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Alcohol Tax Breaks Brewing In Congress - May 2015

Tax relief may be on the way for alcohol producers both large and small. Two tax breaks for brewers are vying for the spotlight on Capitol Hill, while a third piece of legislation would grant earlier tax deductions to distillers of aged spirits. All three pieces of legislation signal a willingness on the part of Congress to address the growth and economic benefit of the alcohol industry, but two of the bills also represent a growing schism among producers. Both the bills concerning beer taxation will reduce the excise taxes on sectors of the brewing industry, but these competing bills pit craft brewers against larger brewers, setting up a David and Goliath fight over tax reform.

The first bill of the two bills to be filed this year, the Small Brewer Reinvestment and Expanding Workforce Act ("Small BREW Act"), would reduce the federal excise tax rate by 50 percent on the first 60,000 barrels produced by breweries that produce 6 million or less barrels a year.[1] Barrels between 60,000 and 2 million produced would also receive a discounted tax rate of $16, down from $18. This bill also widens the net for craft breweries, tripling the capacity under which breweries qualify for incentives. The Brewers Association ("BA"), a trade group for craft brewers, estimates that the cost of the tax will be approximately $64 million annually, but will create around 5,200 jobs in the first 12-18 months after passage.

The Fair Brewers Excise and Economic Relief Act ("Fair BEER Act"), introduced less than a month after the Small BREW Act, contains nearly similar tax provisions to the Small BREW Act, although it also eliminates the excise tax on the first 7,143 barrels of beer.[2] The oddly specific 7,143 barrel threshold in this bill was designed to comport with the definition of "small brewer" under the Department of Treasury's Alcohol and Tobacco Tax and Trade Bureau, helping with ease of administration. The main difference between the bills, however, is that the tax breaks in the Fair BEER Act apply to all brewers, regardless of size. The Fair BEER Act finds its most staunch support from the Beer Institute ("BI") and the National Beer Wholesalers Association ("NBWA"), trade groups that represent the beer industry as a whole and beer distributors, respectively. The cost in tax revenue is a subject of dispute between the BI, which estimates the total around $113 million, and the BA, which puts a figure of $150 million or more on the bill.

The main contention between the interests represented by both bills seems to be inclusion. The Small BREW Act limits the tax breaks to only small brewers, while the Fair BEER Act provides a tax benefit to all brewers and importers. It also cuts the taxes for the smallest breweries to zero, theoretically benefitting small brewers significantly. Opponents of the Fair BEER Act suggest, however, that the tax provisions of that bill disproportionately favor large, multinational brewers that already receive favorable tax treatment. Another argument by opponents of the bill is that it is a red herring, created with the appearance of a more favorable bill to the industry, but destined for failure by design, effectively killing the chances of both pieces of legislation. Supporters of the Fair BEER Act counter that the legislation supports the entire industry, rather than focusing only on certain sectors, providing a more equitable tax benefit to all.

Industry participants from Kentucky are involved in this national debate, such as Country Boy Brewing's Daniel "DH" Harrison, a supporter of the Small BREW Act.

"As a small brewer and a member of the rapidly growing craft beer industry, we are in full support of the BREW Act, as we believe that it will allow small brewers in America to reinvest more of their earnings back into the business in the form of added tanks and most importantly- more workers," said Harrison. "However, we do not oppose the Fair Beer Act. We believe that its cost is too great and that the benefits to large brewers will ultimately make this a bill with no chance of passing. The BREW Act is a more economical and manageable bill that grants real tax breaks to small American craft brewers."

This is not the first time these two excise tax bills have battled it out. Versions of both bills have been introduced in all four Congresses since 2009. The provisions of the legislation have changed over the terms, but the essentials and essential differences have remained the same. Neither of the two contenders has had much traction, mostly dying in committee. Currently, GovTrack.us, a site that tracks legislative action and calculates probabilities of enacting legislation, gives the Small BREW Act a ten percent chance of getting past a committee and a five percent chance of being enacted. The Fair BEER Act, by contrast, has a slightly lower chance - nine percent - of escaping committee, and a far lower chance at two percent of getting passed.

Brewers aren't the only alcohol producers seeking tax reform in the Congressional spotlight, however. In February, Representative Andy Barr (R-KY) introduced the "Aged Distilled Spirits Competitiveness Act."[3] In May, Kentucky's Senators introduced a nearly identical measure the "Advancing Growth in the Economy through Distilled Spirits Act," or the AGED Spirits Act.[4] The introduction of the latter tax relief bill for distillers came on the 51st anniversary of Senate Concurrent Resolution 19, a 1964 Congressional Resolution designating bourbon as a "distinctive product of the United States." The senators deemed the proposal a "pro-growth measure" to boost the economy and create jobs.

Both versions of the bill change tax laws so that distillers can deduct the interest expense that correlates to aging inventories the same year that they are paid. Under current federal tax law, distillers cannot take the deduction for interest until the distilled product is sold, which could be, in the case of some premium bourbons, as long as 23 years. Interest costs can be capitalized under IRC §263(a) if they are paid or incurred during the production period. This tax provision would work by exempting the aging process in the determination of the production period for distilled spirits, allowing distillers to claim the deduction when the spirits are produced and stored, not sold. While identical legislation died in earlier congressional sessions, the current iteration may well benefit in this session from having a newly-christened Senate Majority Leader as its primary sponsor.

In a press release from Sen. McConnell's office concerning the Act, Eric Gregory, President of the Kentucky Distillers' Association, said, "Kentucky Bourbon can't be made overnight like most spirits. It takes years of age and tender craftsmanship to produce the world's finest Bourbon, but that's actually a deterrent when it comes to the discriminatory tax policies that are restricting growth and investment. The AGED Spirits Act will relieve that burden, create new jobs and level the playing field for our signature industry as it competes in the global marketplace."

Time will tell if any of these tax provisions will pass a Congress mired heavily in gridlock, but brewers and distillers can remain hopeful, at least, that tax relief may be forthcoming. At the very least, a discussion of tax relief is underway.


[1] H.R. 232

[2] H.R. 767

[3] H.R.867

[4] S.1179

© 2020 by McBrayer, McGinnis, Leslie & Kirkland, PLLC. All rights reserved.National Law Review, Volume V, Number 140
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About this Author

Stephen G. Amato, civil litigation attorney, McBrayer Law Firm
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Mr. Amato has practiced law throughout Kentucky since his graduation from the University of Kentucky College of Law in 1990. He has been nominated and identified in Kentucky Super Lawyers® for six consecutive years, 2007, 2008, 2009, 2010, 2011 and 2012.

His practice is diverse, focusing on civil litigation and administrative law. His litigation practice is focused primarily on employment law, representing employers in all state and federal trial courts, state and local administrative agencies, and throughout the respective courts of appeal. Employment-related issues with which Mr....

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