Tennessee’s sales tax law is replete with guidance on how vendors are treated when they “give away” goods as promotional items or as part of a marketing campaign. Under that law, when a vendor buys something that it intends to give away, the vendor must pay sales tax on the purchase. In that instance, Tennessee sales tax law views the vendor as the end-user of that purchase, and those goods cannot be purchased on a resale basis.
In many cases, a vendor buys certain goods on a resale basis, because they are primarily in the business of selling those items in the normal course of their business - food, drink and clothing. When the vendor later chooses to give away a free drink or a free food or other free samples, it creates a void in the sales tax continuum and is why many businesses must self-assess use tax. It is not surprising then that auditors will routinely inquire about how giveaways or promotional items are treated whey they are auditing sellers of tangible personal property.
This law is not unique to the sales tax, but also applies to the liquor by the drink tax. Thus, licensed alcohol sellers that give away a drink must pay not only the sales/use tax but also the liquor by the drink tax.
Whether this law applies to distilleries was an issue that came up during the recent legislative session. Parties interested in this issue include distilleries such as the one found in Lynchburg, Tennessee, where Jack Daniels offers some free samples of Old No. 7 and other variations of Jack Daniels’ finest as part of some, but not all, of its tours. (No need to dwell on how I know the specifics of such a tour …)
To clarify the application of the liquor tax to distilleries, the General Assembly during the 2018 legislative session passed Public Law 1027. Based on this new law, the liquor tax does not apply to free samples at a distillery. The Department of Revenue confirmed this result in its recent notice – Notice 18-13, which confirmed that the 15 percent liquor by the drink tax does not apply to beverages served on a distilleries premises whether it is served for free.
A good result for distilleries, and a good reminder for bars and restaurants serving liquor. With all the talk about Beer during the Kavanaugh confirmation hearings, we cannot forget about Whiskey. While many people love their beer, many also love their Whiskey - even if we don’t always agree about how it is taxed.