Changes in tax rules are typically pretty dense pieces of legislation, and The Protecting Americans from Tax Hikes Act of 2015 (or “the PATH Act”), signed into law by President Obama on December 18, 2015, is no exception. But contained within its maze-like clauses are changes to several rules relating to the beverage alcohol industry, as the TTB announced on January 14. These rule changes will provide some relief for smaller producers on their tax obligations, and a significant shift for cider producers.
First of all, we must note that these changes won’t come into effect until January 2017. So you shouldn’t expect to jump on them right away. But it’s better to be well-ahead of the news and prepared, rather than have it pass you by unnoticed (at least, that’s our policy).
The first change affects the reporting period for small producers. Section 332 of the PATH Act amends the Internal Revenue Code, so that, starting January 1, 2017, licensed producers who “reasonably expect” to have no more than $1,000 in taxes due from their production of distilled spirits, wine, and beer can pay the taxes annually, instead of quarterly. These producers must also have had no more than $1,000 in taxes due during the previous calendar year (which should help establish its reasonable expectations).
This means that, if a producer of distilled spirits, wine, and/or beer, expects to have no more than $1,000 in taxes due for 2017–and paid no more than $1,000 in 2016–it can pay its 2017 taxes in January 2018, instead of quarterly throughout 2017. Remember that this only comes into effect beginning in January 2017, so these producers must still pay 2016’s taxes quarterly.
Also in the PATH Act is an exemption for producers who make annual or quarterly tax reports (those who “reasonably expect” to pay less than $50,000 in taxes in a calendar year for their production) from the existing tax bond requirement. Currently, federally licensed producers are required to file a bond that will cover their potential tax liability when they produce and withdraw distilled spirits, wine, and beer. But now, (at least starting next January), producers with a tax liability of less than $50,000 will be excused from this requirement. Since this bond can be a large initial expense, this should relieve the pressure of starting up a smaller-scale operation.
The final amendment in the PATH Act affecting the beverage alcohol industry is a change of the definition of “hard cider,” which has been a long time in coming. The new definition–which is only effective for tax purposes–increases both the permissible ABV limit from 7% to 8.5% and the carbonation level from 0.392 to 0.64 gram of CO2 per hundred mL. Also, perries–products made from pears, pear juice concentrate and pear products and flavorings–will now be “hard ciders.”
The older definition stemmed from established rules on classifying wine; but this failed to include the realities of making cider. Quality cider apples can naturally ferment to a level of around 8.5% ABV, and so previously, cider producers had to artificially dilute the product or prematurely halt the fermentation process to stay under 7% and receive the lower tax rate. Similarly, the lower carbonation level lead to products with an unsatisfying amount of fizz–and set the US apart from European cider-loving nations where effervescence is expected.
These definitional changes, though, will only apply to hard ciders removed after January 1, 2017. For now, the old definition still governs which products can receive the hard cider tax rate. Further, these changes only affect how cider is treated for tax purposes–they will not affect labeling, advertising, permitting, and other requirements for cider above 7% as dictated under the Federal Alcohol Administration Act. (Whether Congress will amend the definition of “hard cider” in the FAAA is currently unknown.) Still, the reduced tax cost of producing fizzier cider with a higher alcohol content will be beneficial to the growing cider industry.
As these rules come into effect next year, we at ShipCompliant will make sure to incorporate them into our compliance checks. And as always, we’ll be sure to keep you informed as alcohol beverage laws develop.