Will the Feds take a Smaller Share?

A few weeks ago, I posted about the Feds’ Share, discussing the amount that federal excise taxes add to the cost of producing distilled spirits (and therefore the amount paid by the consumer), and explaining the proof gallon calculation used to determine the amount of tax owed.

As noted in the earlier post, distilled spirits are currently taxed at $13.50 per proof gallon. But there is hope that this may be reduced.

Currently before the U.S. Senate, tucked away in proposed Amendment 3459 to America’s Small Business Tax Relief Act of 2015 (H.R. 636) (the “Tax Act”) is a promising piece of legislation called the Craft Beverage Modernization and Tax Reform Act of 2016 (the “Modernization Act”).  The Modernization Act was submitted as a proposed amendment to the Tax Act, and has seen some support from across the political spectrum – so if the Tax Act itself is passed into law the Modernization Act may also stand a chance of becoming law.

If the Modernization Act becomes part of the law of the land, it will have a number of effects on the production of alcoholic beverages in the U.S., the most significant of which may be to reduce the excise tax owing for the smallest producers of beer, wine and spirits.

As drafted, the Modernization Act will reduce the excise tax on spirits from $13.50 per proof gallon for all spirits produced, to:

  • $2.70 per proof gallon for the first 100,000 proof gallons produced, and
  • $13.34 per proof gallon for the next 22,130,000 proof gallons produced.

After production of 22,230,000 proof gallons, the producer would then be obligated to pay at the current rate of $13.50 for every additional proof gallon.

While 100,000 gallons isn’t an overwhelming amount of production for large distilleries, it is a very significant amount for craft distilleries.  And even for those small outfits that hope to one day grow into market behemoths, this reduction could provide a meaningful benefit as they try to stay in business while ramping up operations.  As a practical matter, consider the scenario of the hypothetical bourbon producer discussed in the earlier post.

Having made 50 gallons of bourbon at 80 proof (representing 40 proof gallons), our producer now has a tax bill of $540.  Under the new rates, that tax bill would drop to $108 (roughly $0.43 per 750ml bottle compared to $2.14 per bottle at current tax rates). This is a real savings, particularly when the string is played out to the full 100,000 proof gallon production run allowed at the reduced rate.  At 100,000 proof gallons, the annual tax bill currently runs to $1,350,000.  Under the new rate schedule, our producer would owe instead only $270,000.

Think your startup or craft distillery could benefit from a potential tax reduction of over $1 million every year?  If so, you may want to reach out to your senator and express support for this piece of legislation.

 

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