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Sunday, 18 September 2016 16:35

New legislation could alleviate taxes, update antiquated laws for craft distilleries

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Journeyman Distillery recently added a new production still to its operations in Three Oaks in Southwest Michigan. While the distillery has grown since opening its doors in 2011, owner Bill Welter said legislation aimed at reducing Michigan’s tax rate on spirits could help spur additional expansion. Journeyman Distillery recently added a new production still to its operations in Three Oaks in Southwest Michigan. While the distillery has grown since opening its doors in 2011, owner Bill Welter said legislation aimed at reducing Michigan’s tax rate on spirits could help spur additional expansion. Courtesy Photo

When Bill Welter was searching for a location to start a distillery in 2010, he chose a site in Three Oaks, Mich. over his home state of Indiana.

For Welter, the founder of Journeyman Distillery LLC, the decision hinged on Michigan offering more competitive liquor laws and the ability to sell his spirits on site. Back then, the benefits of those progressive on-premise retail laws outweighed the state’s substantial tax burden for spirits.

But times have changed for the craft distilling industry, and those benefits in Michigan have started to wane. As the sector evolved since 2010, nearby states — including Indiana — have updated their retail laws while maintaining lower tax rates. 

As other states tweaked their laws, Michigan kept its tax rate the same, drastically reducing the state’s appeal and amounting to significant costs for producers — which for Journeyman amounts to about $15 per bottle or around 30 percent of the retail price of its products. 

“I think at one point in time, Michigan — just for the sheer fact they offered on-site sales — was at a real competitive advantage regardless of the tax rate, but now there’s been a total reformation around the country,” Welter said. “Michigan, in just a short period of time, has gone from a state that was in many ways the leader in craft distilling to a state that hasn’t updated its laws like other states. They’ve fallen into a position where they’re no longer the leader but are actually lagging behind.”

Distilleries say Michigan’s current spirits tax climate is prohibiting them from investing in growing their operations and is deterring new producers from launching in the state. 

To update what many in the industry see as an antiquated set of laws, Welter and other craft distilleries in West Michigan have thrown their support behind Senate Bill 448, which seeks to cut taxes by as much as 45 percent on the first 60,000 proof gallons of spirits manufactured in a calendar year. 

After the 60,000 proof gallon mark, distillers would be subjected to the current tax. 

The legislation, which was originally introduced in September 2015 by state Sen. John Proos, R-St. Joseph, passed the Michigan Senate Regulatory Reform Committee this June and now awaits a vote by the full senate. 

“It really is a matter of kickstarting the industry,” Proos told MiBiz

Michigan ranks as the ninth most-expensive state in the nation for its taxes on spirits, Proos said. Meanwhile, neighboring states such as Wisconsin and Indiana rank 40th and 42th, respectively. 

In addition to stifling further investment, the current tax structure gives an unfair advantage to large-scale global producers, according to critics of the existing scheme. Because the tax is based on a portion of the product’s shelf price, craft distillers, whose spirits command a premium over mass-produced liquor, pay more in taxes than large manufacturers.

“The system basically penalizes the small producer,” Welter said. “You can find Jack Daniels for $30 a bottle and ours for $50 a bottle — that’s just economies of scale. The system in Michigan says we’re going to tax you based on the shelf prices. But because it costs more to make, we’re paying more in taxes than Jack Daniels.” 

Proos crafted the new legislation out of the same spirit as the recent reforms to the cottage food and food labeling laws, which he also worked on. Those laws were enacted at the end of the Granholm administration to reduce taxes for small food producers.

“Who knows who the next Ben and Jerry’s is going to be?” Proos said of the reasoning behind the cottage food laws. “It was so prohibitive to share your culinary craft at the farmers market and to sell that product. … It really is about the barrier to entry for the smallest guys.” 

Michigan’s nascent craft distilling industry has grown steadily over the years. The Michigan Craft Distillers Association, a trade group that formed in 2014, currently lists 37 active distilleries in the state with four additional distilleries in the process of opening. 

Grand Rapids-based Long Road Distillers LLC had been working with other distillers to advocate for similar legislation that would convert the state’s tax structure to a system based on gallons of spirits produced, rather than a markup on shelf prices, said co-owner Kyle Van Strien. However, with the Proos legislation gaining traction, Long Road has moved to support that bill instead. 

“We’d gotten some fairly good reception, but it seemed like Senator Proos had been working on reducing the tax,” Van Strien said. “For us, we don’t want to stand in the way of something good. We’d like to get something done rather than nothing at all.”

Approximately $10 per bottle of Long Road’s spirit’s is sequestered for state taxes, he said.  

Despite any tax disadvantages, Long Road is staying busy. The distillery is preparing to open new markets in Illinois, Ohio and Wisconsin and plans to release its first aged bourbon next month. 

FACING PUSHBACK 

While the legislation could be positive for Michigan’s craft distillers, it has garnered some resistance because it might result in a loss of revenue for the state.

The new legislation would result a $22.3 million to $35 million annual impact to the state’s general fund, according to an analysis from the Senate Fiscal Agency. That money is allocated to the Michigan Liquor Control Commission for regulatory enforcement, administrative and other expenses, with the remainder being sent to the general fund, Proos said. 

For his part, Proos believes the increase in distilled spirits sales resulting from growth in the overall industry will offset the reduction to the state budget. He also expects the MLCC will be able absorb any revenue loss as a result of the legislation. 

The tax cut could also allow small startup producers, such as Grand Rapids-based Gray Skies Distillery LLC, to ramp up production faster, especially since starting a distillery is often very capital intensive, co-owner Brandon Voorhees said. 

“In an industry that’s already financially involved, it makes it a little more difficult to scale up as much as you want to as a new company,” Voorhees said. “A tax break would allow us to invest in more Michigan grain and ramp up production quicker, which would mean adding more jobs.” 

Gray Skies launched in early 2016 and began distributing in late March, Voorhees said. 

According to Welter at Journeyman, reducing the tax burden would allow the Southwest Michigan company to have more capital to invest in a variety of projects, including launching a catering service and investing in an outdoor kitchen and bar. 

Since starting its operation, Journeyman has grown from employing five people to a payroll of 65 workers. The Three Oaks-based distillery also opened a restaurant last year and recently installed a new still. 

“With any savings on tax revenue, we’ve proven over and over we’d invest that money back into infrastructure and equipment and create more business,” Welter said. “I don’t think anyone who has been to our facility would deny that.” 

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