With Craft Beer, Bigger May Be the New Small – Wacky Tax Wednesday

When I moved to Seattle in 1991, I discovered something wonderful. No, not Grunge. Micro-breweries.

Beer has never been my preferred After-5 beverage, but I soon realized that nothing quenches thirst after a strenuous hike quite like a refreshing Hefeweizen, and few drinks are as satisfying as a pint of porter after a long day of hitting the books. My friends and I even learned to brew our own (with mixed results).

I am not alone in appreciating craft beer. There were few micro-breweries in most parts of the country back in the early 90’s, when brew-pubs were sprouting like mushrooms in the Pacific Northwest. These days, they’re just about everywhere.

The more small breweries grow, the more tax figures into the discussion. Alcohol and tax go together like ice and bourbon.

The taxation of alcohol is the law

There is an astonishing amount of legislation devoted to alcohol, and in recent years, much of it is designed to encourage the growth of local breweries, distilleries, and wineries. For example: Arkansas has loosened laws related to the direct shipment of Arkansas wine; New York exempts from sales tax wine, wine products, and fees associated with wine tasting and will soon expand that exemption to other alcoholic beverages (beer, cider and liquor); and New Hampshire lawmakers are considering legislation that would “allow beer and wine makers to give free samples at farmers markets.” I could go on.

I expect this at the state level but was a bit surprised to learn that it also occurs at the federal level (foolish me). Did you know there has been a House Small Brewers Caucus since 2007? It was created in order to “recognize the important place that America’s small brewers hold in our communities and their unique contributions to our culture and economy.” Its website provides a food and beer pairing chart and links to relevant news, such as the New York Times’ How Beer Gave Us Civilization and the Wall Street Journal’s Lower Taxes Tapped a Beer Revolution. The meetings must be fun.

This year, Capitol Hill lawmakers are considering two bills: the Small Brewer Reinvestment and Expanding Workforce Act and the Fair Brewers Excise and Economic Relief Act. Both seek to amend 26 USC 5051.

The Small BREW Act: bigger is the new small

The Small BREW Act would enable brewers who make more beer than allowed under current law to qualify for reduced excise tax rates on beer produced domestically. Currently, reduced excise taxes apply to brewers producing not more than 2,000,000 barrels of beer per calendar year. The Small Brew Act would expand the reduced rate to brewers producing not more than 6,000,000 barrels of beer during the calendar year.

In addition, the bill seeks to further reduce the reduced rates to the following:

$3.50 on the first 60,0000 qualified barrels of production (currently it is $7)
$16 on the first 1,949,000 qualified barrels of production (after the first 60,000)

The reduction would be substantial. Current rates under 26 USC 5051 are as follows:

For brewers who produce “not more than 2,000,000 barrels of beer during the calendar year, the per barrel rate of the tax… shall be $7 on the first 60,000 barrels of beer.”
“$18 for every barrel containing not more than 31 gallons and at a like rate for any other quantity or for fraction of a barrel.”

Fair BEER Act: less tax = more beer

Under the Fair BEER Act, “all beer brewed or produced, and removed for consumption or sale, within the United States, or imported into the United States during the calendar year” would pay the following tax (quoted directly from the bill):

$0 on so much of such beer as does not exceed 7,143 barrels
$3.50 per barrel on so much of such beer as exceeds 7,143 barrels but does not exceed 60,000 barrels,
$16 per barrel on so much of such beer as exceeds 60,000 barrels but does not exceed 2,000,000 barrels, and
$18 per barrel on so much of such beer as exceeds 2,000,000 barrels.

Remember the excise tax on imported shoes? The one that used to help American shoe manufacturers until the vast majority of American shoe manufacturers moved production overseas? Perhaps to avoid any such awkwardness in the future, under the Fair BEER Act these rates would also apply to beer that is imported into the United States. Or maybe it’s because the bill’s sponsors like Belgian, British and German beer?

The Right Proper Brewing Company of Washington D.C. produced 1,000 barrels of beer in 2014 and paid $7,000 to Uncle Sam. Under the Small BREW Act, it would pay $3,500 in federal excise tax on 1,000 barrels of beer. Under the Fair BEER Act, it would pay none. Either measure would undoubtedly be welcome to a company that now counts “nickels and dimes” due to the tight margins. After all, what business doesn’t like a tax break?

Both the Fair BEER Act and the Small BREW Act have many, many sponsors. We’ve come a long way from Prohibition.

Full disclosure: My brother owns and operates a nano-brewery in the Granite State.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.