Congress voted on a near party line split this week to pass the Tax Cuts and Job Act (“Tax Bill”), a piece of legislation that could have major effects on the U.S. economy, including, notably, major effects for the beverage alcohol industry.
That is because the Tax Bill includes major provisions that were part of the Craft Beverage Modernization and Tax Reform Act (“CBMTRA”). This act, originally introduced in 2015, provided for drastic reductions in federal excise taxes for all alcohol products produced in or imported into the U.S. Despite broad, bipartisan support, the CBMTRA was unable to get through Congress. Until, at least, it was included in a Republican lead effort to overhaul the Internal Revenue Code.
The beverage alcohol provisions of the Tax Bill are slated to come into effect very soon, and be in effect to products taken out of bond after January 1, 2018. There are a number of sweeping changes, which we will attempt to outline here.
What Are The Changes?
The biggest effect that the Tax Bill will have for the beverage alcohol industry are reduced federal excise taxes for beer and spirit products, and expanded tax credits for wine products. Producers of all sizes will be able to receive most of the benefits from the rate and credit adjustments, as will both foreign and domestic products.
Notably, all of the beverage alcohol provisions of the Tax Bill are slated to sunset as of January 1, 2020, and so producers and importers will have only a couple years to enjoy the benefits — unless Congress acts before then to extend the effective period.
The specific provisions are:
- Reduce standard tax rate from $18 per barrel to $16 per barrel on the first 6 million barrels brewed or imported into the U.S.
- For domestic producers brewing less than 2 million barrels per year only, reduce the current discounted rate to $3.50 per barrel on the first 60,000 barrels, down from $7 per barrel.
- Expand existing credits for foreign and domestic producers to:
- $1 per wine gallon for the first 30,000 gallons produced;
- $0.90 per wine gallon on the next 100,000 gallons produced; and
- $0.535 per wine gallon on the next 620,000 gallons produced.
- The current $1.07 per wine gallon rate is still otherwise in effect.
- Effectively, a winery producing up to 30,000 gallons annually would only pay 7-cents per gallon in net taxes; and
- A winery claiming credits on the full 750,000 gallons allowable would receive a total reduction of $451,700 in annual excise taxes
- Adjust the allowable abv of wine that receives the $1.07 rate from 14% to 16%
- Wine with an abv from 16-21% would still be taxed at the $1.57 per gallon rate
- Extend the lower $1.07 to low alcohol content wines (less than 8.5% abv) with a carbonation of no more than 0.64 grams of carbon dioxide per hundred milliliters of wine
- Expand existing credits to foreign and domestic producers to:
- $0.062 per wine gallon for the first 30,000 gallons produced;
- $0.056 per wine gallon on the next 100,000 gallons produced; and
- $0.033 per wine gallon on the next 620,000 gallons produced.
- The current $0.226 per wine gallon rate for hard cider is still otherwise in effect
- These credits only apply to “Hard Cider”, defined as products made from apple or pear juice or concentrate, with an abv of no more than 8.5% and a carbonation of 0.64 grams of carbon dioxide per hundred milliliters
- Establish a definition of mead in the tax code as a product derived solely from honey and water, with no other fruit product or flavoring, with an abv of less than 8.5% and a carbonation of no more than 0.64 grams of carbon dioxide per hundred milliliters
- Extend the $1.07 per wine gallon rate to mead products
- Establish tiered tax rates for distilled spirits of:
- For the first 100,000 proof gallons produced, $2.50 per proof gallon.
- For production over 100,000 but less than 22,130,000 proof gallons, $13.34 per proof gallon.
- For all production over 22,130,000 proof gallons, the standard rate of $13.50 per proof gallon.
Effect on Foreign Producers
The Tax Bill also extends rules relating to foreign producers assigning their reduced tax rates and expanded credits to their domestic importers. The aim to limit the ability of foreign producers to essentially game the new federal tax structure. It does this by preventing foreign from both assigning to any one importer more product than the foreign producer actually produces, or assigning tax-reduced products among several importers of an amount that would exceed the highest threshold amount for receiving a tax break. For example, a foreign winery cannot inflate its production numbers to receive extra tax credits; and a foreign brewery that produces 8 million barrels per year it cannot assign 4 million to one importer, and the other 4 million to a different importer, and still receive tax relief on all 8 million barrels. However, there are some concerns about how effective the tracking will be, and how much enforcement there will be if a foreign producers does seek to game the system.
The bill also adjusts rules regarding in-bond transfers for beer and spirits, permitting more transfers before tax must be paid. These adjustments permit tax-free transfers for:
- Beer may be transferred tax-free from one brewery to another if the transfer is between breweries:
- That are owned by the same person (an existing provision);
- Where one brewery owns a controlling interest in the other;
- Where one person or persons owns a controlling interest in both breweries; or
- Where the ownership of each brewery are completely independent of each other, but the transferring brewery completely divests itself of all interests in the beer and the recipient brewery accepts full responsibility for payment of the tax.
- Spirits may be transferred tax-free if the transfer is made under bond between bonded premises and in containers that are at least one gallon.
It remains to be seen how these adjustments to in-bond transfers will affect the industry, though the impact could be quite remarkable. Certainly for beer, these provisions appear to permit much greater opportunity for collaboration between breweries, and especially when the breweries are operating under the same corporate structure.
Where Have We Come From, To Where Do We Go?
The CBMTRA has had an interesting history. It began as a much more limited bill, introduced in 2015 to provide limited tax relief to select small producers, but then ballooned into its current shape. Over the years, industry groups including Wine Institute and the Brewer’s Association lobbied hard for passage — and indeed by this summer, it reportedly had majority support in both houses of Congress. However, it appears in this political environment, all the air was taken up by more ambitious bills. Thankfully for the beverage alcohol industry, the Senate, instigated by Senator Rob Portman (R-OH), included the provisions of the CBMTRA in its version of the Tax Bill. It survived the reconciliation process with the House, and now, after party line votes in Congress, the bill moves to the President’s desk for an all-but certain signature.
Responses from industry members has been overwhelmingly positive, as it appears that everyone will benefit from the bill. While large producers — even $100 billion corporations — will also benefit, it is undoubted how positive the tax relief can be for small producers. How the industry at large will react, though — whether by reducing prices, raising employee wages, investing in future growth, or just paying a dividend to owners — remains to be seen.
There have also been complaints from some predictable sources, who argue that taxes on beverage alcohol should go up, not down. Many note health concerns, stating that higher taxes mean less drinking, and therefore fewer ill-effects caused by overconsumption of alcohol. Others simply note that federal excise taxes haven’t been adjusted since the late 80s, and have failed to keep up with inflation. They remark that, with the reduced rates and expanded credits available in this bill, beverage alcohol will be taxed federally at the lowest rates since the 1950s.
However, these arguments largely ignore the additional state excise taxes that apply to all alcohol products, and the ongoing efforts among the states to increase their tax rates. And, while any death or illness is tragic, they also overlook the fact that alcohol consumption has been on a steady decline for years, without overly burdening those who continue to enjoy it.
It also bears repeating that all of these these provisions have an expiration date of December 31, 2019. This means there might be only a small window for producers and importers to enjoy the tax benefits provided by the tax bill. Without future action by Congress, everything will revert back to their current rates and rules in 2020 — which seems to be a common theme of the Tax Bill. In some corners, it is a given that a future Congress will come back and make everything permanent — after all, no one wants to be seen as a tax hiker.
But the future is definitely cloudy, and it is unclear where political trends will lead us. That could mean that, someday in the not-too-distant future, beverage alcohol producers and importers might wake up to an effective tax hike. Barring this uncertainty, it seems that producers and importers should take advantage of what they’re getting now, and not look a Congressional gift horse in the mouth.