Changes to the federal tax code implemented at the beginning of the year could alleviate burdensome financial and bureaucratic rules for many craft beverage makers.
Under the new law, small craft brewers, cider makers and distillers generating less than $50,000 in tax liabilities are no longer required to pay bond requirements to the federal government. In the past, those craft beverage producers were required to pay upfront so the government could guarantee payment for the year if the business failed to pay its taxes.
“It was a guarantee that the federal government had the money if you disappeared in the middle of the night,” said Paul Gatza, director of the Brewers Association, a Boulder Colo.-based industry group. “They’ll still have to pay the taxes, but they won’t have to have the extra money on file with the government in perpetuity.”
Gatza notes that producers liable for more than $50,000 in tax liabilities — those who make in excess of 7,143 barrels of beer annually — will still be on the hook for the bond requirements.
“Eliminating the bond payment makes sense although it is not a large sum of money to post up,” Jason Spaulding, owner of Grand Rapids-based Brewery Vivant, said in an email to MiBiz. “It ends up being just one more detail to track and pay on an annual basis, so eliminating it is one less annoyance. … I thought it was dumb the first time I came across it in 1997, and still think that today.”
The smallest craft beverage producers also will benefit from changes to due dates for excise tax payments.
Under the new regulations, craft beverage makers liable for less than $1,000 in annual taxes — those who produce less than 143 barrels — are now allowed to file excise payments annually, rather than quarterly or biweekly, Gatza said.
“For the tiniest brewers, that’s less time they have to spend on the paperwork side,” he said.
While Spaulding acknowledges that making only one tax payment a year saves brewers time, he also points out that waiting until the end of the year could result in more mistakes. Moreover, it could lead to brewers not putting away enough money throughout the year for taxes.
“The government is not very patient when it comes to paying taxes,” Spaulding said. “I would not advise doing it this way. Just because you can, doesn’t mean you should.”
The elimination of the bond requirement and moving to an annual excise tax payment for small craft beverage producers stemmed from the Protecting Americans from Tax Hikes (PATH) Act of 2015.
For Gatza, the changes to the federal tax code mark part of a larger shift to increasing efficiencies throughout the U.S. Alcohol and Tobacco Tax and Trade Bureau (TTB), which oversees federal licensing, taxes, product labeling and other aspects of the industry.
“What seems to work with the TTB, the U.S. Congress and our members are things that streamline and reduce paperwork,” Gatza said. “It benefits everybody. It makes the government more efficient (and) it makes our members more efficient. The (TTB) has fewer people to do the work of label approvals and tax collection at a time when the number of breweries, wineries and distilleries are just exploding in this country.”
IMPROVEMENTS FOR CIDERIES
In addition to the excise tax and bond requirements, hard cider producers will also benefit this year from additional changes that raise the alcohol threshold and carbonation limits on cider.
The revised tax code will allow hard cider makers to produce products up to 8.5 percent alcohol by volume, an increase from the previous limit of 7 percent. Moreover, the new regulations also allow cider makers to increase carbonation levels 36 percent without being charged a much higher tax rate for champagne.
Champagne is taxed at $3.30 a gallon, compared to 22 cents per gallon tax on cider.
The new regulations also apply to ciders made with pears, a beverage known as perry.
Effectively, these updates give cider makers more “breathing room” when it comes to making their products, with less fear of being out of compliance, said Paul Vander Heide, owner of Grand Rapids-based Vander Mill LLC.
“It’s definitely a step in the right direction and we’re continuing to make sure our legislators understand some of the hindrances and difficulties we have in making a lot of this regulation appropriate for today’s market,” Vander Heide said.
ADDITIONAL WORK REMAINS
While the new changes to the tax code should make life easier for some craft beverage producers, industry groups continue to push broader reforms on what many consider as antiquated regulations.
For example, the Brewers Association continues to support the Craft Beverage Modernization and Tax Reform Act, which was reintroduced in late January after failing to pass last year, despite broad bipartisan support.
The legislation specifically seeks to alleviate the tax burden for small to medium-size craft beverage makers, which pay similar taxes to the largest producers.
For brewers, the legislation would cut in half the excise tax, from $7 per barrel to $3.50 per barrel on the first 60,000 barrels produced. The rule would only apply to domestic brewers that make less than 2 million barrels of beer annually.
For all other brewers and importers, the legislation would reduce the excise tax from $18 per barrel to $16 per barrel for the first 6 million barrels.
For distillers, the act would decrease the excise tax to $2.70 per proof gallon — defined by the TTB as one liquid gallon of spirits at 50 percent alcohol by volume at 60 degrees fahrenheit — for the first 100,000 proof gallons produced in a calendar year. Currently distillers pay $13.50 per proof gallon in federal excise tax.
Label approval for alcoholic beverages and other bureaucratic processes also would be streamlined under the act.
Meanwhile, the U.S. Association of Cider Makers (USACM), for which Vander Heide serves as a board member, is busy forming a strategy to lobby lawmakers to include other ingredients — blueberries, peach and ginger — under the new laws governing alcohol content and carbonation.
If a cider contains fruit other than apples or pears, it still falls under the old requirements, Vander Heide said.
“The USACM is trying to play a large role in educating a very young and fast growing industry that is highly regulated and sometimes difficult to understand,” he said.