Men sitting at a bar inside a craft distillery in Portland, Maine. (Photo by: VW Pics/Universal ... [+]
The COVID-19 pandemic has hit craft distillers exceptionally hard. Unlike the established national spirits brands, most craft distillers lack a broad retail distribution network.
On average, the typical craft distiller relies on tasting room sales, both consumed on premise and off, for about half of their revenues. Lock down orders imposed by states have decimated those sales leaving many craft distillers on perilous economic ground.
To add further insult to injury, a key tax provision is set to expire by the end of the year. The result would be a five-fold increase in the excise tax that the federal government levies on alcohol produced by craft distillers.
According to Chris Swonger, President & CEO, Distilled Spirits Council of the United States:
2020 has been such a stressful year for craft distillers with the devasting impact of the pandemic, the retaliatory tariffs and now a looming massive federal tax hike. The countdown is on. If we don’t get the Craft Beverage Modernization and Tax Reform Act (CBMTRA) passed by the end of the year, I fear this may be the final blow for many small craft distilleries.
Eric Zandona, Director of Spirits Information at the American Distilling Institute, noted that:
… a survey on the impacts of Covid-19 on Craft Distillers found that 43% of employees had been furloughed and two-thirds of respondents did not believe they could sustain their businesses for more than 6 months. Covid-19 has been hard on craft distillers. In addition to the loss of sales and the need to lay off employees, we have seen some distilleries go out of business already and some have lost as much as 60% of their normal revenue during the pandemic.
The Craft Beverage Modernization Act (CBMA), which was passed as part of the Tax Cuts and Jobs Act of 2017 (TCJA), reduced the federal excise tax (FET) on alcohol on a producer’s first 100,000 proof gallons from $13.50 to $2.70.
This was the first reduction in FET since the Civil War. The tax reduction was a godsend to craft distillers, many of which are still in the process of getting established. 100,000 proof gallons is the equivalent of about 1.2 million bottles of alcohol at an alcoholic strength by volume (ABV) of 40%.
Production between 100,000 proof gallons and 22,130,000 proof gallons was taxed at $13.34 per proof gallon while any higher production levels were taxed at the old rate of $13.50 per proof gallon. In addition, the CBMA allowed the transfer of spirits between bonded premises in both bulk and bottled form. Previously only bulk spirits could be transferred in this way.
The original CBMA had authorized a permanent reduction in the FET. That reduction was later capped at two years as part of the legislative compromises that led to the passage of the TCJA. That reduction is slated to expire at the end of this year.
Because the tax is imposed on the amount of alcohol in a bottle and not on the bottle’s retail selling price, it has a bigger impact on low priced spirits than on expensive ones.
Alcoholic beverages are among the most heavily taxed items in the US. On balance, roughly $2 of every $3 in retail spirits sales go to local, state or the federal government in various excise taxes, income taxes and fees.
Tom Potter, President New York Distilling Company in Brooklyn, underscored the urgency of Congressional action, noting:
We are waiting with growing dread to learn if our excise taxes will soon quintuple overnight on January 1. Expiration of the current tax rates would be flat devastating to us, and would come at the worst possible time. The increase in taxes would equate to one-third of our entire payroll. It’s hard to understand how a proposal with such overwhelming bipartisan support could be left hanging this way. We’re begging Congress to renew it.
Those comments were also echoed by Jeff Quint, Founder/CEO of Cedar Ridge Distillery in Swisher, IA:
For hundreds of craft distillers across this country, there is no matter more urgent than getting the spirits federal excise tax reduction extended or, better yet, made permanent. Reducing the tax was huge for small craft distilleries. It has enabled us to grow, adding thousands of new jobs here in the US. Being forced to revert back to the higher tax will likely erase all these job gains we’ve created over the last few years.
The CBMTRA coalition, a group of beverage alcohol trade associations including the Beer Institute, Brewers Association, Distilled Spirits Council of the United States, American Craft Spirits Association, American Distilled Spirits Alliance, Wine Institute, WineAmerica, the United States Association of Cider Makers and American Mead Makers Association, is sponsoring a campaign to urge Congress to vote for the reduction in excise taxes mandated by the CBMTRA. They are urging Americans to contact their Representatives and Senators to urge them to vote for the CBMTRA and to make the tax reductions in the federal taxes on alcohol permanent.
Not sure who to contact? You can find your Representative and Senators, along with contact information, on the who is my representative website. The CBMTRA coalition also has a website that will automatically forward your message in support for the passage of the CBMTRA to your elected officials.
