Brookhaven’s recent crackdown on several restaurants and bars they said owed back taxes on liquor sales could put some popular watering holes at risk of not being able to sell booze to customers, at least temporarily. Other venues were able to prove their record keeping was accurate and their alcohol licenses are safe.

Among those affected are three nightclubs that previously sued the city for discrimination for another crackdown, and such popular neighborhood institutions as Kaleidoscope Bistro & Pub, the Rusty Nail and Villa Christina. One restaurant appealing the bill, Hudson Grille, faced testimony from an undercover private investigator who said an unnamed person hired him to sample free drinks there.

The liquor tax crackdown resulting from a citywide audit of 77 businesses where alcohol is served on site is part of an ongoing campaign by the city to tame the city’s nightlife industry. City officials have long said late-night venues create more crime and strains the police force, especially along Buford Highway.

Last year, the City Council approved an alcohol ordinance overhaul that included a new $100,000 alcohol license fee for “entertainment venues,” or businesses with a DJ booth, dance floor or stage. All the businesses targeted with the new fee are located along Buford Highway and catered to mostly Latino and African American clientele.

Three nightclubs — Medusa Restaurant & Lounge, Josephine Lounge and XS Restaurant & Lounge, all located in Northeast Plaza on Buford Highway – sued the city, in part because they alleged the $100,000 alcohol license fee was discriminatory. An early ruling in favor of the clubs forced the city to backtrack on the fee and eliminate the “entertainment venue” category. The clubs eventually dropped the lawsuit and it was dismissed last month.

But the same three nightclubs are again in the city’s crosshairs, this time for allegedly not paying their fair share of liquor excise taxes.

On April 5, the city sent certified letters to the businesses saying their alcohol licenses will be suspended on April 26 unless they pay up. According to the city, Medusa owes $32,240; Josephine owes $48,334; and XS owes $18,443.

Other businesses whose alcohol licenses could be suspended this month due to overdue liquor excise taxes are popular spots the Rusty Nail and Pancho’s Mexican Restaurant and Cantina, both located on Buford Highway, and the Hudson Grille on Peachtree Road.

Also caught up in the audit net were Dresden Drive favorites Kaleidoscope Bistro & Pub, which was told it owed $9,069.60, and Verde Taqueria, which was told it owed $11,439.88. Villa Christina, located in the Hyatt Regency Atlanta Perimeter hotel just off Perimeter Summit Parkway, was told it owed $9,024.22.

Representatives from these venues met with city officials over the last several weeks to compare record keeping. After the city’s outside CPA looked at their records and compared it to their firm’s data, it was determined in March the three businesses did not owe the city any money, leaving their alcohol licenses safe.

City officials said the owners from Medusa Restaurant & Lounge, Josephine Lounge and XS Restaurant & Lounge have never disputed the amount they owe and have been hard to reach.

Attempts to reach the operators of Medusa and XS for this story by email were unsuccessful and no one answered the phone numbers listed. A person who answered Josephine’s phone declined comment.

All businesses that sell liquor pay an excise tax on liquor sold. If an alcohol license is suspended due to failure to pay the liquor excise taxes, the business cannot sell any kind of booze, including beer and wine.

Private eye testifies for city against popular restaurant

In an unusual appeal, Hudson Grille faced testimony from a private investigator during an April 11 hearing at City Hall.

The Hudson Grille was told in December it owed $10,130.92 in overdue liquor taxes and could see its alcohol license suspended April 26.

Jeff Landau, CEO of Metrotainment Cafes, which ownsf Brookhaven’s Hudson Grille, appealed at an April 11 hearing the city’s recent audit that stated the business owes more than $10,000 in liquor taxes. (Dyana Bagby)

But Jeff Landau, CEO of Metrotainment Cafes, which owns the Hudson Grille chain in metro Atlanta as well as other popular restaurants including Sugar Shack and Einstein’s in Midtown, argued before the city’s alcohol beverage hearing officer that the city’s outside accountant was using skewed data and that he owes the city nothing. For example, he said, the city’s numbers don’t take into account that some liquor bottles are broken, or drinks are stolen.

City Attorney Chris Balch stood by the city’s numbers and said such information was included. And in an interesting twist, Balch presented testimony from a private investigator, Jon Von Danz of the Danz Intelligence Group, who said he was hired by an unnamed person to patronize the Hudson Grille restaurant.

Danz said during several covert operations in 2017 at the Hudson Grille, he received compensatory, or free, drinks. He presented receipts from those visits at the April 11 hearing that showed no taxes were charged for the free drinks as required by law, according to Balch.

Danz refused to identify who hired him to conduct covert operations at the Hudson Grille when asked by Landau during cross-examination at the hearing.

Landau acknowledged that Hudson Grille at one time did give out free drinks to certain customers as part of a rewards program, but the program was dropped after the company’s attorney advised them to do so. But he denied the business did not pay its fair share of taxes.

“Under no circumstances did we ever short-pay,” he said at the hearing.

Balch said the private investigator showed up at City Hall one day and offered to tell the city what he knew about alcohol sales at the Hudson Grille. He said he did not know who hired Danz or for what reason. Balch said Danz only conducted surveillance at the Hudson Grille in Brookhaven.

The city’s new alcohol beverage hearing officer, William Linkous, a former Gwinnett County attorney, is expected to issue a ruling in the next few days. The City Council voted as part of last year’s alcohol code overhaul to replace its volunteer five-member Alcohol Board with one hearing officer appointed by the mayor and approved by the council.

The audit and current status of alcohol licenses

The city last year hired the accounting firm Frazier & Deeter to conduct an audit of the city’s 77 “consumption-on-premises” businesses – restaurants, bars and nightclubs – for the dates between January 2016 through March 2018. The audit was done, according to Assistant City Manager and Chief Financial Officer Steve Chapman, because the alcohol industry is notorious for cheating.

“[T]here’s always the opportunity to take cash payments, to underreport, to bring alcohol in from non-distributors, because the rewards are great for the vendors,” Chapman said.

“This business in particular … there is a bigger benefit for people, I hate to say it, cheat, versus other businesses because the margins are larger,” he said.

City spokesperson Burke Brennan added it is also important that all businesses pay their fair share of taxes so that an undue burden is not put on those businesses who do play by the rules.

Chapman also said of the audit, those cited represented a “very small group” of businesses that appeared to underreport their taxes.

During the audit, a CPA with the firm compared how much liquor distributors reported selling to the local businesses versus how much those businesses reported buying, and used social media and website information to deduce average drink prices. The combined numbers produced an estimate of how much booze was sold versus how much was paid, and finally how much taxes were owed.

Letters then went out to 13 restaurants in December — Red Pepper Taqueria, Medusa Restaurant & Lounge, El Potro Mexican Restaurant, Josephine Lounge, Kaleidoscope Bistro Pub, Hudson Grille, Pink Pony, the Righteous Room, Verde Taqueria, Pancho’s Mexican Restaurant, the Rusty Nail, the Righteous Room, Villa Christina and XS Restaurant & Lounge — saying they all owed back liquor taxes.

Red Pepper Taqueria was later removed from the list after the city learned the alcohol distributor reported the wrong amount of booze sold to the business.

The Pink Pony was told it owed $80,237.72, but because the Pink Pony filed bankruptcy last year, how and when the money will be paid is unknown, Chapman said.

Pink Pony CFO Dennis Williams said the business has agreed to pay the amount but is awaiting a ruling on how from the bankruptcy court. He said he disagreed with how the city determined the excise taxes. For example, a mixed drink with juice may cost $8, but the actual alcohol in the drink is valued at much less than $8. The juice, he said, should be taxed as a food and not as liquor.

El Potro Mexican Restaurant was originally told in December it owed $11,793.66. But after presenting its books to the city, the amount was lowered. In a March 10 letter, the city states El Potro owed only $4,594.24 “[b]ased on our agreed upon adjustments and further conversations with you.” The money has been paid and the business’ alcohol license is safe.

The Righteous Room on Johnson Ferry Road was originally told it owed $7,604.12, but now owes only $495.28, according to the city, and that amount is being paid.

Pancho’s Mexican Restaurant was originally told it owed $16,745.80, but after sharing their accounting information with the city, now owes only $4,538.85. The Rusty Nail was initially told to pay $5,609.93, but after discussions with the city the amount was lowered to $3,979.90.

Those two businesses must either pay these amounts or face their alcohol licenses being suspended on April 26. They can also formally challenge the amounts at a May 7 hearing before the city’s alcohol beverage hearing officer.

Dyana Bagby

Dyana Bagby is a staff writer for Reporter Newspapers and Atlanta Intown.