Much of the reporting on the recently passed Tax Cuts and Jobs Act has been cluttered with moans, groans, and general derision.
But the act includes provisions that, until now, were talked about mainly within their respective circles of interest. Provisions that reduce taxes for entrepreneurs struggling to climb a hill pockmarked with rules and regulations. In this case, these entrepreneurs produce and sell alcohol, in the forms of beer, wine, and spirits.
An analysis by the lawyers from Williams Mullen, a regionally based law firm, paints a concise picture of changes under the new law, including lower excise taxes, more lenient rules regarding alcohol-by-volume (ABV) limits, transfer, and production.
But, as the writers point out, these tax reductions and changes are effective only for two years and will “sunset” after Dec. 31, 2019. Brewers and distillers emphasize more needs to be done regarding taxes and regulations, especially in North Carolina.
The changes, though temporary, are significant.
The excise tax on beer, says John Locke Foundation fiscal analyst Joe Coletti, will fall to $3.50 per barrel from $7 on the first 60,000 barrels for brewers under 2 million barrels. The rate falls to $16 per barrel — from $18 — on first 6 million barrels for larger brewers.
Regarding spirits, the rate goes from a flat $13.50 per gallon produced or imported to a tiered rate of $2.70 per proof gallon on first 100,000 proof gallons, $13.40 on the next 22.130 million proof gallons, then to $13.50 for anything more.
For wine, says Williams Mullen, the act includes an expansion of the excise tax credit for wineries by repealing the phase-out of the credit based on production size.
“This will allow all wineries to claim the credit based on the first 750,000 gallons of production.” Sparkling wine will also now qualify for the credit. The bill increases the ABV limit to qualify for the lower excise tax on wine — from 14 percent to 16 percent.
North Carolina’s craft brewers, distillers, and vintners say they are welcoming the new rules by expanding and hiring additional workers.
North Carolina has some 200 breweries, more than any other Southern state, and carry an economic impact of about $1.2 billion, the N.C. Craft Brewers Guild says. In 2015, craft brewers produced 675,469 barrels.
This isn’t a trend. It’s a booming industry, and just 4 percent of beer consumed in North Carolina is made locally, craftfreedom.org says.
The distilling industry is growing exponentially, as more than 40 are producing liquor. North Carolina, the state Department of Agriculture says, has more than 525 vineyards and 185 wineries set from the mountains to the coast.
In fact, NoDa’s Todd Ford said the Charlotte brewery is adding an employee next week, bringing the number of production workers to 12 and the employment roll to 44.
“This saving will also slightly help defray the cost of our company-paid employee health, dental, and vision care as well as 401(k) contributions,” said Ford, who cited the federal tax burden, which will drop from $3.50 per one-half barrel keg to $1.75.
“That is a federal tax reduction of 50 percent, which is nothing to sneeze at. “
“Unfortunately, the state tax obligations are what are really strangling our current operations. For every one half barrel keg we sell we are currently paying $3.50 to Washington, but we are paying approximately $9.61 to Raleigh in state excise tax. The state tax is more than triple the federal burden, even before the current federal reduction.”
Imagine, Ford says, if North Carolina followed the lead of the federal government.
“The new tax burden per half barrel keg would drop from $9.61 to $4.81, and the total tax burden would be reduced to $6.56 per keg, or about 5 percent of the total keg cost in the market.”
For the states, says Coletti, it’s pretty much business as usual.
“Unlike income taxes, state taxes on alcohol aren’t tied to definitions in the Internal Revenue Code, and the excise tax changes mostly are about rates,” he said. “Short answer is that the tax changes will have little effect on states, other than to provide them with more revenue as prices fall and volume goes up, since state alcohol taxes are often based on volume instead of price, though it could have some offsetting effects if alcohol-related social problems increase,” even though, he pointed out, the evidence here is mixed.
“As for the effect on retail prices, they would go down by somewhat less than the reduction in the tax depending on how consumers and producers respond to price changes in general.
It’s the elasticity of supply and demand,” he says.
“Beer tends to be price inelastic, meaning consumption does not change much with a change in price or taxes, so the lower tax will result in lower prices, but the tax itself is only about 51 cents per case. For 80-proof liquor, the tax cut is about $1.73 per fifth, but demand is more elastic, which means more of that will carry through to volume and less to prices.”
Gentry Lassiter, of Lassiter Distilling Co. in Knightdale, called the tax reduction a long overdue step in the right direction toward supporting small beverage industry businesses.
N.C. House Bill 909 passed in 2015 and allowed distillers to, at the time, sell one bottle per customer every 365 days. They can now sell five, thanks to Senate Bill 155, which lawmakers passed last year.
A state excise tax of 30 percent is levied on spirituous liquor and antique spirituous liquor sold in ABC stores, according to statute, which says, “The price of liquor on which this tax is computed is the distiller’s or the antique spirituous liquor seller’s price plus the state ABC warehouse freight and bailment charges, charges and a markup for local ABC boards.”
“Last year,” Lassiter said, ”we paid $2.14 of federal excise tax on every bottle that we put into the market, and that is reduced in 2018 by 80 percent, to just $0.43 a bottle. We plan to put the reduced cost of producing our award-winning rums to work through additional investment in our business and passing along some of the savings to our customers.”
The Distilled Spirits Council of the U.S. lobbied hard for the legislation and, not surprisingly, lauded its passage.
“The Distilled Spirits Council commends U.S. House and Senate leaders and their colleagues for approving the Craft Beverage Modernization and Tax Reform Act as part of the Tax Cuts and Jobs Act,” wrote DISCUS president and CEO Kraig Naasz.
“This legislation reduces the federal excise tax on distilled spirits producers for the first time since the Civil War, which will enable the more than 1,300 operating distilleries nationwide to re-invest in their businesses and stimulate job growth in their communities.
“Supported by 303 co-sponsors in the House and 54 co-sponsors in the Senate, this landmark legislation creates a more equitable tax structure for distillers, brewers, winemakers and importers of beverage alcohol by equalizing the federal excise tax on spirits, beer and wine for the first 100,000 proof gallons. It also provides for the same in-bond treatment of spirits transferred in bottles as for beer and wine and exempts the spirits aging process from interest expense capitalization rules.”
It’s progress, say those affected by the act, albeit temporary. Rules and regulations — particularly in North Carolina — still stifle the industry, regarding all spirits, they say.
Ford is continuing a push among brewers to self-distribute their products, even if they produce more than 25,000 barrels per year.
“The ability to self-distribute any beer is why North Carolina has over 300 breweries while South Carolina has around 50. Unfortunately, the law that allows you to grow early on hurts you when you have had a bit of success and grow to 25,000 barrels production in an year. At that point you lose all ability to self-distribute beer and must ‘contract’ with a third party distributor to sale your product.”
“I am very hopeful that North Carolina lawmakers will follow the national trend of support for the local brewer, vintner, and distiller, and will consider actions in 2018 to make North Carolina a friendlier place to do business as a member of the beverage industry — perhaps by allowing direct shipments of North Carolina-made spirits, further loosening quantity restrictions of onsite bottle sales, or by allowing distilleries to self-distribute our products directly to mixed beverage permit holders who are clamoring for them.”
Asked Ford, “Shouldn’t a business owner be allowed to choose how to run their business? It is interesting to note that only 5 percent of the beer consumed in North Carolina is actually made here. One only has to look at this statistic to see we have a lot of room for improvement in bringing manufacturing to North Carolina.”