Avalara Tax Changes 2023

Beverage alcohol tax changes

Avalara Tax Changes 2023

Beverage alcohol tax changes

Beverage alcohol

Originally published January 2023
Updated August 2023

Beverage alcohol businesses are bracing for big challenges throughout 2023. Ongoing supply shortages and worry about climate change impacts take center stage next to seasonal labor shortages, pressure to adopt more sustainable practices, and the likelihood of more extensive labeling disclosures.

The industry will also have to stay nimble in the face of shifting requirements and continual scrutiny by state authorities, who are looking to raise tax rates on some alcohol products while lowering the rates on others.

Technology will play an important role in helping the beverage alcohol industry move with the tides and stay afloat. A recent Avalara/Potentiate survey found that 58% of beverage alcohol businesses said they’re more likely to purchase new technology solutions in the next 12 months because of the pandemic, the shift to remote work, and the economic climate.

“Beverage alcohol businesses are turning to technology to remain competitive and hold their bottom line against external factors like the economy, weather, and regulatory changes. Companies have a growing need to adapt quickly and to do more with less. Beverage alcohol compliance software is one way businesses can help meet those needs and prepare for the future,” says Oliver Hoare, General Manager of Avalara for Beverage Alcohol.

More businesses are opting to automate to offset increased labor and production costs and to streamline efficiencies. Big data and machine learning are helping distilleries control flavor profiles and reduce filtration process time. Drones are used to spray and observe vineyards. Remote control weeders are keeping unwanted plants down. Software-operated tractors can help farmers remotely handle mowing and spraying. Robotics are picking up the pace on the bottling line. AI analysis tools can improve quality and predict consumer preferences.

Automation can also make beverage alcohol compliance easier. Businesses surveyed by Avalara/Potentiate spend an average of 50 hours per week on tax management and compliance. Automating areas like tax calculation, shipping verification, licensing, returns, product registrations, and tax research can save time and reduce costs. 

Supply chain disruptions put the squeeze on materials

Supply chain bottlenecks that started during COVID lockdowns continue to take a toll on the beverage alcohol industry. From diminishing packaging materials to a shortage of truck drivers to congested ports, supplies and goods are being held up along the way. The trickle-down effect is that businesses further down the pipeline are paying more for what they need.

A worldwide glass bottle shortage has producers stocking up when they can and considering lighter-weight bottles that are less expensive. At least one wine business is thinking about hiring someone full time to source supplies, something that “used to be simple and quick.”

Tardy shipments impacting imports and exports have become so frequent that the managing director of the Wine and Spirits Shippers Association said, “Chaos is the new normal.”

Some improvements have been noted, however. Among them, more alcohol products that were previously out of stock are again on store shelves.

Climate change heats up

Winegrowing regions in the United States and throughout the world are being affected by climate change. Many farmers and winemakers face increased pressure to adapt their practices in response to severe weather events like droughts, frosts, wildfires, and floods.

Warmer temperatures have been a boon to certain cooler regions like Oregon’s Willamette Valley and parts of Europe. At the same time, growers in other areas including Napa and Sonoma in California are fearing a potential water shortage, covering vines with shade cloths to prevent sunburn, and experimenting with grape varieties more likely to endure heat.

New research may help winemakers make decisions about how to deflect potential impacts from smoke caused by wildfires. Past years have seen some wineries refuse to release vintages due to smoke taint.

It’s not just grapes that are affected. The beer industry, too, is turning to science to create drought-tolerant barley varieties and monitor water supplies.


What the numbers tell us


Leveling the playing field by expanding DTC shipping

Some of the hottest topics in beverage alcohol today stem from the U.S. Department of Treasury report examining Competition in the Markets for Beer, Wine, and Spirits (February 2022). Among other findings, the report recognized that state and federal laws and regulations may actually be inhibiting the growth and competitiveness of small producers.

Case in point: direct-to-consumer shipping laws.

Beverage alcohol businesses fared fairly well during the worst of the pandemic, thanks in large part to direct-to-consumer (DTC) shipping. Enabling more DTC shipping would improve competition. Currently, out-of-state wineries can ship DTC in most states (only Mississippi and Utah ban all DTC shipping outright, while Arkansas, Delaware, and Rhode Island allow on-site wine shipments, but not off-site shipments). In comparison, out-of-state breweries can ship to consumers in 10 states plus Washington, D.C., and out-of-state distilleries can ship into just six states and Washington, D.C. 

Shipping DTC isn’t a top issue for brewers, in part because of the price point of beer and the high cost of shipping. However, DTC shipping is a key priority of the Distilled Spirits Council of the United States (DISCUS). 

And yet DTC shipping may be losing ground in the U.S. rather than gaining it. No states added new DTC shipping laws in 2022, and Nevada actually disallowed DTC shipments by beer and spirits manufacturers and by wine retailers effective July 1, 2021. Separate but related, in September 2022, a federal court in  Ohio dismissed a case challenging the state’s prohibition on out-of-state wine retailers shipping directly to Ohio consumers. 

“While new regulations are often implemented with the intent of protecting the public, reducing instances of underage alcohol consumption, or increasing tax revenue, they often increase barriers to entry,” says Avalara Tax Research Analyst Shannon Fahey. “Any time new regulations are introduced, the cost of compliance increases, making it more difficult for smaller firms with less resources to enter or remain in the market. That being said, we’ve seen a trend in recent years toward increasing regulatory efforts.”

Reducing tax rates for spirit-based RTD cocktails

Another top initiative for DISCUS is lowering tax rates on ready-to-drink (RTD) products, which are experiencing a surge in demand

“In recent years, we’ve seen the rise of RTD products. While many of these are malt-based, the spirits industry is working to grow their share of the market. The trend toward reducing spirit-based RTD tax rates is the result of the industry’s effort, arguing that spirit-based RTDs are comparable to a can of beer or a glass of wine and should be treated similarly. Additionally, it has been argued that decreasing the tax rate could actually lead to increased tax revenue, as it would result in increased consumption,” Fahey says.

Tax rates for spirit-based RTDs are generally much higher than tax rates for malt-based RTDs. In West Virginia, for example, spirit-based RTDs with 6% alcohol by volume (ABV) are typically taxed at a rate 35 times higher than malt- or sugar-based beverages with an ABV of 6%. A 12-ounce (354 ml) can of a spirit-based beverage is taxed at 71 cents compared to 2 cents for the same size can of a malt-based beverage.

The Treasury Department report noted that differing federal tax rates among beer, wine, and spirits affect competition. Research bears that out: About 62% of craft distillers surveyed by DISCUS cited high tax rates as a barrier to entering the market.

States seem to be listening. Already, Michigan and Vermont have reduced the gallonage excise tax rates on spirit-based RTDs. A bill introduced in Arizona in February 2023 is attempting to do the same.

Producers may need to be more environmentally responsible

Beer, wine, and spirits producers have different priorities, but all may soon need to move sustainability to the top of the list. The beverage alcohol industry will likely continue to face pressure to develop responsible sourcing, production, and packaging practices in 2023. 

This isn’t a new concept. The Swedish government threatened to ban the use of aluminum beverage cans for beer and soft drinks in 1982 unless a recycling rate of 75% was achieved by 1985. By 1995, Sweden’s recycling rate had reached 92%. See what a little incentive can do?

Similar ultimatums are on the horizon in the U.S., where there’s a growing push for producers to take a more active role in sustainability.

Maine and Oregon enacted packaging extended producer responsibility (EPR) laws in 2021, and California and Colorado followed suit in 2022. Among other requirements, Colorado’s new law requires producers to participate in the state’s program starting July 1, 2025, or discontinue selling affected products. 

Approximately 13 states introduced EPR packaging legislation in 2023, and at least three passed some type of EPR law: ConnecticutIllinois, and Maryland. The United States Congress has also considered this topic with the likes of H.R. 2821 and H.R. 5389

There’s never been a time when these issues have been so important, according to the drinks market analysis firm IWSR. Thus, more states will likely explore EPR requirements in coming years.

Warning: Better beverage alcohol labels could soon be required

All beverage alcohol producers may also need to adapt to new labeling requirements at some point.

The Treasury Department report on competition advised the Alcohol and Tobacco Tax and Trade Bureau (TTB) to revamp its alcohol labeling requirements to prioritize consumer protection and public health while reducing regulatory burdens on small and emerging businesses. TTB is the bureau within the Treasury Department that regulates alcohol imports, taxes, and trade.

Like sustainability, this is not a new concept. In 2003, 66 organizations, eight individuals, the Center for Science in the Public Interest (CSPI), the Consumer Federation of America (CFA), and the National Consumers League (NCL) submitted a petition urging the Treasury Department to establish basic alcohol labeling requirements: alcohol content, calorie count, and ingredients, including potential allergens. They’ve been waiting for a response ever since. 

Their patience exhausted, CSPI, CFA, and NCL filed suit against the Treasury Department in October 2022 to compel them to respond to the nearly 20-year-old petition. There’s some question as to whether the court will take on a case that’s been 19+ years in the making. However, as there seems to be public support for better beverage alcohol labeling, the time may be right. 

In the meantime, TTB provides voluntary labeling guidance and other labeling resources

The debate over fulfillment houses will continue

Another key issue for many beverage alcohol producers, especially wineries, is the regulation of fulfillment houses.

Many wineries wouldn’t be able to ship directly to consumers nationwide without the help of fulfillment houses, which store products for producers and prepare them for shipping. Yet, Oklahoma prohibits the use of fulfillment houses and in recent years, several states have come close to banning their use. Other states are trying to figure out how to treat fulfillment houses.

Tennessee implemented new license and reporting requirements for fulfillment houses in the fall of 2021. In January 2022, it also mandated new license and reporting requirements for direct wine shippers. Louisiana is requiring direct wine shippers to identify the fulfillment houses they use as well as provide a copy of the written appointment of the fulfillment house(s) to the Louisiana Office of Alcohol and Tobacco Control.

Licensed craft distillers in California can ship directly to consumers in California until January 1, 2024. Out-of-state spirits producers currently can’t ship directly to consumers in California. If the market opens to them, many would want to use fulfillment houses as their wine-producing counterparts do. Yet under one version of a bill put forward in early 2022 to authorize DTC spirits shipping in California, distilled spirits direct shippers would only be able to ship from their own premises; the use of fulfillment houses wouldn’t be allowed. Advocates of direct spirits shipping regrouped and introduced another bill in California in 2023 that would allow California craft distillers to ship until January 1, 2025.

Tied-house laws may be clarified

TTB and states may clarify tied-house rules, which were initially created to promote and preserve competition, responsible marketing, and temperance. Tied-house provisions prevent producers, wholesalers, and importers from crowding out competition by directly or indirectly inducing a retailer to purchase the beverage alcohol they supply. 

TTB recognizes seven “means to induce” (practices that could lead to a tied-house violation):

  • Acquiring or holding an interest in a retailer’s license
  • Acquiring an interest in a retailer’s real or personal property
  • Giving, renting, lending, or selling things of value to a retailer
  • Paying or crediting a retailer for advertising, display, or distribution services
  • Guaranteeing a loan or repaying a retailer’s financial obligation
  • Extending credit to a retailer beyond 30 days from the date of delivery
  • Requiring the retailer to take and dispose of a certain amount of product (quota sales and tie-in sales)

Since tied-house provisions, for the most part, predate third-party platforms or marketplaces, it’s often not clear how they apply to those platforms. Is it OK for a supplier to pay for advertising on a third-party platform that includes retailers? States will likely be asked to clarify these and similar issues in the coming years.

In fact, the New York State Liquor Authority was recently asked to determine whether the state’s tied-house provisions allow Amazon to accept payment for advertising alcohol beverage brands.

Other issues likely to affect the beverage alcohol industry in 2023

States will try to raise tax rates on alcohol

Studies suggest raising the price of alcoholic beverages can decrease alcohol consumption. Lawmakers in New Mexico recently passed a bill that would have raised beverage alcohol taxes, but the governor vetoed the increase. Massachusetts and Oregon also introduced measures to increase beverage alcohol taxes.

This is a conversation that’s likely to continue, even as more states make alcohol more accessible by allowing the sale of cocktails to go.

Greater choice for cocktails to go

Since COVID-19 first hit the U.S., at least 28 states relaxed their laws to allow restaurants and bars to sell alcohol for takeout or delivery. 

States that have made these policies permanent include Alabama, Alaska, Arizona, Arkansas, Connecticut, Delaware, Florida, Georgia, Iowa, Kansas, Kentucky, Louisiana, Maine, Missouri, Montana, Nebraska, New Hampshire, Ohio, Oklahoma, Oregon, Rhode Island, Texas, West Virginia, Wisconsin, and the District of Columbia.

States with temporary cocktail-to-go provisions include (with expiration dates):

Maryland and Tennessee ceased allowing carryout sales of alcoholic beverages on June 30, 2023.

Several states amended their alcohol delivery laws during the first half of 2023. It brings up a lot of issues, including who’s responsible for age verification and collecting and remitting applicable taxes — especially if delivery marketplaces are involved.

More low- and no-alcohol options

If it’s getting easier to enjoy cocktails and other alcoholic beverages at home, it’s also getting easier to find low-alcohol and no-alcohol options. All sorts of brands are entering the space with low- and no-alcohol versions of established products or net-new options. In fact, the no- and low-alcohol beverage alcohol market is expected to grow by 7% between 2022 and 2026 in 10 global markets. Wine is the only low-alcohol segment showing growth in the U.S. 

Millennials and Gen Z are driving growth in the low-alcohol and no-alcohol category, with most switching between these products and full-strength alcoholic beverages during the same occasion or on different occasions. Expect alcohol moderation as a health and wellness trend to continue during coming years.

The main barriers to increased consumption of low- and no-alcohol today are lack of availability, lack of choice, and price. As more products hit the market, states will likely clarify regulations governing the classification of low-alcohol products. 

Understanding the trends impacting the beverage alcohol industry can help your business brace for what lies ahead and be strategic. Read our guide, Conquering beverage alcohol compliance challenges for strategies to reduce risk while expanding into new markets.

Keep exploring what’s happening with tax compliance in other industries.


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