Alcohol Special Occupational Taxes: Administration and Compliance Issues
(Letter Report, 08/10/1998, GAO/GGD-98-156).

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.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-98-156
     TITLE:  Alcohol Special Occupational Taxes: Administration and
	     Compliance Issues
      DATE:  08/10/1998
   SUBJECT:  Alcohol taxes
	     Collection procedures
	     Tax administration
	     Tax nonpayment
	     Government collections
	     Federal taxes
	     Reporting requirements
	     Law enforcement

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GAO/GGD-98-156

Cover
================================================================ COVER

Report to Congressional Requesters

August 1998

ALCOHOL SPECIAL OCCUPATIONAL TAXES
- ADMINISTRATION AND COMPLIANCE
ISSUES

GAO/GGD-98-156

Alcohol Special Occupational Taxes

(268845)

Abbreviations
=============================================================== ABBREV

  ATF - Bureau of Alcohol, Tobacco, and Firearms
  FAA - Federal Alcohol Administration Act
  IG - Inspector General
  IRC - Internal Revenue Code
  IRS - Internal Revenue Service
  SOT - Special Occupational Tax

Letter
=============================================================== LETTER

B-279781

August 10, 1998

The Honorable George Radanovich
The Honorable John Kasich
House of Representatives

Businesses that engage in the manufacture and sale of alcohol are
required to register their operating locations with the Department of
the Treasury's Bureau of Alcohol, Tobacco, and Firearms (ATF) and to
pay special occupational taxes (SOT).  ATF is responsible for
collecting the taxes and enforcing compliance with other SOT
requirements.  Revenue collected from the SOTs 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
SOTs.  In fiscal year 1991, President Bush proposed to Congress that
the tax collection point be changed by repealing the SOTs on
retailers and increasing the amount of SOTs paid by wholesalers and
producers.  Another proposal would have changed the structure from a
tax on the number of business locations to a tax that would be based
on the volume of business.  In 1998, a bill was introduced in
Congress to repeal the SOTs on retailers and wholesalers.\1

This report responds to your request that we study the alcohol SOTs.
Our objectives were to identify 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.

--------------------
\1 HR 4140.

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

ATF uses a variety of methods to enforce compliance with the alcohol
SOTs.  For example, ATF annually sends the special tax renewal
registration and return and a notification letter to producers and
wholesalers holding federal permits and to retailers known to ATF.
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.  ATF also informs the public about
alcohol occupational tax requirements using a variety of media.  In
addition, 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.  ATF has assessed civil and
criminal penalties, as well as interest, to enforce compliance with
the SOT provisions.

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.  ATF officials were unable to separate alcohol SOT cost
from the total cost for the ATF-administered SOTs--alcohol, tobacco,
and firearms.  However, the officials estimated that more than 90
percent of the costs could be attributed to the alcohol occupational
tax provisions.

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.  However, the two offices used
different data, methods, and definitions of compliance to make their
estimates.  ATF's definition of compliance covered the timely filing
of tax returns and the timely payment of taxes by taxpayers.\2 The
IG's definition of compliance covered only the payment of tax when a
tax liability existed.  ATF's estimate covered only those taxpayers
already known to ATF, while the IG attempted to estimate the rate of
compliance for all potential taxpayers.  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.  The IG estimated the
average compliance rate for retailers over tax years 1993, 1994, and
1995 to be 83 percent.  Limitations in their data and methods leave
the accuracy of both offices' estimates uncertain.  The audit work
needed to quantify the potential error in these estimates was beyond
the scope of our study.

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.  However, the
SOTs are not likely to accurately reflect the current costs of
regulation because the tax rates have rarely been changed.  ATF has
justified the SOTs as facilitating its regulatory and law enforcement
activities.  The SOTs give ATF the authority to enter the premises of
alcohol dealers and require that retailers keep certain records.  ATF
officials believe that the access and recordkeeping authority
provided by the SOTs is necessary for their efforts to control the
alcohol distribution system, prevent illegal sales of alcohol, and
enforce other federal taxes on alcohol.  ATF officials are concerned
that they may lose this authority if the SOTs are repealed and that
the same authority may not exist under other provisions of current
law.  If that were the case, ATF officials believe that additional
legislation may be needed to provide ATF with the same enforcement
powers.

The SOTs have been criticized in the past because of relatively high
administrative costs and low compliance rates among retailers.
Although SOT administrative costs have declined in recent years, the
accuracy of estimates of recent SOT compliance among retailers is
uncertain.  An evaluation of whether costs are excessive would
require that the SOTs be compared with specific alternative revenue
sources in terms of their compliance rates and administrative costs,
as well as other factors, such as the cost to taxpayers of complying
with the taxes.

Opponents of the SOTs have criticized the taxes for being unfair.
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.  To evaluate the fairness of the SOTs, one needs to
know who actually pays the tax (i.e., how much of the tax is shifted
from producers, wholesalers, and retailers to others in the economy
in the form of higher prices); the income of those who pay the tax;
and the degree of compliance with the SOTs.

--------------------
\2 The timely filing of a return is required of alcohol dealers who
owe SOTs and of dealers who do not owe SOTs because they have gone
out of business.  These latter must file a return to notify ATF that
they are out of the business of selling alcohol and the date on which
the business discontinued.

   BACKGROUND
------------------------------------------------------------ Letter :2

Congress enacted a version of the alcohol occupational taxes over 200
years ago.  This tax was repealed in 1817 but alcohol occupational
taxes were again instituted in the 1860s to generate revenue for the
Civil War.  The current taxes essentially remained unchanged from
1950 until Congress passed the Omnibus Budget Reconciliation Act of
1987.\3 With this act, Congress raised the rates to their current
levels in response to the President's proposal that direct
beneficiaries of the regulatory provisions pay a greater share of the
cost incurred to administer the SOT program.

In July 1987, ATF assumed the responsibility for administering the
alcohol SOT program from the Internal Revenue Service (IRS).  There
are separate occupational taxes for alcohol producers, wholesalers,
and retailers.  Each tax is a fixed amount per business location per
year.  The per location tax is $1,000 for large producers and $500
for small producers who grossed less than $500,000 the previous
year.\4 Producers include distillers, breweries, wineries,
wine-bottling houses, and bonded wine cellars and warehouses.
Wholesalers are required to pay a $500 occupational tax for each
location.\5 Retailers are required to pay a $250 occupational tax for
each operating location.\6 Retailers, who make up the largest group
of alcohol SOT taxpayers, cover a wide variety of businesses--for
example, liquor stores, bars, restaurants, sports facilities, grocery
stores, convenience stores, airlines, caterers, and hotels.

Alcohol businesses are required to obtain a special tax stamp from
ATF for each operating location before commencing business.  These
businesses are required to obtain the special tax stamp on or before
July 1 if they are to continue operating.  Businesses must file a
special tax renewal registration and return and pay the appropriate
taxes to obtain the stamps.  (App.  I contains information on the
annual special tax registration and return process.) The stamps must
be available for inspection as proof of payment, are nontransferable,
and are valid for 1 tax year.  The SOT tax year begins on July 1 and
ends on the following June 30.

Under provisions of the Internal Revenue Code (IRC), retailers are
required to keep specific records of the distilled spirits, wine, or
beer received showing the quantity, source, and date of all shipments
received on their premises.  Retailers are also required to keep
records for each sale of 20 gallons, or more, of any alcoholic
beverage sold to the same person at the same time.

Failure to comply with the alcohol SOT provisions can result in the
assessment of civil and criminal penalties against the proprietors.
The civil penalties are the failure-to-file penalty and the
failure-to-timely-pay penalty, both of which are limited to 25
percent of the amount due.  (App.  II contains more information on
the civil penalties and interest.) Any person who willfully fails to
comply with the alcohol SOT provisions is subject to criminal
penalties under section 5691 of the IRC.  This section allows fines
of up to $5,000 or imprisonment for up to 2 years, or both, for each
offense.

The alcohol industry is a heavily regulated industry.  ATF
administers a system that regulates businesses according to their
function as producers, wholesalers, and retailers and requires ATF to
keep track of who is operating as a producer, wholesaler, and
retailer.  The regulation of alcohol businesses by function is a
feature of federal and state laws, which govern the production and
distribution of alcohol.  Producers and wholesalers are required to
obtain federal permits from ATF to operate.  Federal law does not
require retailers to qualify for or to obtain a federal permit.
Retailers are licensed by the states and some local jurisdictions.

--------------------
\3 Under the Trade Agreement Act of 1979 (P.L.  96-39), Congress
repealed the occupational tax for persons who rectify, purify, or
refine distilled spirits to increase the alcohol proof or who blend
this absolute alcohol to make compound liquors, such as brandy,
whiskey, gin, cordial, and rum.

\4 Internal Revenue Code (IRC) 5081 and 5091.

\5 IRC 5111.

\6 IRC 5121

   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

To identify the methods ATF uses to enforce compliance with SOT
provisions, we discussed ongoing compliance programs with ATF
officials.  We reviewed samples of information prepared by ATF for
public release and for inclusion in the annual registration and tax
return packages.  We met with industry representatives to get their
views on the adequacy and availability of alcohol SOT information
provided by ATF.  We discussed the matching of federal and state data
on retailers with ATF officials.  We discussed the assessment of
civil and criminal penalties with ATF officials and reviewed data on
cases where ATF had imposed civil and criminal penalties.  We
discussed the value of the occupational tax provisions as an
enforcement tool with officials from ATF's Diversion Branch, Revenue
Division, and Office of General Counsel.

To identify the compliance rates for producers, wholesalers, and
retailers, we reviewed fiscal year 1998 compliance information
provided by ATF officials and discussed the completeness,
limitations, and sources of this information.  We reviewed compliance
estimates for retailers reported by the IG in 1996 and discussed
methodological and data limitations with the audit manager for the
study.\7 To determine the costs of collecting the special
occupational taxes and alcohol excise taxes, we obtained cost
information from ATF officials and discussed their methods for
determining the costs of collection activities.

To determine the arguments for and against continuing the alcohol
SOTs, we reviewed legislative histories, our previous reports,
alcohol industry publications, IG reports, and Congressional Research
Service reports.  We interviewed Treasury and ATF officials and
industry representatives to obtain their views on the various
arguments that have been made for and against the alcohol SOTs.

We did our work from February through May, 1998, in accordance with
generally accepted government auditing standards.  We requested
comments on a draft of this report from the Secretary of the Treasury
and the Director of ATF or their designees.  Their oral and written
comments are summarized near the end of the letter.

--------------------
\7 Audit of Alcohol, Tobacco, and Firearms Special Occupational Tax
Program, U.S.  Department of the Treasury, Office of the Inspector
General, OIG-97-016, Dec.  27, 1996.

   ATF USES A COMBINATION OF
   EFFORTS TO ENFORCE SOT
   COMPLIANCE
------------------------------------------------------------ Letter :4

ATF has implemented a combination of efforts to enforce compliance
with the alcohol SOTs.  These efforts include (1) sending known
alcohol businesses their annual registration and stamp renewal
returns, (2) matching ATF and state information on retailers, (3)
publicizing occupational tax information, (4) licensing producers and
wholesalers, (5) assessing civil and criminal penalties and interest,
and (6) verifying SOT compliance during on-site inspections.  ATF
officials believe that it would not be cost-effective to commit
additional resources to enforcement.

      ATF ADMINISTERS AN ANNUAL
      REGISTRATION AND RETURN
      PROCESS TO ENFORCE
      COMPLIANCE
---------------------------------------------------------- Letter :4.1

In May of each year, ATF sends the special tax renewal registration
and return forms to alcohol producers, wholesalers, and retailers
known to the Bureau.  Alcohol businesses known to ATF include
producers and wholesalers who have obtained federal operating permits
from ATF and retailers who paid SOTs in previous years or were
identified through other means by the Bureau.  ATF mails the special
tax renewal registration and return form to the registered address of
the primary business and shows the total amount of SOT due for all
operating locations listed on the form.

With the special tax registration and renewal form, ATF includes a
letter to the alcohol businesses advising them to report changes in
ownership and discontinued operations.  ATF also at that time advises
the businesses that it may assess penalties and interest if they are
liable for the special tax and do not pay on a timely basis.  (App.
I contains additional information on the special tax stamp
registration and return process.) If the taxpayer is liable for the
special tax and does not pay in a timely fashion, ATF is to follow up
with correspondence that advises the taxpayer of the additional
interest and penalties and that further failure to comply may result
in legal proceedings.

      ATF MATCHES FEDERAL AND
      STATE DATA ON RETAILERS TO
      ENFORCE COMPLIANCE
---------------------------------------------------------- Letter :4.2

ATF receives lists of alcohol retailers from all but five states.\8
Contract staff at ATF's National Revenue Center in Cincinnati are to
manually compare the names and addresses of the businesses reported
by the states as licensed alcohol retailers with the names and
addresses of retailers listed in the SOT master file--a federal
database of businesses that have paid SOTs in previous years or are
otherwise known to ATF.

By comparing the two sets of information, ATF can identify businesses
that were listed by the states as licensed alcohol retailers but were
not shown in the SOT master file as having paid the annual
occupational taxes.  The National Revenue Center is to send an
information package to each of the nonmatched retailers.  This
package includes an ATF flyer, special tax information sheet, and the
special tax renewel registration and return.  This information
explains the SOT requirements for alcohol retailers and wholesalers.
The flyer informs the retailer that it is being notified because a
state or local jurisdiction has issued it a license to sell alcoholic
beverages.  The flyer advises the retailer that it must file a tax
return and pay the occupational tax and that failure to do so could
result in costly penalties and interest.  Retailers that had not
engaged in or are not currently engaged in the sale of alcoholic
beverages are instructed to report this so that the Bureau can update
the retailer's account and not mail additional notices.  Otherwise,
ATF is to update the amounts due and continue to contact the retailer
by mail for up to 3 years to get compliance.  ATF does not believe
that it is cost effective to routinely go beyond this correspondence
to ensure compliance.

--------------------
\8 Ten states include payment of the federal SOTs as part of their
licensing procedures.  ATF accepts that there is 100-percent
compliance with federal SOTs among retailers licensed to sell
alcoholic beverages in these states and does not match state data
with the SOT master file.

      ATF PUBLICIZES OCCUPATIONAL
      TAX INFORMATION TO FOSTER
      COMPLIANCE
---------------------------------------------------------- Letter :4.3

ATF officials believe that informing the public about the SOT
requirements improves compliance.  We reported in 1990 that many
retailers said they did not comply with the SOT provisions because
they were not aware of the requirements.\9 Alcohol industry
representatives believe that there are some retailers who may be
unaware of this tax obligation.

ATF uses several methods to inform the public about the SOT
requirements.  For the tax year 1999 filing season, ATF issued an
April 3, 1998, news release to remind businesses of the July 1, 1998,
deadline for the alcohol SOT.  The news release was placed on the
ATF's Web site (www.atf.treas.gov.) with an authorizing note that
allows editors to print the information in organizational magazines,
periodicals, and newsletters.  ATF has issued a similar release
annually, just prior to the filing period.

ATF has placed on the Web site copies of the special tax renewal and
registration return and instructions, which can be downloaded for
filing or

informational purposes.  Also on the Web site is a pamphlet entitled
Liquor Laws and Regulations for Retail Dealers, which provides an
overview of the SOT and other alcohol requirements pertinent to
retail operations.

For the 1999 tax year, which began July 1, 1998, ATF sent its SOT
news release to 412 public affairs offices and general public
addressees; 78 media addressees; and 248 trade associations,
societies, and state addressees.  The trade associations list
included a variety of organizations, such as state alcohol control
and licensing organizations, the National Bar Association, the
National Tax and Bookkeeping Services, the American Beverage
Institute, the American Hotel and Motel Association, and state and
national organizations of wholesalers and retailers.

ATF has produced several different flyers for distribution at trades
shows and fairs.  One flyer gives a sample listing of businesses that
may be subject to the alcohol occupational taxes.  Another flyer
advises recipients that if they sell beer, wine, or liquor, they may
owe federal occupational taxes.  This flyer gives the tax rates for
retailers and wholesalers, explains the type of sales to which the
tax applies, notes the tax due date, and gives the telephone number
for the Tax Processing Center in Cincinnati and a toll-free number
the taxpayer may call for additional information.  ATF also provides
another flyer with toll-free numbers for its National Revenue Center
and the Tax Processing Center.

--------------------
\9 Alcohol Excise Taxes:  Simplifying Rates Can Enhance Economic and
Administrative Efficiency (GAO/GGD-90-123, Sept.  27, 1990).

      ATF HAS MORE CONTROL OVER
      SOT COMPLIANCE AMONG
      PRODUCERS AND WHOLESALERS
---------------------------------------------------------- Letter :4.4

ATF has more control over alcohol producers' and wholesalers'
compliance with the SOT requirements than over retailers' compliance
because ATF issues the federal permits for these businesses to
operate and the universe of producers and wholesalers is relatively
small.  Alcohol businesses with federal permits are required to
comply with all federal laws and regulations, including SOT
requirements; and ATF can revoke their permits or charge them with
fraud if they fail to do so.  Additionally, the universe of producers
and wholesalers is small.  Tax year 1998 ATF data showed that there
were about 18,000 registered alcohol producers and wholesalers
compared to about 372,000 known retail entities.  ATF officials
believe that they can ensure greater compliance among producers and
wholesalers than retailers because they have more administrative
control over this smaller group of alcohol businesses.

      ATF ASSESSES CIVIL AND
      CRIMINAL PENALTIES TO
      ENFORCE COMPLIANCE
---------------------------------------------------------- Letter :4.5

ATF can assess civil penalties and interest for failure to file the
annual SOT registration and return form and/or pay the taxes due.
While civil penalties are limited by statute to not more than 25
percent of the taxes due, there is no limit on the amount of interest
taxpayers may incur for unpaid SOTs.  (App.  II contains more
information on computing civil penalties and interest.) Examination
of SOT revenue data for fiscal year 1995 showed that ATF assessed and
collected about $972,000 in failure-to-file penalties, about $164,000
in failure-to-pay penalties, and about $410,000 in interest from
alcohol, tobacco, and firearm businesses.  The total penalty and
interest amounts accounted for about 1.4 percent of the total SOT
payments for the fiscal year.  ATF was unable to separate the penalty
and interest amounts collected for the three business categories but
estimated that over 90 percent of the tax, penalty, and interest
amounts were from the alcohol SOTs.

ATF also has authority to assess criminal penalties to enforce SOT
compliance.  Businesses and individuals can be fined up to $5,000 or
imprisoned up to 2 years, or both, for each willful failure to comply
with the SOT requirements.  ATF uses these criminal penalties to
enforce compliance with wholesale and retail operating requirements.
For example, current law prohibits a retailer from selling to other
retailers or from operating as a wholesaler.  Review of criminal data
file information showed that ATF has a history of assessing the
criminal penalties to combat the black market sale of alcohol.

      ATF USES SITE VISITS TO
      VERIFY COMPLIANCE
---------------------------------------------------------- Letter :4.6

Alcohol businesses are required to have current Special Tax Stamps
available for ATF inspection as proof that they have paid the
required SOTs for their operating locations.  ATF officials informed
us that field office inspectors who routinely monitor compliance with
alcohol laws and regulations also verify compliance with SOT
requirements during visits to alcohol businesses, primarily alcohol
producers and wholesalers.  ATF inspectors who discover businesses
that are not in compliance with SOT provisions are to report this
information to the National Revenue Center.  Following up on this
information, ATF staff at the Center are required to notify the
business to get compliance.  They are to do this through
correspondence with the noncompliant business.  The correspondence
includes SOT requirement information and the tax return that the
business needs to file.  The staff are to continue corresponding with
the business for 3 consecutive years in an effort to get compliance
with the SOT provisions.  ATF does not believe that it is cost
effective to conduct site visits solely for SOT compliance.

   SOT COMPLIANCE RATES ARE
   UNCERTAIN
------------------------------------------------------------ Letter :5

Both ATF and the Treasury's IG estimated SOT compliance rates.  The
two offices used different data and methods when computing their
estimates, and those data and methods leave the accuracy of both
offices' estimates uncertain.  The audit work needed to quantify the
potential error in these estimates was beyond the scope of our study.

The two offices also used different definitions of compliance.  ATF's
definition covered the timely filing of the annual return and the
timely payment of taxes due in response to ATF's annual renewal
notification.  The IG's definition covered only the payment of tax
when a tax liability existed.

      ATF'S ESTIMATED COMPLIANCE
      RATES
---------------------------------------------------------- Letter :5.1

ATF estimated that, as of April 3, 1998, 93 percent of the producers
with permits, 95 percent of the wholesalers with permits, and 89
percent of the retailers known to ATF filed timely returns and timely
paid the taxes due for tax year 1998.\10 The noncompliant taxpayers
were those known to ATF that did not respond to the annual
notification process and were not identified by ATF as being out of
business.  ATF determined that about 0.03 percent of the producers, 3
percent of the wholesalers, and 4 percent of the retailers did not
respond because they were out of business.

The rates of compliance for all alcohol businesses could be lower
than ATF's estimated rates because the latter cover only alcohol
businesses known to ATF--producers and wholesalers with federal
permits and federally registered alcohol retailers that have paid
SOTs in the past or have been identified by ATF.  ATF officials
acknowledged that they have not identified all alcohol businesses.
They could not estimate the number of illegal producers and
wholesalers that might be operating, without federal permits, as
moonshiners and bootleggers.  Registered alcohol businesses are
required to certify that all operating locations have been correctly
reported to ATF, but ATF does not verify that this has been done.
However, the Bureau is confident that there is high compliance among
producers and wholesalers because ATF issues federal permits for
these alcohol businesses to operate and closely monitors their
operations.  In addition, alcohol producers and wholesalers account
for a small number of businesses.  ATF could not estimate the number
of retailers not known to ATF who had not paid their occupational
taxes.  SOT compliance among retailers is more difficult to manage
because they do not need federal permits to operate, have a high
turnover rate, and account for a large universe of business entities.

--------------------
\10 For the 1998 tax year that began July 1, 1997, and ended June 30,
1998, ATF sent renewal notices to alcohol businesses in May 1997
advising them to pay the taxes by July 1, 1997, to get their 1998
stamps.  An ATF staff member estimated that ATF had issued at least
98 percent of the 1998 stamps by April 1998.  Stamps that ATF issued
later in the year to new businesses account for the remaining 2
percent or less.

      IG'S ESTIMATED RETAILER
      COMPLIANCE RATE
---------------------------------------------------------- Letter :5.2

The IG reported an estimated average compliance rate of about 83
percent for retailers over tax years 1993, 1994, and 1995.\11 The IG
made this estimate by comparing ATF data on the total number of SOT
stamps issued in each state and the District of Columbia and the
total number of retail operating locations where alcohol is sold, as
reported by state and the District licensing officials whom it
surveyed.  A total of 43 states and the District provided usable
data.

Because the IG simply compared the federal government's count of all
retail locations in a given state with that state's own count, rather
than doing a detailed matching of specific retail locations, it could
have overestimated or underestimated the rate of compliance.  The IG
did not verify whether the states followed its instructions for
enumerating the number of retail locations.  The IG requested data
from each state that (1) included all locations that were in
operation at any time during the SOT tax years and (2) did not
include locations that had ceased operations before the start of each
SOT tax year.  States may or may not have been able to produce
enumerations from their information systems that met these exact
criteria.  Given the high rate of turnover among alcohol retailers,
if the state data did not cover the time periods set by the IG, then
those data could overestimate or underestimate the number of
locations liable for tax.  The fact that five states reported fewer
retail locations than the ATF data showed had tax stamps for tax
years 1993, 1994, and 1995 suggests that at least some states' data
did not accurately represent the occupational taxpayer population.
Also, like ATF's estimate, the IG's estimate did not cover retail
locations that operate without the required state or local licenses,
such as illegal after-hour clubs.

The reliability of the ATF and IG estimates is difficult to assess
without a more detailed examination of the methods used and data
collected.  To evaluate the accuracy of the state data, one would
need to know what methods the states used to collect and verify their
statewide data.  One would also have to estimate the number of
unlicensed retailers that do not appear on any records.  Because such
analyses were beyond the scope of our review, we cannot say how
accurate ATF's and the IG's compliance rates may be.

--------------------
\11 OIG-97-016.

   ARGUMENTS FOR THE SOT
------------------------------------------------------------ Letter :6

Supporters of the SOTs have justified the taxes as a general source
of revenue and as providing revenues intended to offset the costs of
regulating the alcohol industry.  ATF officials believe that the
authority provided by the SOTs to enter the premises of dealers and
require them to keep certain records has facilitated ATF's efforts to
enforce the laws and regulations governing the alcohol industry.  ATF
is concerned that the agency could lose necessary enforcement tools
if the SOTs are eliminated.

      SUPPORTERS OF THE SOTS HAVE
      JUSTIFIED THE TAXES AS A
      SOURCE OF REVENUE
---------------------------------------------------------- Letter :6.1

Historically, supporters have justified the SOTs as a general source
of revenue.  Congress reinstated the SOTs in the 1860's for the
purpose of raising revenue.  More recently, supporters have also
justified the SOTs as providing revenues intended to recoup the
federal costs of regulating the alcohol industry.  Congress enacted
special occupational tax rates increases under the Omnibus Budget
Reconciliation Act of 1987\12 so that the beneficiaries of ATF
regulation would pay a greater share of the costs of regulation.  In
addition to regulatory costs, economists believe that taxes on
alcohol, such as the SOTs, may be used to offset the social cost of
alcohol abuse.

The SOTs have long been a source of revenue for the federal
government's General Fund.  After repeal in 1817, the taxes were
reinstated in the 1860s to generate revenue.  Under the Budget
Enforcement Act of 1990 as amended,\13 Congress must offset the
budget impact of tax legislation that would reduce revenue.
Eliminating the SOTs, or changing the SOTs in ways that reduce
revenue, would require that Congress identify and enact revenue
increases and/or spending reductions.  For example, an increase in
alcohol excise taxes has been suggested to offset revenue losses from
repeal of the alcohol SOTs, and an increase in SOTs paid by producers
and wholesalers has been proposed to offset revenue losses from
repeal of the SOT on retailers.  We have not evaluated these or other
tax and spending alternatives.

Supporters of the SOTs have justified the taxes as payments by the
industry for the benefits that they claim the industry receives from
regulation.  If ATF's regulatory activities benefit the industry, SOT
revenue may offset the costs of providing these benefits.  ATF's
regulatory activities, such as operating laboratories for testing and
labeling alcoholic products, may benefit the industry if, by assuring
consumers of the safety and quality of those products, the activities
increase demand for alcohol products.  ATF's law enforcement
activities may benefit the industry, for example, by protecting the
industry from the influence of organized crime.

Economists have justified taxes on alcohol as providing revenues to
recoup the social cost of alcohol abuse.  Although this justification
is usually made for alcohol excise taxes, both the excise taxes and
the SOTs can be viewed as offsetting the costs to the government and
society of alcohol abuse.  People who abuse alcohol may use certain
government programs, such as government-provided health-care and
criminal justice services, more than nonabusers.  People who abuse
alcohol also impose costs on other members of society, such as the
lives and property lost in alcohol-related traffic accidents.

The SOTs are not well designed to reflect the benefits received by
the taxpayer, the cost to the government of providing the benefits,
or the costs to society.  First, the SOTs are not likely to reflect
how much individual taxpayers may benefit from ATF's regulatory
activities because each alcohol retailer, wholesaler, and producer
(collectively known as dealers) pays the same amount of tax for each
premise.  To the extent that dealers benefit from ATF's activities,
the benefits are likely to vary considerably across premises because
profits are likely to vary considerably from one location to another.
Second, the tax rates are not likely to reflect the current costs of
regulation because they are rarely changed.  Before 1987, the rates
had not been changed since the 1950s.  Although rates were increased
in 1987 for the stated purpose of recouping regulatory costs, SOT
revenues may have been higher or lower than regulatory costs in 1987,
and the rates have not been changed since 1987 to reflect any changes
in costs.  Finally, the revenue from SOTs is small relative to total
federal excise taxes on alcohol, and therefore, their role in
offsetting the regulatory or social costs associated with alcohol is
likely to be small.

--------------------
\12 P.L.  100-203.

\13 P.L.  101-508.

      ATF HAS JUSTIFIED THE SOTS
      AS FACILITATING ATF'S
      ENFORCEMENT OF LAWS AND
      REGULATIONS
---------------------------------------------------------- Letter :6.2

The SOTs have been justified as facilitating ATF's enforcement
efforts by giving the agency the authority to enter the premises of
alcohol dealers and to require that the dealers keep certain records.
ATF officials said that ATF uses this authority in its efforts to
control the alcohol distribution system, prevent illegal sales of
alcohol, and enforce all federal taxes on alcohol.  ATF officials
believe that the access and recordkeeping authority provided by the
SOTs is necessary for ATF enforcement efforts.

The SOTs allow ATF inspectors entry into establishments that permits
them to inspect for other violations.  Provisions of the IRC permit
ATF inspectors to enter premises to examine records, documents, and
any alcohol stored on the premises.\14 Once on the premises, ATF
officials say that inspectors are able to check for nonpayment of the
SOTs and other violations.  For example, alcohol dealers are subject
to fine and/or imprisonment for refilling or reusing liquor
bottles.\15 Inspectors can check for this violation, which prohibits
dealers from refilling bottles of more expensive brands with cheaper
liquor.  ATF officials note that ATF has access to producers and
wholesalers as part of its licensing and inspection authority.
Except for the provisions of the IRC that are related to SOTs, ATF
has only limited authority over retailers and no access to retailers'
premises.

The SOTs give ATF the authority to require that retailers and
wholesalers keep records that help ATF control the alcohol
distribution system.  Under provisions of the IRC related to SOTs,
retailers are required to record all of their purchases of alcohol
and sales of alcohol of 20 gallons or more to the same person at the
same time.  The records must include the name and address of those
from whom they purchased or to whom they sold the alcohol.\16
Wholesalers are required to keep similar records for all of their
purchases and sales.\17 These records of transactions between dealers
may help ATF enforce laws and regulations throughout the distribution
system.  For example, ATF officials say that the requirement that
retailers record individual sales of 20 gallons or more helps ATF
identify retailers who are operating as wholesalers by selling to
other retailers.  Retailers not paying the SOTs and unknown to ATF
can be identified from the sales records of wholesalers, and the
records of wholesalers and retailers can be used to trace
transactions between dealers to check for payment of excise taxes.
According to ATF officials, the SOTs are also useful to ATF for
identifying retailers who owe floor-stock taxes.  The floor-stock
taxes are imposed on inventories when alcohol excise tax rates are
increased and are generally equal to the difference between the old
and new tax rates.

ATF officials believe that the SOTs are useful in diversion cases to
control distribution and enforce taxes.  Diversion occurs when
alcohol is sold at an illegal destination to evade federal and state
excise taxes, rather than the legal destination stated on the
required federal form.  There are two kinds of diversion.  Export
diversion occurs when a dealer claims that alcohol is exported but
actually sells the alcohol domestically.  The dealer avoids an excise
tax on this alcohol because excise taxes are not imposed on exports.
Domestic diversion occurs when a dealer purchases alcohol in a low
tax jurisdiction and smuggles the alcohol to a jurisdiction with
higher excise tax for illegal sales.

Provisions related to the SOTs can be used by ATF to combat both
kinds of diversion.  ATF officials say that ATF uses its access to
records required by the SOTs to detect diversion by reviewing sales
of unusually large volumes of alcohol and sales in certain types of
containers that are easier to divert.  The retailers' records may
show evidence of the domestic sale of alcohol intended for export; or
the absence of such records may be grounds to prosecute retailers for
receiving the alcohol intended for export.

ATF has pursued both criminal and civil prosecutions of diversion
cases using SOT provisions.  According to ATF data, there were 23
criminal alcohol diversion cases involving SOT violations between
October 1, 1996, and March 31, 1998.  ATF has also pursued civil
prosecutions in 86 cases of diversion involving 62 companies between
December 1, 1992, and December 19, 1996.  According to ATF officials,
these civil cases, like the criminal cases, involve prosecutions
under the SOTs.

--------------------
\14 IRC 5146(b).

\15 IRC 5301(c).

\16 IRC 5124(a), 5124(b); 27 CFR 194.234.

\17 IRC 5114 and 5555; 27 CFR 194.221, 225-226.

      ATF IS CONCERNED THAT IT MAY
      LOSE NECESSARY ENFORCEMENT
      AUTHORITY IF THE SOTS ARE
      REPEALED
---------------------------------------------------------- Letter :6.3

ATF officials believe that the authority for entering retail premises
and requiring retailers to keep records provided by the SOTs has been
necessary for its other law enforcement activities.  ATF officials
said that they were concerned that this authority may be jeopardized
if the SOTs are eliminated, but they were uncertain about the effect
that repeal of the SOTs would have on their enforcement capabilities.
ATF was uncertain whether the access and recordkeeping authority may
exist under other provisions of current law.  ATF was not sure
whether recordkeeping could be imposed under other provisions of the
IRC if the retailer does not have a special occupational tax
liability.  If the SOTs were repealed, ATF said it could attempt to
write regulations requiring specific records be kept by retailers.
According to ATF officials, the courts could rule that the
recordkeeping requirement is a valid exercise of the taxing power, or
they could deny the authority because the activities that the Bureau
wants recorded are not closely enough related to the excise tax
collection process.

If SOTs are eliminated and access and recordkeeping authority do not
exist under other provisions of current law, ATF officials believe
that the laws concerning regulation of the alcohol industry may have
to be changed to permit the Bureau the same enforcement powers.  The
Federal Alcohol Administration Act of 1935\18 (FAA) regulates fair
trade practices, chiefly promotional activities of dealers that
affect the sales of other dealers.  The act also imposes licensing
requirements for wholesalers and producers, but there is no authority
in this act for imposing recordkeeping requirements.  If the SOTs
were repealed, FAA could be expanded to impose recordkeeping
requirements on retailers.  ATF officials believe that the access and
recordkeeping authority currently provided by the SOTs is essential
for effective enforcement of alcohol laws and regulations.

We have not evaluated ATF's claim that the access and recordkeeping
authority provided by the SOTs is necessary for ATF's enforcement
efforts.  For example, we have not determined whether, or how
seriously, repeal of the SOTs would harm ATF's efforts to combat
diversion.  Although retailers would no longer have a SOT liability,
ATF would still need to identify and prosecute retailers who
participate in illegal sales.  However, we have not determined how
important access and recordkeeping authority is in the prosecution of
such cases, and we are uncertain whether such authority would be lost
if the SOTs were repealed.

--------------------
\18 P.L.  74-401.

   ARGUMENTS AGAINST THE SOTS
------------------------------------------------------------ Letter :7

The SOTs have been criticized for being costly to administer relative
to alcohol excise taxes, having low compliance rates, and being
unfair.  These criticisms have led some to propose changes in the
SOTs that include (1) eliminating the tax on retailers to reduce
administrative costs and (2) changing the structure of the tax from a
fixed amount per business location to one that is based on business
volume to make tax burdens fairer.  Others have proposed that the
SOTs be eliminated entirely.

      SOTS HAVE BEEN CRITICIZED
      FOR HIGH ADMINISTRATIVE
      COSTS AND LOW COMPLIANCE
---------------------------------------------------------- Letter :7.1

We concluded in two separate reports that the administrative costs of
the SOTs were high relative to the costs of administering the alcohol
and tobacco excise taxes and that compliance among retailers may have
been low.\19 Since these reports were issued, the costs of
administering the SOTs have declined.  Estimates of current
compliance with the SOTs among retailers are uncertain.  An
evaluation of whether administrative costs are excessive would
require that the SOTs be compared with specific alternatives in terms
of compliance rates and administrative costs, as well as other
factors such as the compliance burden of taxpayers.

In our 1990 report, we concluded that SOT costs were high relative to
the costs of administering the alcohol and tobacco excise taxes.  In
fiscal year 1989 (in 1997 dollars), ATF spent $13 million to collect
$162.6 million of SOTs--a cost of 8 cents for every dollar collected.
In the same year (also in 1997 dollars), ATF spent $64.9 million to
collect $12.7 billion in alcohol and tobacco excise tax revenue--a
cost of 0.5 cents per dollar collected.  Thus, the cost per dollar
collected was 16 times greater for the SOTs than for the excise
taxes.  We also found in our 1986 study of compliance with the SOTs
in four states that only about 60 percent of the retailers had paid
the SOTs.  ATF stated that it believed that the compliance rate found
in our study was probably representative of compliance nationwide in
1986.

According to ATF data, the costs of administering the SOTs, and the
amount of revenue collected, have declined since 1989.  In fiscal
year 1997, ATF spent an estimated $1.9 million to collect $107
million of SOTs--a decline in both costs and revenue from the $13
million spent to collect $162.6 million in 1989.  The cost per dollar
collected fell from 8 cents in 1989 to 1.8 cents in 1997.  ATF also
spent $55.1 million in 1997 to collect $12.6 billion in excise tax
revenue--a cost of 0.4 cents per dollar collected.  The relative cost
of administering the SOTs dropped from 16 times as great as the cost
of the excise taxes in 1989 to 4.5 times as great in 1997.

SOT revenues have declined in inflation-adjusted terms, despite the
fact that the number of active business locations has increased from
350,000 in 1987 to 426,370 in 1998.  Part of the decline is due to
the fact that the tax, as a fixed amount per business location, does
not increase with price inflation.  Also, according to ATF officials,
SOT revenues in 1989 included large amounts of back taxes, penalties,
and interest that ATF discovered were owed when ATF took over
administration of the SOTs from IRS.  SOT administrative costs
declined because ATF has devoted fewer resources to administering the
SOTs.\20 According to an ATF official, administrative costs depend
largely (1) on ATF priorities that determine how many field staff are
allocated to SOT enforcement, (2) on the number of contacts with
taxpayers, and (3) on the number of congressional inquiries.
Currently, the SOTs are not a high priority enforcement issue for
ATF.  Field staff have been instructed by ATF not to pursue SOT
enforcement alone, but to check for SOT payment only as part of an
investigation of alcohol dealers for other violations.

While administrative costs have declined, the compliance rates,
especially for retailers, are uncertain.  As previously discussed,
some estimates indicate that compliance among retailers may have
increased from the 60 percent that we reported in 1986, but these
estimates have limitations that make their reliability difficult to
assess.  An ATF official believes that compliance rates may have
increased since 1986 because, when the Bureau took over enforcement
of the SOTs from IRS in 1987, it devoted more resources to
enforcement than IRS had and began matching state and federal records
of alcohol dealers as part of its enforcement effort.

Determining whether the administrative costs of the SOTs are
excessive may be difficult because one would have to compare the
costs and compliance rate for the SOTs with those of alternative
revenue sources.  It is important to compare both administrative
costs and compliance rates because a tax may appear less costly to
administer only because compliance rates (and enforcement costs) are
lower.  However, complete and reliable data on compliance and
administrative costs for both the SOTs and alternative revenue
sources may not be available.  For example, ATF has estimates of the
costs of collecting excise taxes but does not have estimates of
compliance rates for the excise taxes.\21

A complete evaluation of the SOTs relative to alternative ways of
raising revenue would have to include other factors besides
administrative costs and compliance rates.  The evaluation would have
to include an assessment of the compliance burden imposed on
taxpayers by the SOTs relative to the compliance burden of
alternatives that may be proposed, as well as the relative impact of
the SOTs and alternatives on the efficiency and equity of the tax
system.  These factors affect the total cost to society of a tax in
terms of the resources taxpayers use to comply with the tax, the loss
of income and output that occurs when taxes interfere with economic
decisionmaking, and the losses to taxpayers who perceive the tax as
producing an unfair distribution of tax burdens.

--------------------
\19 GAO/GGD-90-123.  Tax Administration:  Compliance and Other Issues
Associated With Occupational Excise Tax (GAO/GGD-86-49, June 5,
1986).

\20 An ATF official also noted that the costs of administering the
SOTs may have been unusually high in fiscal year 1989 because (1) ATF
may still have had significant start-up costs from the takeover of
enforcement from IRS in 1987 and (2) ATF may have been spending more
to deal with changes in the SOT tax rates that became effective in
January 1988.

\21 An ATF official said that compliance is likely to be high among
large producers who pay most of the tax; but ATF does not have good
information on compliance among small producers, such as
micro-breweries.

      OPPONENTS HAVE CRITICIZED
      THE SOTS FOR BEING UNFAIR
---------------------------------------------------------- Letter :7.2

Opponents of the SOTs have criticized the taxes for being unfair.
Because the taxes are a fixed amount per location, they may take more
income from those with less ability to pay the tax, and, if
compliance rates are low, compliant taxpayers would pay an unfair
share of the tax burden.  Other features of the SOTs, such as the
requirement that businesses operating for only part of the year pay
the full yearly rate, have also been criticized for imposing unfair
tax burdens.  The fairness of the SOTs depends on factors such as who
actually bears the burden of the tax (i.e., how much of the tax is
shifted from alcohol dealers to others in the economy in the form of
higher prices); the income of those who pay the tax; and the rate of
compliance with the SOTs.

The SOTs have been criticized as inequitable because the fixed amount
of tax per business location does not vary according to the
taxpayers' ability to pay.  There is no universally accepted measure
of tax fairness.  However, one commonly used criterion of fairness is
that a tax burden should increase, at least proportionately, with the
incomes of taxpayers.  When this criterion is violated and the tax
burden, as a percentage of income, is higher for low-income
taxpayers, then the tax is considered to be "regressive." Whether the
SOTs are regressive depends on the incidence of the taxes, i.e., who
actually bears the burden of the taxes, and the amount of the SOT
paid by these individuals relative to their total income.

The incidence of the SOTs depends on how much of the tax is shifted
from the dealers to others in the economy through price changes, such
as price increases to consumers of alcohol.  The incidence of the
SOTs is uncertain, but it is likely that, in the long run, at least a
part of the SOTs is passed forward in higher prices to consumers.\22
Determining whether the taxes are regressive requires measuring the
share of the tax paid by the dealers and consumers relative to their
total income.  Thus, in order to determine regressivity, data are
required on factors such as the total income of dealers and
consumers, the effect of the SOTs on alcohol prices, and consumers'
expenditures on alcohol.  However, whether the taxes are shifted to
consumers or paid by the dealers, the size of the SOTs means that
their effect on prices and incomes is likely to be very small.

The fairness of the SOTs may also be viewed from the broader
perspective of the entire tax system.  In this context, whether the
SOTs are regressive depends on the income of those paying the tax
relative to those not paying the tax.  The taxes may be judged
regressive if they are paid by individuals who tend to have lower
incomes.

The SOTs also have been criticized as inequitable because of
allegedly low rates of compliance.  Another commonly used criterion
of fairness is that a tax should provide equal treatment of
individuals with equal ability to pay.  Noncompliance can create
inequity because people with equal ability to pay and equal tax
liability end up paying different amounts.  Some critics of SOTs
believe that the nonpayment of tax by some alcohol dealers puts the
compliant dealers at a competitive disadvantage.  Some industry
representatives believe that compliance among retailers may be low
relative to producers and wholesalers because retailers are unaware
of their tax liability and because ATF has difficulty identifying
retailers who have not paid the SOTs.

Critics claim that other features of the SOTs, besides the fixed
amount per location and low compliance, impose unfair tax burdens.
Establishments open on a seasonal basis, such as marinas and
campgrounds, have shortened sales periods but still pay the annual
tax.  As previously described, a standard for judging the fairness of
a tax requires that the tax be related to the taxpayer's ability to
pay.  The SOT requirement that seasonal establishments pay the annual
rate may make the taxes more regressive if the shortened sales period
results in less income and the seasonal dealers bear the same tax
burden as year-long dealers.

Critics also claim that the SOTs are unfair because retailers who are
unaware that they owe the tax can face substantial, accumulated tax,
penalties, and interest if they have been in operation for several
years without filing returns and paying the taxes.  Generally, the
IRC limits the period during which the SOTs and other taxes can be
assessed to 3 years from the date the tax return was filed.\23 The
purpose of this provision is to limit the taxpayers' compliance costs
of keeping and maintaining records.  However, the IRC contains
exceptions to this limitation that permit assessments at any time if,
for example, the taxpayer fails to file a return or files a false
return with the intent to evade taxes.\24 This statute of limitations
with its exceptions applies to taxpayers who owe income taxes and
other taxes as well as those who owe the SOTs.  An evaluation of the
fairness and effectiveness of these general provisions, and any need
to modify the provisions, is beyond the scope of this report.

--------------------
\22 The SOTs increase the costs of dealers, and the dealers may
attempt to pass these cost increases to others in the economy in the
form of higher prices.  The studies of industry structure and tax
incidence described in our report, District of Columbia:  Taxes and
Other Strategies to Reduce Alcohol Abuse (GAO/HEHS-98-140, May 19,
1998), indicate that it is likely that at least part of the tax will
be passed forward to consumers as higher prices.

\23 IRC Section 6501(a).

\24 IRC Section 6501(c).

   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

We discussed a draft of this report on July 9, 1998, with the
Director, Office of Tax Analysis, and other officials from the Office
of the Assistant Secretary of the Treasury for Tax Policy and with
the Deputy Assistant Director, Alcohol and Tobacco, and other ATF
officials.  In addition, ATF provided written comments.  ATF's
comments clarified its enforcement practices, its definition of
compliance, and its methods for measuring compliance.  ATF officials
also provided additional data on the numbers of alcohol business
entities that filed timely returns and timely paid the taxes due.
ATF and Treasury officials made other comments to improve the clarity
of our presentation.  We have incorporated the comments from ATF and
Treasury officials into this report where appropriate.

---------------------------------------------------------- Letter :8.1

As agreed with your offices, unless you publicly announce the
contents of this report earlier, we plan no further distribution of
it until 30 days from the date of this letter.  At that time, we will
send copies to the Chairmen and Ranking Minority Members of the House
Committee on Ways and Means and the Senate Committee on Finance;
various other congressional committees; the Secretary of the
Treasury; the Director of the Bureau of Alcohol, Tobacco, and
Firearms; and other interested parties.  We will also make copies
available to others upon request.

Major contributors to this report are listed in appendix III.  Please
contact me on (202) 512-9110 if you have any questions.

James R.  White
Director, Tax Policy and
 Administration Issues

SPECIAL TAX STAMP REGISTRATION AND
RETURN PROCESS
=========================================================== Appendix I

In May of each year, the Bureau of Alcohol, Tobacco, and Firearms
(ATF) sends a notification package to each alcohol business known to
ATF.  This begins the annual process for businesses to renew the
registration of their alcohol operating locations with ATF and to
obtain the Special Tax Stamps.  The SOT notification package contains
the special tax renewal registration and return, a notification
letter, and a preaddressed return envelope.  ATF preprints on the SOT
return the business' name, identification number, registered address,
operating locations, and taxes due.  ATF instructs the taxpayer to
verify the preprinted information on the return, correct any errors,
sign and date the taxpayer certification at the bottom of the return,
and submit the payment.

The taxpayer can submit the SOT return with the appropriate payment
or report that the alcohol business is no longer in operation.  After
the taxpayer files the SOT return and pays the taxes, ATF issues a
Special Tax Stamp, ATF Form 5630.6A, as evidence of tax payment for
each location.  The special stamp is nontransferable and is printed
with the principal business address and the physical address of the
operating business location for which the stamp was issued.  Alcohol
businesses are required to keep these location-specific stamps
available for inspection by ATF.  ATF uses unique business location
numbers to account for all known operating and out-of-business
locations for each principal business.

If the taxpayer fails to register the alcohol business with ATF and
pay the taxes due or to report that the business is no longer in
operation, the Bureau considers the taxpayer to be noncompliant and
sends a follow-up inquiry letter to the taxpayer.  This letter
informs the taxpayer of the new total amount due, which includes the
occupational taxes, failure-to-file penalty, failure-to-pay penalty,
and interest.  The taxpayer is advised to pay the new total due
within 10 days of the letter to avoid additional penalties and
interest.  The letter contains an explanation of the taxpayer's
appeal rights and a telephone number the taxpayer may call for
assistance.  The taxpayer is advised that failure to respond to the
letter could result in assessment proceedings against the taxpayer.

COMPUTATION OF CIVIL PENALTIES AND
INTEREST
========================================================== Appendix II

ATF advises the taxpayers in the renewal notification process that
they may incur (1) failure-to-file and failure-to-pay penalties and
(2) interest if they are liable for the SOT and do not pay or file in
a timely fashion.  The failure-to-file penalty is 5 percent of the
tax liability for the first month late, plus an additional 5 percent
for each additional month or part of the month.  The maximum
failure-to-file penalty is 25 percent of the taxes due.  The
failure-to-pay penalty is 0.5 percent of the taxes due for the first
month late and 0.5 percent for each additional month or part of a
month.  The total failure-to-pay penalty also cannot exceed 25
percent of the tax due.  If both the failure-to-file and
failure-to-pay penalties are assessed, the total amount of these
combined penalties cannot exceed 25 percent of the tax due.  However,
if failure to file a return is due to fraud, the penalty is 15
percent, not to exceed 75 percent.

Unlike the penalty amounts, which are limited, there is no limit on
the interest charges taxpayers may incur for unpaid SOTs.  Interest
amounts are computed beginning with the first day of delinquency,
using compound interest rates.  Because of the exceptions to the
statute of limitations on the assessment and collection of the SOTs,
in some cases, the total amount of interest due can be substantial
for a taxpayer who has not filed a return for several years.  SOT
revenue data show that ATF has assessed and collected failure-to-file
penalties, failure-to-pay penalties, and interest for the
occupational taxes.

ATF can accept offers-in-compromise or installment agreements or
waive penalties if the taxpayer can show that the failure to file or
failure to pay is due to reasonable cause and not willful neglect or
gross negligence.  If a taxpayer exercised ordinary business care and
prudence and still was unable to file within the required time, the
failure would be due to reasonable cause.  ATF may consider that a
failure to pay was due to reasonable cause if the taxpayer
demonstrated ordinary business care and prudence in providing funds
for payment of the tax liability but still was unable to pay or would
endure undue hardship if the tax were paid on the due date.  ATF does
not consider ignorance of the law a reasonable cause.

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C.

James Wozny, Assistant Director, Tax Policy and Administration Issues
Helen D.  Branch, Evaluator-in-Charge
Kevin Daly, Senior Economist

*** End of document. ***