The new Trump tax plan, Tax Cuts and Jobs Act, affects most Americans in one way or another. But do you know how it affects distillers and the spirits they’ll be providing you in 2018 and beyond?
Part of the tax plan includes the Craft Beverage Modernization and Tax Reform Act of 2017. A long time in the making this act has been heavily promoted and supported by the American Distilling Institute (ADI) and the Distilled Spirits Council of the United States (DISCUS). It affects brewers, winemakers, and craft distillers who we’ll focus on here.
From a DISCUS press release last week:
“This legislation reduces the federal excise tax on distilled spirits producers for the first time since the Civil War, which will enable the more than 1,300 operating distilleries nationwide to re-invest in their businesses and stimulate job growth in their communities.”
What this means for craft distillers
This new legislation makes changes to IRS code enacted in 1986. One of the primary benefits is to reduce the rate of excise tax on distilled spirits meant for consumption for the next 2 years, bourbon included. Federal excise tax on distilled spirits is reduced to $2.70 per proof gallon on the first 100,000 proof gallons of distilled spirits. Down from the previous $13.50 per proof gallon. (This also applies to spirits importers.) This is a boon to craft distillers, who by law can sell a maximum of 100k proof gallons per year. If they do produce 100k gallons this year they will save over $1 million on taxes! That could translate to another copper still, more employees, or more bourbon. This new, temporary, tax reduction brings the tax rate on distilled spirits more in-line with wine and beer.
Further, the “production period” no longer includes the aging period for distilled spirits. This means any applicable interest costs no longer accrue during the aging period of bourbon. The amendment also strikes the word “bulk” from the 1986 IRS code. For example, “Bulk distilled spirits” is replaced with “Distilled spirits” eliminating any confusion as to the application of these regulations to craft distillers.
What is a Proof Gallon?
A proof gallon is one liquid gallon of spirits that is 50% alcohol at 60 degrees F.
To find out exactly how this affects local craft distillers we reached out to Nick Nagele, Co-Founder of Whiskey Acres Distilling Co. Here’s what he had to say.
“The reduction in the FET [Federal Excise Tax] will allow Whiskey Acres to make immediate investments back into the business which includes increasing our production and building a new visitors center. This manifests immediately in expanding our payroll as we are adding an assistant distiller to work a second shift. We’ll also be utilizing local labor for the building, and have expanded staffing needs once the visitor’s center is complete. These investments will help Whiskey Acres to continue to be a sustainable and reliable supplier, as well as give our customers a unique and more comfortable setting to enjoy Whiskey Acres year round. Our second shift will allow us to add approximately 70 more batches per year without making any major capital investments. However, the reduction in FET has made it far more likely that we’ll be able to make necessary investments in equipment to continue our growth to meet consumer demand.”
But not all distillers see this temporary tax change as a windfall. Another industry source I spoke with had this to say “If a craft distillery can’t compete on a price/quality combination that is competitive with the big distillers then they don’t belong in the industry.” And his thoughts on how this tax reduction for distillers might impact consumers. “I think it will do minimal good for consumers in terms of price cuts. Those who already have a strong price/quality combination won’t want to further lower prices because the tax cut is temporary and you can’t raise prices when it expires in 2 years. Some of the tax cut probably will get spent on equipment.” To be fair, it isn’t only craft distillers benefiting from this tax reduction. Distillers of all sizes will realize a benefit on the first 100k proof gallons they produce.
When I asked him how the craft spirits industry as a whole might be affected long-term he shared these thoughts. “It won’t help the craft industry on an overall basis because it will encourage mediocre producers to stay in the game longer, thus continuing to drag down overall quality and the reputation of the industry.” The idea of a craft spirits market correction is very real. Craft distilleries in the US have opened at an incredible rate, 195 craft distilleries in 2010 to 1,308 craft distilleries in 2016 according to Statista.com. Many of these distilleries make good spirits, some not so good, and even fewer produce excellent whiskey. While more bourbon options on the shelf can be a good thing, if most of your options are really good bourbon that is a great thing.
The Alcohol Tobacco Tax and Trade Bureau (TTB) is also getting a boost in funding as part of this bill. Specifically, $15 million is earmarked to accelerate the processing of formula and label applications, accelerate the processing of permit applications for non-industrial alcohol production and distribution, and support programs to enforce trade practice violations.
What this (could) mean for you the consumer
There’s no doubt this amended regulation will put more money into the pockets of distillers. What they do with that money is of course up to them. It could lead to:
- Increased bourbon production
- Distillery expansion and improvements
- More variety, new and expanded product lines or experimental releases
- New distillery openings
- Lower bourbon prices (This probably won’t happen but re-investment in distilleries is likely)
The boost in funding for the TTB, specifically the programs outlined above, should hopefully result in more distilled spirits making it to market faster. I hope this will also lead to better and more accurate bourbon bottle labeling but I’m not holding my breath. Subscribe to our email list below as we continue to follow this and other bourbon news into 2018!