Avalara Tax Changes 2024

Beverage alcohol tax changes

Avalara Tax Changes 2024

Beverage alcohol tax changes

What tax changes will affect beverage alcohol in 2024?

The beverage alcohol industry is experiencing both highs and lows. Changing consumer preferences and drinking behaviors are boosting sales of certain products while other markets are declining. Yet even in the face of economic pressures, environmental threats, and a continually evolving regulatory landscape, the sector is expected to find success.

What the numbers tell us about the beverage alcohol industry

Chart showing U.S. alcohol tax revenue climbing to $10.54 billion by 2028

SOURCE: Statista

Graphic showing 62% of U.S. adults drink alcohol while 38% abstain

SOURCE: Gallup

Graphic showing 37% of drinkers surveyed drink beer most often, 31% prefer liquor, and 29% prefer wine

SOURCE: Gallup

Graphic showing the expected global market growth for low- and no-alcohol beverages by 2024 is 31%

SOURCE: Exploding Topics

Graphic showing Washington state has the highest per-gallon tax rate for distilled spirits in the U.S. at $36.55; NH and WY have no such tax

SOURCE: Tax Foundation

States look to refine tax policies as RTDs have their heyday

Ready-to-drink (RTD) products are swallowing more and more of the beverage alcohol market. As the industry’s fastest-growing category in the U.S., RTDs quickly became popular among consumers looking for flavor and convenience during the pandemic. According to a NielsenIQ 2023 study, RTD consumption has spiked 104% in the past two years while all other alcohol segments have contracted in their percent of equivalent volume. 

Hard seltzers opened the door and now account for 43% of RTD sales. Recent years have seen many new products come onto the market, including hard kombucha, cocktails in cans, and boozy lemonade pouches that provide adults with nostalgia for the Capri Sun of their childhood. 

Big brands are getting in on the action. E. & J. Gallo and Anheuser-Busch added spirit-based RTDs to their portfolios. We’re also seeing partnerships between household name companies that produce beverage alcohol and mixers. Coca-Cola and Jack Daniel’s teamed up in 2023 to debut canned Jack & Coke. Vita Coco and Captain Morgan came out with a line of tropical drinks. And PepsiCo and Boston Beer produced Hard Mtn Dew.

Premium RTD cocktails are helping lead growth in the segment as demand for hard seltzers levels off. The global RTD cocktail market was estimated at $1.54 billion in 2022 and is expected to reach $2.92 billion in 2028. RTDs accounted for a 2.8% share of total sales on alcohol delivery platform Drizly in 2022, up from 1.1% in 2020. Comparatively, the hard seltzer category accounted for a 2.7% share of the company’s total sales in 2022, down from 3.6% in 2020.

Consumers are looking for transparency in ingredients. They’re also paying more. The average unit price of an RTD on Drizly grew by 9.5% from $12.60 to $13.80 within a year. Depending on where you live and buy, beverage alcohol tax can increase that cost considerably. Some states tax spirit-based RTDs at the same rate as straight-up spirits.

Graphic showing a spirit-based RTD is taxed 35 times more than a malt- or sugar-based RTD with the same alcohol content in West Virginia

SOURCE: Avalara

But the tax environment is starting to change. Industry advocates have been lobbying for lower taxes on spirit-based RTDs on the grounds that these products tend to have a similar alcohol content as malt-based or wine-based RTDs. At the very least, RTD cocktails usually have a much lower alcohol by volume (ABV) than distilled spirits. As one reviewer observed after tasting an RTD made of whiskey and ginger ale, “There’s a lot more ginger ale in here than whiskey.”

February 2023 report from the Maryland Alcohol and Tobacco Commission examined the disparity between excise tax on spirit-based RTDs and their malt-based or sugar-based counterparts. The report notes that 25 states have a tax rate for spirit products with lower ABV that differs from the states’ full-spirit rate based on ABV. 

In the year prior to the report’s publication, 12 states introduced legislation proposing low-proof, spirit-based, RTD cocktails be assessed at a lower tax rate than full-strength spirits. Out of these, three states enacted laws (Michigan, Nebraska, and Vermont). The other nine states rejected legislation lowering the excise tax (Alabama, Arizona, Hawaii, Kentucky, Maryland, Minnesota, North Carolina, Washington, and West Virginia). In Utah, a citizen-led initiative is seeking to privatize the distribution of alcohol. It remains to be seen if it will receive enough signatures to be on the ballot for 2024.

“How RTD taxes will impact sales remains to be seen. We could see suppliers inclined to do business in states with lower tax rates or where taxes are passed on to the consumer. Consumers may choose to mix their own beverages by hand instead of buying RTDs that are heavily taxed,” says Oliver Hoare, General Manager of Avalara for Beverage Alcohol.

Wine takes a hard hit amid crowded product competition

Following 27 years of consecutive growth, U.S. wine consumption has been declining for the past three years. Sales were down between 5% and 6% over the previous year and a half as of August 2023. The trend is taking a toll on some wineries. 

“California wineries are struggling to sell excess bulk wine and wineries are reevaluating their capital expenditure outlays for difficult economic times ahead,” says Michael Dominguez, Senior Strategic Alliance Manager for Avalara for Beverage Alcohol.

Inflationary pressures along with competition from high-end spirits, craft beer, and especially RTDs are to blame. U.S. spirits consumption is projected to surpass wine consumption by 2025 — for the first time in over 45 years.

Bar chart showing the U.S. beverage market by consumption value with beer leading and spirits surpassing wine by 2025

“The wine industry has been hard hit amid changing consumer preferences and younger consumers’ tendency to drink less overall,” explains Hoare.

Research also shows consumers are trading down in price

“Millennials and Generation Z are choosing cheaper wine. They don’t care as much about awards and prestige,” says Shannon Fahey, Indirect Tax Researcher at Avalara.

Consolidation is another trend prevalent in the wine industry, particularly during times of compression in the market. Dominguez says he’s seen a large number of mergers and acquisitions in recent years as brands like E. & J. Gallo and Jackson Family Wines purchase other wineries. “We’re seeing a generational shift in ownership where sometimes the new generation doesn’t want to take over the family wine business either by choice or market conditions, creating good buying opportunities for well-capitalized wine businesses,” he says.

Avalara experts agree that over the long term, wine will make a comeback.

“Wine is not recession-proof, but it’s recession resilient,” says Dominguez.

Climate change continues to heat up

Changing consumer preferences isn’t the only challenge the wine industry is facing. 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. The costs associated with climate change impacts can be considerable, as wineries absorb the expense of bad fruit, are unable to replant burned vineyards, and pay more for fire insurance.

Graphic explaining techniques to reduce smoke-related aromas and flavors in wine. Methods may qualify for an R&D tax credit.

SOURCES: Wine Business, AWRI

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

Beer holds top spot as the beverage of choice

Americans, like drinkers in much of the world, like their beer. Beer remains the top alcoholic beverage of choice in the U.S. and globally, with 37% of U.S. drinkers saying they drink beer most often. U.S. drinkers in the low- and middle-income brackets are more likely to prefer beer, while those with incomes of $100,000 or more are more evenly divided in their preferences.

Bar chart showing U.S. drinkers’ preferred alcoholic beverage by annual household income

SOURCE: Gallup

While large brewers like Anheuser-Busch InBev and Molson Coors continue to own the greatest market share, consumers’ preference for craft beers and microbreweries is enhancing competition and contributing to significant growth in this sector. Many say they’re looking to support small, local businesses and they’re drawn to the abundance of choices and flavors that craft brews provide.

The global craft beer market is predicted to grow by $79.02 billion between 2022 and 2026, accelerating at a compound annual growth rate (CAGR) of 12.22%. Retail sales of craft beer in the U.S. increased 5% between 2021 and 2022 to $28.4 billion, and accounted for 24.6% of the U.S. beer market. Small and independent breweries claimed a 13.2% share of the U.S. beer market by volume.

In comparison, the U.S. beer market was estimated to be worth $115 billion in 2022, and overall U.S. beer volume sales in 2022 were down 3%. The Beer Institute estimated federal tax was paid on 13.2 million barrels of beer produced and shipped in the U.S. in September 2023, a decrease of 7.4% compared to September 2022.

More consumers choosing low-alcohol and nonalcoholic beverages

Craft beer isn’t the only beer segment that’s growing. Nonalcoholic beer sales are up too.

Beverage alcohol companies are taking notice of a growing population that prefers to imbibe less frequently or abstain from drinking alcohol altogether. Millennials and Generation Z especially are choosing nonalcoholic and low-alcohol beverages either regularly or on occasion. Concerns about health and well-being are a main driver. Gen Zers started the “sober curious” trend and are drinking 20% less than other generations did at their age. A global study by IWSR shows 78% of consumers who drink low- and no-alcohol products also drink full-strength alcohol. 

Low- and no-alcohol beer, cider, wine, spirits, and RTDs grew over 7% in volume across 10 key global markets in 2022. The category is forecast to grow at a CAGR of 7% through 2026, compared to 5% from 2018 to 2022, and achieve a market value surpassing $11 billion.

Sales of nonalcoholic beer, wine, and spirits stood at $395 million in the U.S., only 0.47% of total alcohol sales. However, the category showed year-over-year growth of 20.6% between August 2021 and August 2022, reported NIQ.

Nonalcoholic spirits make up the smallest category but are growing the most quickly. In 2022, nonalcoholic spirit sales in the U.S. were up 88.4% from the previous year while nonalcoholic wine sales were up 23.2%.

Graphic showing percentage of sales of nonalcoholic beverages by category with nonalcoholic beer at 85.3% in 2022

SOURCE: Nielsen

Nonalcoholic beer makes up the largest share of the market, claiming 85.3% of U.S. sales in 2022. Although nonalcoholic beer isn’t growing as quickly as spirits, some businesses have seen record success. Nonalcoholic beermaker Athletic Brewing saw 13,000% growth over three years. 

Bar chart showing compound annual growth rate of nonalcoholic drinks worldwide from 2021 to 2025 with RTD and spirits both growing at 14%

SOURCE: Statista

As low- and no-alcohol beverages increase in popularity, states are looking to refine tax policies on these products. Minnesota introduced a bill to tax low-alcohol spirits products at the same rate as wine effective 2023 but it died in committee.

The U.K. government is taking steps to promote low- and no-alcohol beverages, including allowing for the labeling of drinks with 0.5% ABV as alcohol free. This is in line with other countries around the world including, Australia, Belgium, Denmark, Germany, Portugal, Sweden, and the U.S. The threshold in the U.K. is currently 0.05%.

Businesses still rely on direct shipping as consumers return to stores

Direct-to-consumer (DTC) sales comprise 12% of total wine sold in the U.S., calling some industry advocates to declare DTC the “lifeblood of the wine industry.”

“DTC sales exploded during the pandemic as consumers had their favorite beverage alcohol products conveniently sent to their homes. Now people can go into the store. They are cutting wine subscriptions and the industry is feeling it,” says Oliver Hoare.

Currently, out-of-state wineries can ship DTC in most states (only Mississippi and Utah ban all DTC shipping outright, while Arkansas 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. 

Graphic of map showing states that can ship beverage alcohol directly to consumers

California extended shipping rights for licensed craft distillers until January 1, 2025. The law permits licensed California craft distillers and distilled spirits producers or craft distillers licensed in any other state that produce no more than 150,000 gallons of distilled spirits per year to ship to California consumers.

DTC shipping remains a key priority of the Distilled Spirits Council of the United States (DISCUS), which hopes to level out the playing field. According to a March 2021 DISCUS survey, 80% of consumers believed distillers should be able to ship products directly to customers in any state.  

Rhode Island is in the midst of a three-tier system tug-of-war around direct shipping of alcohol. The First Circuit refuted claims brought by plaintiffs that just because one state has a “lesser” law does not compel another state to accommodate it.

Beverage alcohol looks to become environmentally responsible

Beverage alcohol businesses continue to face pressure to adopt sustainable practices. As more states push legislation to require responsible packaging and recycling initiatives, beverage alcohol businesses are experimenting with eco-friendly options. According to a 2021 survey of consumers, 73% of respondents say they’re willing to pay more for sustainable packaging; that number is even higher among younger buyers. 

California enacted a law in 2022 to expand its refundable bottle recycling fee to wine and spirits producers and distributors effective January 1, 2024. California’s bottle fee currently applies to beer, wine coolers, and many nonalcoholic beverages. The law doesn’t just apply to glass; it also applies to box, bladder, and pouch containers. Out-of-state beverage alcohol companies that ship wine DTC to California consumers will have to pay the fee, as will out-of-state beer certificate of compliance holders and companies located within the state. Businesses will need to register as a manufacturer, distributor, or both. 

California passed a law in October 2023 that updates the definition of “beverage manufacturer” for wine, beer, and spirits to better align with the industry. The definition is now based on what type of California Department of Alcoholic Beverage Control license a business holds, not who fills the container. Other states including Oregon and Maine have enacted bottle bills or are considering legislation.

Approximately 13 states introduced Extended Producer Responsibility (EPR) packaging legislation in 2023, and at least three passed some type of EPR law: Connecticut, Illinois, and Maryland. Colorado’s EPR law requires producers to participate starting July 1, 2025, or stop selling certain products. The United States Congress has also considered this issue with the likes of H.R. 2821 and H.R. 5389

Vermont’s governor vetoed a bill that would have expanded the state’s container deposit system and created a 15-cent fee on wine bottles. Vermont’s bottle bill currently covers beer, liquor, wine coolers, malted beverages, and premixed spirits cocktails.

Marketplace facilitator laws complicate compliance for alcohol delivery services

Beverage alcohol marketplaces and delivery services like Drizly and Vivino make it convenient for consumers to have their favorite drink sent to their doorsteps. 

Uber, which acquired Drizly in 2021, continues to expand its alcohol selection. The company announced in August 2023 that it’s partnering with midwestern grocery chain Hy-Vee, including its liquor stores.

In recent years, these businesses have realized that state marketplace facilitator laws apply to them and they must register to collect and remit sales tax in states where they exceed thresholds. Today, all but four states have marketplace facilitator laws, which shift the obligation to collect and remit sales tax from the seller to the marketplace platform. None of the four has a general statewide sales tax.

Drizly reached a settlement with the District of Columbia in November 2022 over allegations it failed to pay millions of dollars in sales and use taxes it owed, including taxes for orders processed on its platform under the district’s marketplace facilitator law.

Not only do marketplaces need to understand who’s responsible for tax, they also have to find ways to comply with age verification requirements for shipments. Expect marketplace facilitator laws to continue to muddy sales tax compliance for alcohol delivery services, especially as jurisdictions refine their regulations. 

Retail delivery fees drive up tax revenues

Delivering wine DTC to doorsteps typically involves a truck. Some states now impose a fee on wine shippers simply because a vehicle is involved in shipping.

Colorado became the first state to impose a retail delivery fee in 2022. The fee applies to tangible personal property delivered by motor vehicle to a Colorado address. That includes wine. Wineries may have to pay the fee whether they’re based in Colorado or another state (assuming they’ve triggered nexus in Colorado). 

Colorado simplified its law in May 2023. Among the changes, businesses with less than $500,000 in annual retail sales in Colorado are exempt from the retail delivery fee.

Colorado initially set the fee at 27 cents then bumped it up to 28 cents on July 1, 2023. The fee applies to each sales transaction, even if multiple orders arrive in the same shipment.

Minnesota followed Colorado’s lead and will impose a 50-cent retail delivery fee starting July 1, 2024. Minnesota’s fee will also apply to DTC wine deliveries in the state.

We talk more about retail delivery fees in the sales tax, retail, and energy sections of this report.

Beverage alcohol industry turns to technology

Technology will play an important role in helping the beverage alcohol industry go with the tide and stay afloat. A 2022 Avalara/Potentiate survey found that 58% of beverage alcohol businesses said they were 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.

More beverage alcohol 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 tax 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. 

There’s still more brewing in beverage alcohol, but this is just a snapshot of the top issues affecting the industry.

How Avalara can help

Avalara tax automation solutions for wineries, breweries, distilleries, and other businesses in the industry can mitigate compliance risk. Learn more about our complete solution for licensing, product registrations, tax calculation, and filing for beverage alcohol businesses.

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Avalara Tax Changes 2024

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