MAKING SENSE CRAFT BEVERAGE of the
MODERNIZATION and TAX REFORM ACT WRITTEN BY RYAN MALKIN WITH ASHLEY HANKE
JUST DAYS AFTER THE INK DRIED ON EXECUTION OF SENATE BILL 41-59, considerable changes impacting the distilled spirits industry went into effect almost immediately, leaving many in the industry questioning: what now? The passage of the bill was certainly a cause for celebration for craft spirit producers. The dramatic reduction in federal DISTILLERS: If excise tax naturally takes top billing. It passed thanks to the efforts of many, including the you’re simply distilling, American Craft Spirits Association. “The reduction in the Federal Excise Tax for bottling and selling your own product, craft distillers is long overdue and we expect an even greater impact things are easy. The federal excise tax rate for in local economic development in communities where distilled spirits went from the flat $13.50 per proof gallon empty or abandoned buildings once stood,” rate to $2.70 per proof gallon on the first 100,000 proof says Margie A.S. Lehrman, gallons of distilled spirits, $13.34 for all proof gallons in ACSA’s executive excess of that amount but less than 22,130,000 proof director.
CONTRACT BOTTLERS:
gallons, and $13.50 for amounts greater. TTB confirmed that the same forms will be utilized in reporting. So for most craft Things distillers, the real question is what to do with the tax savings. become a bit more complicated “We will use the savings to invest in capital equipment [to] when considering the relationship between build our bourbon inventory, as well as sales and a DSP and its contract bottling clients. In a contract marketing to grow our brand,” says production relationship, the company that is distilling or bottling Philip McDaniel, CEO of St. the spirits on its bonded premises is responsible for paying the FET. Both Augustine Distillery. the DSP and client will no doubt seek to keep as much of the allocation of the first 100,000 proof gallons for itself. As a client of a DSP, to be certain you receive your full benefit from the reduced FET, one route is an alternating proprietorship. “There has been a lot of interest from distilled spirits companies that have contract produced with big manufacturers to set up an alternating DSP,” says Rachel Dumas Rey, president of compliance company Compli. An alternating proprietorship refers to an arrangement where two or more distilled spirits companies alternate use of a portion of a bonded DSP. It involves the leasing of space and equipment to manufacture product as if you established the DSP yourself—sans the up-front investment. In the eyes of the TTB, you are the proprietor of the DSP and you are responsible for what happens on the ground while you are leasing the space. In an alternating proprietorship, you are responsible for the permits, record keeping, bonds, label approvals and taxes that result from your operations as a DSP while in use. The advantage of this model is direct tax benefits without having to negotiate with the DSP for reimbursement. Jeff Carroll, Vice President, Product and Marketing at Compli, warned that there is a compliance cost with receiving that benefit. Also, he says, “remember that this could be a short-term solution because the Act is only valid through 2019 unless renewed.” Until we see how these tax breaks play out, individual businesses need to assess the pros and cons of different business models to determine how to make the most of the tax breaks while they are in effect.
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