Every weekend, UI students and others form long lines outside downtown bars, waiting to dish out their cash to enter.
Now, city officials want to know where money generated from cover charges goes and if it’s being taxed properly.
“Is there the appropriate oversight so it’s being handled like any other transaction in our state?” asked Iowa City Mayor Regenia Bailey.
Some bar owners said they aren’t thrilled with the new concentration on cover charges — an issue on the Iowa City City Council’s 2010 legislative priority list. The council will discuss their priorities with other cities on Dec. 7 and then share them with the Legislature.
The new interest in how businesses regulate their income from cover charges comes at a time when the council and bar-owners have an already shaky relationship over new guidelines for liquor-license denials and opening new drinking establishments downtown.
Mike Porter, who owns three downtown bars including the Summit, 10 S. Clinton St., said a cover charge is subject to income and sales tax. He said all of his profits from cover charges are correctly reported to the state.
“If we charge a dollar at the door, 7 cents goes to the state,” Porter said, making an example how the sales tax works. “If we aren’t reporting our income, we can get shut down — that’s tax fraud.”
Councilors first brought up the issue of cover charges at their meeting on Oct. 19, where some said because of its economic situation, the state may be interested in looking into how bars charge entry fees. In addition, others expressed concern the price paid at the door could supplement cheap drinks, which can fuel binge drinking.
Councilors aren’t the only ones worried about the cash-only entry system.
Because money is handed over in cash with no documentation, other business owners, such as Jim Clayton — who serves on the Iowa Alcohol Beverages Commission — have wondered about the process of reporting cover charges as well.
“I’ve always been curious if they’re [bars] reporting correctly,” he said. “I know a lot of cash is taken in.”
The Union Bar, 121 E. College St. — the largest capacity bar in Iowa City — could rack up about $4,250 in one night while charging $5 per person if it met its capacity of 850.
Some nights, bars can charge up to $15 or $20.
Clayton said he is concerned no means exist to monitor each transaction.
“How does the number get written down on the books,” he said. “The big question is who counts it and what happens to it.”
At Porter’s bar, his bookkeeper counts the cash under the surveillance of a camera, he said.
However, officials are still wary.
“I never see anyone writing anything down or giving a customer a receipt,” Clayton said.