Fightin’ Foodies of the SideDish Nation, please welcome Ms. Amy Severson as a special contributor to SideDish. Amy is married to Jim who goes by “Sevy” and together they operate Sevy’s Grill in Preston Center. Amy has been a regular commenter on SideDish and FrontBurner and I invited her to “teach” from the trenches of the restaurant biz to those of us who love learning new things.
Today’s topic, “State Franchise Tax”, informs the innocent diner of some of the pressures that face restaurant operators. Pay attention, I may post a pop quiz. Without further ado, Miss Amy:
“The year ahead is looking tough for restaurants in the Dallas area. Higher food and transportation prices and higher wages are hitting our industry as consumers are scaling back. While the market is not “dead”, the revised state franchise tax could be the nail in the coffin for many small business owners. The franchise tax was revised in 2006, to be put into effect in 2007, and paid in June 2008, offsetting a 1/3 reduction in the school district portion of property taxes.
I’m not here to argue what was right or wrong about the previous taxing system, I only want to point out the effects of the changes on the restaurant industry. Few retail businesses saw relief from the property tax reduction, the Dallas Central Appraisal District has apparently been undervaluing commercial property for years and many of us saw large increases in the amount of taxes assessed on our locations. To add insult to injury, property taxes paid are not a deductible expense from the franchise tax calculation, nor is the 14% Gross Receipts tax that is paid on alcoholic beverage sales.
Greg Williams is partner/owner of Restaurant CFO Partners in Plano, an accounting services firm for restaurants large and small. His clients can be split into two categories: firms that paid no franchise tax previously but had a payment this year, and those that paid the tax in previous years and paid a higher amount this year due to the new calculations. Larger restaurants, with the highest franchise tax bills, were generally profitable and able to absorb the new cost.
“All restaurants with over $300,000 in revenue were required to file a return, but there is a graduated scale that provides discounts until total revenue equals $900,000,” says Greg. “As a result, the restaurants with $900,000 and over had to pay the full tax, but as you know, $900,000 to $1.1 million is not a profitable level of sales for many fast casual, casual theme, and fine dining restaurants.” Those clients, with the tightest bottom line margins, had franchise taxes due regardless if they were actually profitable. Greg also noted that in several cases, the tax put additional cash flow strain on his clients operations.
These smaller restaurants, while sometimes barely profitable add a richness and texture to our city. They are the little places that people find enjoyable to visit over and over again, a “hidden jewel,” some are well run enough to grow and become chains. They have high overhead–labor, rent, insurance, marketing–but they employ people, pay payroll taxes, and they collect sales taxes and gross receipts taxes and pay rent and property taxes on their location. The ten to fifteen people they typically employee rely on their jobs to pay their bills, and are hope for job stability in unstable times. Their owners are typically operators, and live off what is left on the bottom line.
When taxes go up, restaurant prices are increased to cover the necessary additional expenses, as prices go up, demand goes down, someone ends up closing their doors. Fewer investors think it’s worth the risk, fewer restaurants serve the marketplace, fewer tax dollars being sent in. We all know who makes up the tax shortfall, it’s you, the guest.