Tax

Congressional bill would eliminate excise tax on Kombucha

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Kombucha traditionally has small amounts of alcohol in it, which can make it a tricky case for federal excise taxes on alcohol if it rises above 0.5% alcohol by volume. A U.S. Senator recently introduced legislation to help protect the drink from these taxes, according to Bend Bulletin:

A measure in Congress would help kombucha manufacturers by eliminating excise taxes on their products that contain more than 0.5% alcohol.

The bill, introduced by U.S. Sen. Ron Wyden, D-Oregon, raises the limit on alcohol by volume for kombucha to 1.25% and makes the product exempt from excise taxes imposed on alcoholic beverages like beer…

Kombucha is a fermented product, created when sugar and yeast are combined. When kombucha is not kept cold, it continues to ferment, raising the alcohol level above 0.5% and making it subject to the excise tax, said Amelia Winslow, director of project management at Kombucha Brewers International, a nonprofit trade association.

“Commercial kombucha producers work hard to control their processes to achieve compliance,” Winslow said. “However, if there are gaps in the cold chain during distribution, authentic kombucha, which is a living food, can go slightly above this 0.5%.”

It doesn’t make sense to tax kombucha for exceeding that threshold, Winslow said…

Read more here.

R Street's Jarrett Dieterle Interviewed About Nebraska Alcohol Taxes

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Nebraska’s legislature is considering increasing taxes on beer, wine, and spirits in an effort to raise more revenue and provide property tax relief. The Heartland Institute interviewed R Street’s Jarrett Dieterle about the proposal:

Local craft breweries that produce small volumes of beer are growing in popularity nationally and in Nebraska, says Jarrett Dieterle, director of commercial freedom policy at the R Street Institute.

“The craft beverage industry is booming cross the country,” said Dieterle. “In 2017, craft breweries created the second-most manufacturing jobs of any industry in America.

“Nebraska is no exception,” Dieterle said. “Nebraska has 3.5 breweries per 100,000 people, which puts it in the top 15 states for breweries per capita. Overall, breweries had a $465 million economic impact in the state.”

The craft beer industry will shrink if Nebraska moves forward with this tax hike, says Dieterle.

“Research has demonstrated that increasing taxes on products like beer can lead to a decrease in brewpubs and breweries in a state,” said Dieterle…

Governments shouldn’t focus on a specific product category to increase revenue, says Dieterle.

“Generally, state and local governments fund their operations through a combination of property, income, and sales taxes,” said Dieterle. “Singling out the alcohol industry to bear the brunt of revenue-generation in the state makes little sense,” Dieterle said…

Read the whole article here.

A (Small) Step Forward For Virginia Distilleries

Silverback Distillery CEO Christine Riggleman.

Silverback Distillery CEO Christine Riggleman.

Virginia distillers continue to labor under some of the worst distilling laws in America, but their outlook is set to get (at least slightly) better. Virginia has the the 3rd highest distilled spirits taxes in the country, requires all liquor sales to take place through government-run liquor stores, and restricts the amount of tastings and servings a distillery can provide to on-premise visitors to a mere 3 oz. of spirits.

Even worse, the state’s notorious “NET 30” payment scheme requires distillers who sell their own bottles in their tasting rooms to send 100% of the proceeds of the sale to the Virginia Alcoholic Beverage Control Authority (ABC). Then, only 30-45 days later, ABC sends back the distiller’s portion (which amounts to a mere 46% of the sale price after Virginia’s high mark-ups and taxes are factored in).

Unsurprisingly, this antiquated process creates tremendous cash flow problems for craft distilleries since they are not even able to touch the money they derived from bottles sales until over a month later. To add insult to injury, the state also charges distilleries handling fees even for bottles sold inside the distillery (and thus handled exclusively by the distillery’s own employees).

Despite these burdensome rules, the state legislature has been resistant to even small changes to the law. Finally, this year, a modest step forward was achieved. An effort led by Silverback Distillery CEO and Founder Christine Riggleman resulted in Virginia lawmakers passing legislation that ends the NET 30 payment scheme and eliminates on-site handling fees (although the law doesn’t take effect until 2020). The DrinksReform.org team reached out to Riggleman, whose distillery is located in Afton, Virginia, to get her reaction to the news.

“[The legislation] allows us to have the working capital on-hand to meet demand,” Riggleman said. “With the flow of tourism and customers, you can’t predict always what the demand for the products will be, so you need the funds on-hand to be able to gear up for busier times.” Riggleman specifically cited the need to have adequate cash flow to invest in bottles and labels in preparation for periods of heightened sales, like around the holidays—something that is hard to do when the Virginia ABC holds their sale proceeds for over a month.

While Riggleman was relieved that her efforts resulted in real change, she was quick to note that more work remained to bring Virginia’s laws on distilled spirits in line with how it treats beer and wine. “This is just a band-aid; I still want full parity [with beer and wine],” Riggleman said. “We’re still hemorrhaging every month in Virginia trying keep up with customer demand as well as all the laws.”

In fact, Silverback Distillery recently opened a new production facility in Pennsylvania rather than expanding in its home state of Virginia. Riggleman noted that, in contrast to Virginia, Pennsylvania has no on-premise tasting limits and even allows distilleries to serve beer and wine.

Ultimately, Virginia will need to continue to grapple with the fact that its many Prohibition era laws are continuing to hamstring a promising growth industry. Hopefully Riggleman’s efforts will lead to more Virginia distillers joining the push for reform.

(R Street’s Jarrett Dieterle has previously profiled Christine Riggleman and her family’s experiences dealing with Virginia alcohol laws).

The Benefits of Legalizing Sunday Liquor Sales

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Numerous states around the country still restrict or prohibit the sale of distilled spirits on Sundays, a Prohibition era relic known as “blue laws.” Last year, Minnesota took steps to legalize Sunday sales, and now a wave of additional states—including West Virginia, Texas, North Carolina, and South Carolina—are considering similar legislation. Doing so is a good idea from both a revenue-raising perspective and as a freedom-enhancing measure. A recent article for the Duluth News Tribune by Lindsey Stroud of the Heartland Institute recaps the economic success stemming from Minnesota’s reform:

July 2019 will mark two years since Minnesota repealed its Prohibition-era ban on selling alcohol on Sundays. In 2017, then-Gov. Mark Dayton, a DFLer, signed legislation "allowing for the sale of alcohol from stores on Sundays between the hours of 11 a.m. and 6 p.m."…

To understand the impact of Sunday sales, it's actually better to look at excise tax collections. An estimated 75 percent to 80 percent of all sales, as measured in volume, occur at off-premise establishments. According to data from the Minnesota Department of Revenue, the state collected an estimated $86.8 million in annual excise taxes during the pre-Sunday sales period. Since Sunday sales began, excise taxes have increased to $90.4 million, a growth rate of 4.2 percent. Typically, alcohol tax revenue grows around 2 percent to 2.5 percent annually. Sunday sales in Minnesota seems to have generated a much higher revenue growth rate.

Moreover, with full-strength beer sales boosted as well, it's safe to say that Sunday sales has provided an economic gain to Minnesotans and will continue to do so…

Stroud’s entire article is well worth a read (here).

R Street: A Little Less Tariff, a Lot More Booze

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Politicians from across the ideological spectrum are constantly waxing poetic about the importance of blue-collar manufacturing jobs. In fact, much of the justification for the recent tariff disputes has been a need to protect American manufacturing industries. R Street’s Jarrett Dieterle and Clark Packard argue in National Review that the best path to more manufacturing jobs is to scrap the tariff wars and start deregulating the alcohol industry:

From the earliest moments of his campaign, President Donald Trump has emphasized the importance of domestic manufacturing jobs. He’s negotiated carve-outs to keep factories in America, railed against companies that move jobs overseas, and increased tariffs in an attempt to protect blue-collar workers. Nearly all of the president’s rhetoric, however, has fixated on a handful of sectors traditionally associated with manufacturing, such as the steel industry, automobiles, and construction. This myopic focus has blinded the president to one of the most promising sources of manufacturing jobs in modern America: the alcohol industry.

President Trump is far from the only government official who obsesses over manufacturing jobs, with stories cropping up daily about politicians visiting production plants in Rust Belt states and donning hard hats for well-publicized photo ops…

Lost in all this is the fact that the American drinks industry has some of the best job-growth potential in the country. According to data from the Bureau of Labor Statistics, breweries, wineries, and distilleries created the second-most manufacturing jobs of any industry in 2017. These numbers don’t even include support industries that are tied to drinks, such as barrel manufacturers or bottle producers. With new breweries and distilleries opening every day, the growth seems primed to continue — if policymakers will let it…

Read the whole piece here.

Oregon Governor Proposes Stealth Tax Via Liquor Markup

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After claiming that she wouldn’t raise taxes on alcohol, Oregon Gov. Kate Brown’s budget proposal includes a call for a 5% increase in the markup for liquor. As reported by Oregon Public Broadcasting:

As she finalized her budget proposal for the next two years, Oregon Gov. Kate Brown made no secret of the fact she’d push for higher tobacco taxes, which she believes should play a larger role in funding health care.

At the same time, Brown said she wouldn’t pursue higher taxes on beer and wine, despite a request by the Oregon Health Authority…

But there was one “sin tax” that Brown didn’t mention — to the media or the industry that would be affected. Brown wants to increase what the state collects from liquor sales.

Tucked toward the back of Brown’s 500-page, $26.3 billion budget proposal released Wednesday is a single mention that the governor hopes to raise the markup on Oregon liquor sales by 5 percent beginning July 2019. The move would bring an extra $21.2 million into the state’s general fund, according to the budget proposal…

Read more here.

Oregon is one of 13 states that controls distilled spirits sales at the retail level—liquor stores are operated by state-appointed liquor agents, but the state sets the prices. As R Street’s Jarrett Dieterle has noted before, control states that increase liquor markups are really instituting a form of stealth tax on their citizens—especially when the money generated from the enhanced markup merely flows to the state’s general fund. (Read Jarrett’s report on control state markups here.)

Why Rebranding Sin Taxes as "Health Taxes" Doesn't Fix Anything

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There's been a recent wave afoot to rename sin taxes as health taxes. R Street's Kevin Kosar writes for American Spectator about how this doesn't alleviate any of the drawbacks of using sin taxes:

Have you heard the news? So-called “sin taxes” — particularly those on alcoholic beverages — are being rebranded as “health taxes.” It’s true...

Former New York Mayor Michael Bloomberg and other public health advocates think sin taxes should be called and viewed as “health taxes.” Certain activities and products, like gambling and booze, issue “externalities” that are born by the community collectively. They say the overwhelming evidence indicates that higher taxes on alcohol and other vices will reduce excessive consumption and the associated health costs.

For sure, alcohol addiction and severe abuse is damaging. Anyone who has ever known an addict can speak to the awfulness and tragedy of it all. The same goes with compulsive gambling, which is horrifically costly.

So, what’s not to like about a sin or health tax?

Plenty. Dressing up the sin tax as a “health tax” sweeps under the rug some of the problems with this policy tool...

Read the rest of Kevin's column here.

 

Trump Administration Challenging Wine Tax Breaks

Trade has been a hot topic on R Street's drinks team lately. Now, the Trump Administration is furthering this discussion, as they are questioning a tax benefit that wine importers have. Richard Rubin and Jennifer Maloney explain in the Wall Street Journal:

The Trump administration is challenging a tax benefit that gives the wine industry more than $50 million annually and blocking beer and spirits makers from using the same break.

The government’s fight against the alcohol industry stems from what officials describe as an error by a Customs and Border Protection office in San Francisco in 2004. Since then, wine importers have been able to offset taxes owed on imports by getting credit for their exports—even when excise taxes on those exports were never paid.

The Treasury Department attempted to end the benefit for wine companies in late 2009 but senators from wine-producing states, including current Senate Minority Leader Chuck Schumer (D., N.Y.), objected and Treasury withdrew the proposal...

Read the entire article here.

Wine Taxes by State

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The Tax Foundation recently released its annual report on wine taxes by state:

Today’s map shows wine excise tax rates across states, expressed in dollars per gallon.

Due to differences in alcohol content, states tend to tax wine at a higher rate than beer but at a lower rate than distilled spirts. Kentucky has the highest wine excise tax rate at $3.47 per gallon, followed by Alaska ($2.50), Florida ($2.25), Iowa ($1.75), and Alabama and New Mexico (tied at $1.70). The lowest rates are found in California and Texas ($0.20), Wisconsin ($0.25), and Kansas and New York ($0.30).

Read the whole article here.

Sales Tax Ruling May Not Affect Direct-To-Consumer Shipping

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The Supreme Court recently ruled that states have the authority to require online vendors to collect state sales tax--even if those online retailers are not physically present in a given state. This overturns the previous law, where online vendors did not need to charge sales tax if they were not brick-and-mortar retailers. Bev News Online, however, explains why this may not harm direct-to-consumer shippers as much as we think:

...we don’t think the decision will have any meaningful impact on DtC shipments.

Neither does Steve Gross, vp-state government relations at the Wine Institute.  “For the most part this will have only a limited impact on wineries making Direct-to-Consumer (DTC) shipments, as most states already are collecting sales taxes on wine DTC since those provisions were included in the DTC statutes when they were passed,” he told us.

The decision overturned two earlier decisions – the most recent being 25 years old – involving catalog sales.  Those cases held out-of-state retailers cannot be required to collect and remit sales taxes to any state in which it didn’t have a physical presence...

Read the entire article here. Chain Storage offers a similar perspective here, with some elaboration on the law's protectionist nature.

According to Wine Searcher, the Supreme Court officially confirmed that this tax will apply specifically to wine:

Wine sales have been somewhat of a laissez-faire business in the US for some decades – some retailers charged taxes on out-of-state purchases while others elected not to do so. As a result, the same bottle of wine might cost a New York consumer less online in New Jersey than at the shop down the street.

However all of that has changed as last week with the Supreme Court case of South Dakota v Wayfair Inc. In keeping with the justices' ruling, the wine retail market is going to be revamped and standardized in terms of taxes across the country. This telling case – which comes just nine months on the heels of wholesaler pressure pushing UPS and FedEx wine deliveries out of 36 states – will mandate a retail market in which taxes will be paid by retailers large and small.

Most major internet wine sales entities, such as Amazon and Wine.com, have been charging their out-of-state customers taxes all along. Until six months ago, Amazon didn't charge sales tax on sales in areas where it didn't have a brick-and-mortar presence, says Eric F. Citron, counsel of record for South Dakota in the recent Supreme Court case and a partner in the Maryland law firm Goldstein & Russell, P.C. They changed that policy six months ago, he notes. Amazon did not respond in time to comment for this story...

Read more about the taxes here.