Alcohol Special Occupational Taxes

Businesses that manufacture and sell alcohol are required to register their operating locations with the Bureau of Alcohol, Tobacco, and Firearms (ATF) and to pay special occupational taxes. ATF collects the taxes and enforces compliance with other special occupational tax requirements. The revenue collected is deposited into the General Fund of the U.S. Treasury. ATF estimates that alcohol occupational taxes accounted for more than 90 percent of the $107 million collected from alcohol, tobacco, and firearms occupational taxes in fiscal year 1997. Several proposals have been made to eliminate or change the alcohol special occupational tax. This report discusses the (1) methods that ATF uses to enforce compliance with the taxes and the costs incurred in these efforts; (2) compliance rates for alcohol producers, wholesalers, and retailers; and (3) arguments that have been made for and against these occupational taxes.

GAO noted that: (1) ATF uses a variety of methods to enforce compliance with the alcohol SOTs; (2) among other information preprinted on the special tax renewal registration and return, ATF lists each known operating location and the total amount of taxes due; (3) ATF also informs the public about alcohol occupational tax requirements using a variety of media; (4) all but five states routinely provide retailer licensing information that ATF can compare with federal records to identify retailers who may not be in compliance; (5) ATF has assessed civil and criminal penalties, as well as interest, to enforce compliance with the SOT provisions; (6) ATF estimated that it cost a total of $1.9 million to administer the SOT programs for alcohol, tobacco, and firearm businesses in fiscal year 1997; (7) ATF and the audit staff at the Department of the Treasury's Office of the Inspector General (IG) have estimated rates of taxpayer compliance with the alcohol SOTs; (8) however, the two offices used different data, methods, and definitions of compliance to make their estimates; (9) ATF estimated that, as of April 3, 1998, 93 percent of the producers and 95 percent of the wholesalers with federal permits and 89 percent of the retailers known to ATF were compliant for tax year 1998; (10) IG estimated the average compliance rate for retailers over tax years 1993, 1994, and 1995 to be 83 percent; (11) supporters of the alcohol SOTs have justified the taxes both as a general source of revenue and as providing revenues to offset the costs to the government of regulating the industry; (12) however, the SOTs are not likely to accurately reflect the current costs of regulation because the tax rates have rarely been changed; (13) the SOTs give ATF the authority to enter the premises of alcohol dealers and require that retailers keep certain records; (14) ATF believes that the access and recordkeeping authority provided by the SOTs is necessary for its efforts to control the alcohol distribution system, prevent illegal sales of alcohol, and enforce other federal taxes on alcohol; (15) the SOTs have been criticized in the past because of relatively high administrative costs and low compliance rates among retailers; (16) opponents of the SOTs have criticized the taxes for being unfair; and (17) because the SOTs are a fixed amount per location, the SOTs may take more income from those with less ability to pay the tax, and, if compliance is low, compliant taxpayers may bear an unfair share of the tax burden.