Forbes - Tara Nurin

Congress gave distillers a reprieve Thursday by voting to extend critical tax breaks to the spirits industry for one year. By passing one of two remaining spending packages by a vote of 71-23, senators affirmed a vote their House colleagues took Tuesday to let the Craft Beverage Modernization and Tax Reform Act of 2019 (CBMTRA) contained within it sunset on December 31, 2020, instead of at the end of this year as previously determined by the passage of the Tax Cut and Jobs Act of 2017. It headed to the president’s desk Thursday for his expected signature Friday.

For Scott Harris, co-founder of the ten-year-old Catoctin Creek Distillery in Northern Virginia, failure to pass FET reform would have meant potentially reducing employees and shifts in production. Now, he plans to add equipment and 1.5 to 2 sales positions this year.

“With it now,” he says, “we are able to keep going full steam ahead.”

“We are so delighted that the FET relief was included in the appropriations bill,” adds his wife and head distiller, Becky Harris. “Making this relief permanent is our next priority so we can plan with more confidence every year.” 

In an unprecedented show of solidarity between the spirits, beer, wine and cider industries, together with their raw material suppliers, six trade representative trade associations have worked together for the past several years to lobby Congress for federal excise tax (FET) relief. They won their first major battle in December 2017 when Congress voted to implement their requested reduction for two years. This year, they hoped to make the changes permanent but will have to settle for what they got, for now.

“It has been a long, hard fight for this one-year FET extension, a critical relief that will protect our industry in the near-term, and we look forward to working towards FET relief permanence as together we protect the future success of craft spirits and the peripheral industries we support,” says Margie Lehrman, CEO of the American Craft Spirits Association (ACSA), which represents the nation’s 2,000 small, independent distillers.

With taxes set to revert to their pre-2018 levels if this hadn’t passed, most of the nation’s small distillers faced what would have amounted to a 400% federal increase. Though brewers and winemakers would have also suffered grievously, distillers pay a far higher tax rate than the others. Not only is this the ACSA’s top ongoing legislative priority, its executives warned in statements earlier this week, “These numbers are grave, and the threat is real and imminent.”

The numbers they reference come from a poll of 100 ACSA members taken before the vote. In their words:  

·      100% of craft distillers report that the tax hike will negatively impact their small businesses.

·      More than 50% of craft distillers will take action to immediately cut jobs.

·      15% of craft distillers will cut production.

·      12% of craft distillers will halt any expansion efforts.

·      13% of craft distillers will increase pricing.

·      11% will cancel or stop negotiating equipment purchases.

·      5% will cut grain purchases, creating a direct impact on U.S. agriculture.

·      5% will close their operations altogether.

Says Ryan Perry, master blender for Bob Dylan’s Heaven’s Door line of whiskeys, “With our brand built in part on collaborations with smaller brands, anything that helps the industry grow is a positive. Everyone will capitalize on the reduction in a way that allows them to put money into interesting and cool things.”

Perry and Dylan have based their brand in Tennessee. Next door, Virginia boasts an extremely proactive industry association that arguably works harder than most to promote the commonwealth’s whiskey history, along with its 70 craft distilleries.

Says Virginia Distillers Association (VDA) executive director Amy Ciarametaro:

“Tax reform uncertainty is the single greatest threat faced by American craft distillers. It’s been an emotional whirlwind, continually asking Congress to support FET reform since the original passage in 2017 and now the pending one-year tax extenders package. While we are grateful for the one-year extension, it continues to be an interim fix.”

Despite ranking 46th in the nation for spirits consumption in 2016, Virginia’s distillers contributed $163 million in economic impact to the commonwealth in 2018 and anticipate spending $86 million on capital investments by 2021. Yet even before factoring in federal taxes, the state’s distillers net a mere $4-$7 per $30 bottle sold. FET uncertainty has created what Ciarametaro calls “an industry-wide bottleneck” because distillers can’t accurately budget for the future.

“Our industry is abnormally capital intensive; couple that with state-by-state regulations that severely impact the economics and then compound that with the highest federal tax rates across the various beverage sectors. If the tax rate reverts back to pre-2017 reform, or $13.50 per proof gallon, that’s an additional expense of approximately $3/bottle in expenses. That doesn’t leave a lot of wiggle room for additional expenses to support employees, capital investments, brand development, etc.,” she emails.

Both of Virginia’s (Democratic) senators voted to pass the bill, as did all seven Democratic congressional representatives. The commonwealth’s four Republican representatives voted no, however CMBTRA’s inclusion in a much larger tax package makes it inaccurate to gauge a lawmaker’s support based on his or her vote. In fact, all three Republican co-sponsors (of the seven total from across party lines) voted no, and all but one of the representatives who didn’t co-sponsor voted yes. The lone nay-sayer comes from within Republican party ranks; the rest are Democrats. Neither senator co-sponsored.

According to Ciarametaro, some members of Virginia’s delegation opposed CMBTRA because they mistakenly believe it almost exclusively benefits multi-national distillers rather than independent American ones. The Brookings Institution is among those making this case in an argument against giving tax breaks to foreign importers and large U.S. producers that don’t need it.

In a lengthy web article entitled, “How to close the loopholes in the Craft Beverage Modernization Act,” the author writes, “According to estimates from the Joint Committee on Taxation, updated to reflect what they’ve learned from the tax cut’s first-year impacts, most of the $1.2 billion cost of a one-year extension of the bill is associated with producers of distilled spirits who use this loophole, rather than true craft distillers.”

He describes this loophole as one that “allows large producers of distilled spirits to ship their product tax free through smaller firms, importers, or even shell company intermediaries, allowing them to claim the lower tax rate that was supposed to be reserved for small, craft businesses.”

He points to distilleries that legally buy and blend and/or bottle product from others while branding them as their own. The sticking point comes as a result of the act’s three-tiered approach to the tax cuts, which assesses distillers at $2.70 per proof gallon on the first 100,000 to leave the production site or warehouse, and $13.34 per proof gallon on the first 22,130,000 after that. Anything over 22,130,000 proof gallons gets taxed at the pre-2018 rate of $13.50.

Brookings advocates several alternatives, including lowering the first-tier ceiling to 10,000 proof gallons instead of 100,000. But what the think tank doesn’t take into account is that the bill likely wouldn’t have passed in the first place if it weren’t for these specific numbers, which might be viewed as a necessary evil that convinced large spirits corporations to compromise and join ranks with their smaller peers in getting behind just one tax reform bill rather than diffusing their power into multiple ones.

Plus, according to ACSA, 92% of craft spirits producers remove 10,000 proof gallons from bond annually, and just two percent remove more than 100,000. So while large-scale producers do benefit enormously from the tiered structure, almost every craft producer gets to take advantage of it as well.

In Virginia, 69 of 70 distilleries fall entirely below the 100,000 level.

“Having worked with Virginia distillers for some time now, I hear and see the economic pains they face on a continual basis,” says Ciarametaro. “They’re not running out and buying yachts as a result of tax reform.”