New SideDish Feature: Restaurant 101

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.

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6 comments on “New SideDish Feature: Restaurant 101

  1. The last three paragraphs sum up our existence and struggle as well as any written words can. We fall right into the wheelhouse of several of Mr. Williams’ comments.

    Amy,
    Thanks for articulating what so many misunderstand about our challenging but rewarding business. You are welcome on THIS side of town ANYDAY.

    Buy the Ticket; Take the Ride.
    Kitchen 1924

  2. My daughter is a CPA and told me this past weekend this franchise tax has blindsided alot of people. Absoultly no way around paying it. I’m sure not seeing it reduce my property taxes.

  3. So true, so true … Great job Amy, keep up the good work – I look forward to your next posting.

  4. Great Article, it is difficult to be an operator in this business, on top of this adding taxes and fees to businesses in an industry that has very competitive margins is irresponsible

  5. It would have been helpful to understand how much the average patron’s bill has to rise to pay for the State Franchise Tax. Is it 5 cents? 50 cents? I really have no insight.

  6. Bubba, frankly most of us have not been able to raise prices to offset this trend. This is one of the very rare times in our business when a spike in the commodities markets is being met with inflationary concerns and a broad ranging, poor economy.

    Currently many (most) establishments can’t raise their prices because it would further alienate the core customer. It is just a margin dance and the franchise tax’s revision wasn’t a helpful addition to this year’s accounting hurdles.

    Nonetheless, we knew what we were getting into when we jumped into this industry and the rewards will always outweigh the risks.

    …and we are never more than about 10 feet away from good wine and good friends.

    Buy the Ticket; Take the Ride,
    Kitchen 1924