The following is what I learned from my inquiry of the BOE and my research:
1. Tax is payable for liquor sales based on the cost or purchase price of the liquor. This is because no tax is paid but deferred when it’s purchased as it’s for resale. Therefore when you don’t sell it, but give it away as a comp, tax must be paid when it’s given as a comp.
Consequently, for drink sales, there should be established two general ledger accounts, one for drink sales, and one for the cost of drinks to determine the amount of sales tax due.
This treatment is consistent with annotation 280.0280 “Complimentary Drinks” that was quoted in an e-mail sent to the company’s previous Controller, by a BOE Senior Tax Advisor in reply to her inquiry. The Controller added liquor sales comps as a use tax on line 2 of a restaurant’s last sales tax return filed.
Conversely, no tax is due when nonalcoholic or non-carbonated drinks are given away as comps, per BOE publication 22. That includes fountain drinks; also see below.
Annotations are summaries of conclusions reached by BOE staff counsel as applied to specific situations involving sales tax.
2. Tax is payable on sales of food served at a restaurant, as prepared meals are taxable, but since food is exempt from sales tax at the time of purchase, no tax is payable on food items given away.
For that reason, fountain drink comps aren’t taxable. The syrup in fountain drinks is considered a food item, which is exempt from tax. In general, sales tax is due based on the raw material in that which is given away.
Only one General Ledger account needs to be established for food sale comps, e.g. food and comps expense.
3. The cost of other complimentary items, e.g. owner comps, musician comps, in contrast to what was reported by the prior CPA, isn’t deductible. The Operations Manager suggested it may still be helpful to compile that information for the owner’s benefit when determining gross profit margins. The company’s prior CPA compiled the information, but it was used for preparing the sales tax returns, not for determining profit margins.