How Much is Too Much?

This post concerns customer comps or promotional drinks served by restaurants and bars.  The issue is:  how much is too much?

Most restaurants and bars offer promotional drinks to their customers from time to time.  Sometimes it is to acknowledge frequent visits, high spending or special occasions.  Other times it may be to “compensate” a customer for a service or quality issue.  In either case, the customer receives a free (complimentary) drink.  All restaurateurs know that this is an effective method of promoting and growing a restaurant business.  However, if you don’t keep track of these types of promotions properly, customer comps could be your downfall.

Many small or independent restaurants and bars have very lax policies and procedures around their customer comps.  Examples include giving regular bar customers better pours than those given to occasional customers or simply giving free drinks without recording them.  If you were asked to prove the amount of liquor, wine and beer that you gave away to customers, during the last four years, could you?  Most cannot.  Both the Ministry of Revenue and Canada Revenue Agency auditors know that you can’t prove most of these promotional amounts.  Consequently, they make allowances for spillage, customer comps and over-pouring.  They rarely allow you enough, however.

For example, in a court appeal case [Gestion Cheers Inc. v. The Queen, 2001 CanLII 524 (T.C.C.)], the CRA auditor had allowed the restaurant a 10% allowance for spillage and promotional giveaways, based upon the average amount for these items in similar establishments.  The Appellant (Gestion Cheers Inc.) claimed that it should have been 30% of sales.  The auditor reassessed the restaurant for the GST on $770,565 of unreported sales over the period from June 1, 1991 to January 31, 1995, about 3-1/2 years.  Despite the facts that there were no discrepancies between the cash register receipts and the bank records and the restaurant used an anti-theft pouring system for its alcohol, the auditor reassessed the restaurant, because he felt the spillage and promotional amount was excessive.  Here’s what happened at court.

In all tax appeals, the onus of proof is on the taxpayer to refute the assumptions of the Minister (made by the auditor).  If the taxpayer can present a prima facie case that the Minister’s assumptions are incorrect, the onus shifts back to the Minister to prove the assumptions made on a balance of probabilities.  In this case, even though the taxpayer’s testimony was not corroborated, it was well presented and not contradictory.  The restaurateur presented a promotional book, which was a ledger made up from chits that documented all of the promotional giveaways during the audit period.   The judge found that the taxpayer’s records and testimony were credible and that they disproved the auditor’s assumption of a 10% promotional allowance.  Consequently, the onus shifted onto the Minister to show that the restaurateur and his staff conspired to falsify the promotional chits and books of records.  Since the auditor had not spoken with any of the employees or managers during the audit, the Minister was unable to meet this onus of proof and the taxpayer was successful in the appeal.

There are a few lessons to be learned from this case example.  It is not the amount or percentage that is important.  It is whether you can prove the amount in court, if necessary.  In the absence of any reasonable support by the taxpayer, the auditor will rely on a rule of thumb, based upon the average percentage in other “similar” establishments.  An auditor is not particularly qualified to understand the differences in sales, promotional activities or other operational aspects of the many types of bars and restaurants in the industry.  Auditors are equally unqualified to determine which establishments are “similar”.  Consequently, they rely on broad industry categories, such as “Fine Dining”, “Sports Bars”, etc…  Within these broad categories, there are significant variations in most of the restaurant business metrics.  Consequently, estimates based on these broad industry statistics can be quite misleading, and they frequently are.  However, if the restaurant is unable to credibly support its promotional (spillage or theft, too) expenses, the auditor’s rule of thumb will be accepted by the court.

The taxpayer maintained a promotional book, which was a ledger of all promotional giveaways.  This was an ongoing log of all promotional chits, as they occurred.  This was not a document prepared after the fact, to try to explain why the restaurant’s promotional discounts should be higher.  This gave it substantially more credibility when it was needed to support the actual promotional activities.  It is not enough to simply record the sales transactions that occurred, you must also maintain documentation of the “non-sales” that occurred.

Bottom Line:  If you are going to give away alcoholic drinks to your customers, make sure that you document all transactions.  Most computerized POS systems will allow you to maintain a detailed breakdown of all comps, discounts and voids.  Ideally, you should consider maintaining a log of the details about each promo amount (who and reason).  This can easily be maintained in an Excel spreadsheet supported by printed POS chits for the comps.

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