion and executive decisions.
State Taxes on Beer, Wine, and Spirits

(Excise Tax Rates by Dollar per Gallon)

Highest Taxing States

Kentucky $3.16
Alaska $2.50
Florida $2.25
Iowa $1.75
Alabama $1.70

Washington $35.22
Oregon $22.73
Virginia $20.56
Alabama $18.24
North Carolina $13.02

Tennessee $1.17
Alaska $1.07
Alabama $1.05
Georgia $1.01
Hawaii $0.93

Lowest Taxing States

Louisiana $0.11
California $0.20
Texas $0.20
Wisconsin $0.25
Kansas $0.30
New York $0.30

New Hampshire $0.00
Vermont $0.00
Wyoming $0.48
Missouri $2.00
Colorado $2.28
Texas $2.40

Wyoming $0.02
Missouri $0.06
Wisconsin $0.06
Colorado $0.08
Oregon $0.08
Pennsylvania $0.08

Cooper’s Hawk is flying high. Since opening in 2005, the 13-unit winery and restaurant has stretched its reach from its suburban Chicago home into Indiana, Wisconsin, Missouri, Ohio, and Florida. Next year, the upstart eatery will make its debut in Virginia.

At each Cooper’s Hawk location, alcohol accounts for about one-third of revenue, a figure in line with many others in the full-service restaurant space. Adult beverages represent an important pillar in the chain’s business model, a reality that heightens the leadership team’s attention to alcohol taxes, including liquor-licensing fees, in areas throughout the U.S.

“We’re a wine-themed restaurant, so there’s no way around these taxes, and no matter where you go, taxes are going up, not down,” Cooper’s Hawk senior vice president of real estate development Ron Dee says.

As full-service restaurants enjoy the friendly margins alcohol sales bring and as alcohol sales in U.S. restaurants hustle toward the $100 billion mark, according to research firm Technomic, an unfortunate reality emerges for restaurant operators: Corresponding alcohol taxes sting profitability and impact a restaurant’s ability to hire new staff, make capital improvements, and open new units.

“A higher tax burden typically translates into a lower growth rate by reducing the amount a restaurant owner has to invest in his business,” says Distilled Spirits Council chief economist David Ozgo, who considers alcohol taxes “the biggest discriminatory tax” facing the restaurant industry.

While population, income, demand, and a plethora of other data points may top any restaurateur’s list of development considerations, alcohol tax burdens—from ongoing excise taxes to licensing fees—cannot be pushed aside.


“If you don’t take tax burdens into account [when opening a new unit], then you’ll be surprised by your bottom line,” Ozgo says. “Alcohol taxes will directly impact your business in that the higher the tax rate, the higher your prices or the lower your profits.”

Though Florida claims one of the nation’s most demanding excise taxes on wine ($2.25 per gallon), the state’s favorable demographics and AUV prospects did not stop Cooper’s Hawk from launching units in Tampa and Orlando.

“We’ll certainly look at taxes in any market we enter because we understand it impacts our bottom line; it won’t, however, impact our decision to build a restaurant,” Dee says. “We know some of this will get passed onto the consumer, and we also recognize that two-thirds of our business is driven by the culinary experience.”

Dee, however, does admit that an exorbitant liquor-license fee, which many consider a lump- sum tax, will compel Cooper’s Hawk leadership to pursue development elsewhere. In some areas of Florida, Dee encountered licensing fees in the $200,000 to $300,000 range, while some New Jersey licenses ran into seven figures.

“[Liquor-licensing fees are] a significant decision-making factor … and something that cannot be passed onto the consumer,” Dee says. “Every restaurant company has a limited amount of capital to build new restaurants each year, and high licensing fees will be a significant deterrent.”

While John Longstreet, CEO of Pennsylvania-based Quaker Steak & Lube, a chain of more than 50 full-service restaurants scattered around 16 states, says alcohol taxes play but a fractional role in his brand’s expansion equation, he acknowledges the potential tax burden will factor in when comparing two like spots.

“If there’s a choice, we’ll go where we get the best bottom line,” says Longstreet, whose concept entered the Dakotas and Kentucky this year.

Longstreet advises expansion-minded restaurateurs to look at all of the costs of opening and operating a restaurant, alcohol taxes included, in any new market. “Never assume that the costs over there are the same as where you are now,” he says.

Once in a new market, Dee says a restaurant’s menu mix, including alcohol sales, will help it manage its profitability and combat costly alcohol taxes.

“How you design, price, and market your menu is dependent on the local economic environment, including alcohol taxes,” Dee says.

For Cooper’s Hawk, that means its Orland Park, Illinois, location will carry different menu prices than its Tampa restaurant.

“You have to figure out how to price your offerings in any given market to generate the profit and earnings that ensure continued growth,” Dee says.

When alcohol taxes increase—an increasingly common occurrence in cash-starved states convinced that such moves bypass the public’s collective consciousness—operators then face another dilemma: Either eat the costs or raise prices.

“If the restaurant cannot pass on a significant chunk of the tax burden, then its bottom line will take a hit,” Ozgo says. “That’s the unfortunate reality operators face, and either decision will impact business.”


Legislative Roundup

Around the country, states explore new alcohol legislation and officials from the Distilled Spirits Council, Wine Institute, and National Restaurant Association continue to watch alcohol taxing maneuvers that could further impact restaurant operators and send ripple effects throughout the industry.

Alaska: On October 1, voters in Alaska’s Matanuska-Susitna Borough, a fast-growing suburban area just north of Anchorage, voted down a proposal to impose a 5 percent retail tax on all alcohol sales. The potential revenues that the tax would have yielded were linked to voter-friendly public issues such as education and public safety. This has become an increasingly common play by legislators looking to make a tax hike more palatable.

Minnesota: While an alcohol tax was narrowly avoided in the spring, there continues to be ongoing interest in alcohol taxes in Minnesota and thoughts that some aggressive legislation will be resurrected. One 2013 bill, for instance, called for an increase to the excise tax on spirits from $5.03 to $17.82/gallon, on wine (less than 14 percent ABV) from $0.30 to $2.60/gallon, and on beer from $4.60 to $16.17/gallon.

New Mexico: Earlier this year, New Mexico’s House Taxation and Revenue Committee tabled House Bill 212, which would have granted counties greater autonomy in defining local alcohol taxes. While New Mexico’s McKinley County has claimed such authority for decades, other New Mexico counties have sought to capture a similar piece of the revenue pie, a move that could—if successful—result in higher alcohol taxes for restaurant operators throughout the state.

Pennsylvania: Privatization remains on the docket in Pennsylvania, one of the nation’s 17 control states. If the state removes itself from wholesale and retail alcohol sales, restaurants could potentially find themselves a new revenue stream with off-premise sales. The potential move, however, raises concerns about the availability of product and the calculations restaurants use for determining their margins on alcohol sales.

Footnotes as of Jan. 1, 2013: For wine, tax rates are those applicable to off-premise sales of 11% ABV non-carbonated wine in 750 mL containers; five control states (NH, PA, MS, WY, and UT) do not factor into the rankings; Kentucky’s rate includes the wholesale tax rate of 11% converted into a gallonage excise tax rate. For spirits, local excise taxes are excluded; rates are those applicable to off-premise sales of 40% ABV distilled spirits in 750 mL containers. For beer, rates are those applicable to off-premise sales of 4.7% ABV beer in 12-ounce containers; local excise taxes are excluded; Alabama and Georgia figures include uniform statewide local taxes; Tennessee’s figure includes the wholesale tax rate of 17% converted into a gallonage excise tax rate.
Source: Distilled Spirits Council, Tax Foundation
Feature, Finance