Avalara Tax Changes 2023

Beverage alcohol tax changes

Avalara Tax Changes 2023

Beverage alcohol tax changes

Beverage Alcohol

Beverage alcohol businesses fared fairly well during the worst of the pandemic, thanks in large part to direct-to-consumer (DTC) shipping. Because DTC shipping isn’t permitted in every state, expanding DTC shipping rights will continue to be a top priority for the beverage alcohol industry in 2023. But it won’t be the only priority.

SOURCE: Industry Update



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.

Enabling more DTC shipping could improve competition. Currently, out-of-state wineries can ship DTC in most states (only Mississippi and Utah ban all DTC shipping outright), while 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 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.

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

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%.

The Treasury Department report noted that differing federal tax rates among beer, wine, and spirits affect competition. Research by DISCUS bears that out: About 62% of craft distillers “not currently producing RTD products” surveyed by DISCUS in 2021 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. More states are likely to do the same in 2023.

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 producer responsibility 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. 

All told, about 40 extended producer responsibility (EPR) bills were introduced in 2022 in 19 states, including Connecticut, Hawaii, Illinois, Maryland, Massachusetts, and Washington. New York Governor Kathy Hochul called for packaging EPR in her 2022 State of the State report. 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 2023 and beyond.

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, in recent years, several states have come close to banning the use of fulfillment houses. Other states are trying to figure out how to treat them.

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.

Although licensed craft distillers in California can ship directly to consumers in the state 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 may regroup and reintroduce another bill in California in 2023 or 2024.

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 alcoholic 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. That theory could soon be tested in New Mexico and Oregon, where lawmakers have introduced measures to increase beverage alcohol taxes. 

This is a conversation that’s likely to continue in 2023, 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, Delaware, Florida, Georgia, Iowa, Kansas, Kentucky, Missouri, Montana, Nebraska, 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):

Alcohol delivery will likely continue to come under review in 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 8% between 2021 and 2025 in 10 global markets. 

The main barriers to increased consumption 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.

Stay tuned. We’ll share more insights in our upcoming comprehensive beverage alcohol industry report coming your way in 2023. 

Avalara Tax Changes 2023

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