Examining the Two Craft Beer Tax Bills: What Brewers Need to Know About the Fair BEER Act and the Small BREW Act

Beer tax law is on the table, and lawmakers will be evaluating two different beer tax positions. The good news is, should either bill become law, it will spell breaks for the majority of US craft breweries.
Beer tax law is on the table, and lawmakers will be evaluating federal beer tax policy. The good news is, should either bill become law, it will spell breaks for US craft brewers.

 

 

 

 

 

 

 

 

 

 

 

Edit: 2/15/2015 at 8:55pm PST. Thanks to journalist and Twitter comrade @WSJbeerbaron (Chris Drosner) who is working on a piece for The Beer Baron column relating to beer tax reform, he spotted a correction for the article. I had read language in the Fair BEER Act to maintain certain production rate carveouts for smaller producers. ‘Tis not the case. I have updated the article and calculations to reflect this. Cheers to Chris for taking on this heady issue to get the word out; I’ll link to his article when it’s in. I anticipate he’ll have a lot of great analysis coming your way.

Beer tax reform might be on the horizon, as two competing bills are teed up for debate in Congress. On the one side is the Beer Institute, which advocates for all sizes of breweries but is known for having Anheuser-Busch InBev and MillerCoors among its interested parties. They’re standing behind the Fair BEER Act and, as we’ll get to in a minute, the majority of breweries out there may be the biggest fans of what this act would offer. Another bill out there is the Small BREW Act, which the Brewers Association is behind. The Brewers Association advocates for the interests of those brewing under 6 million bbl per year. As we all know, that 6 million bbl distinction is big enough to sweep in a brewery like Boston Beer Co. (Sam Adams), but small enough to keep the two big guys out. As you’ll soon see, the Small BREW Act spells tax breaks across the board, including advantageous ones for the pretty-big-but-still-craft breweries, but not as dramatic of breaks for the majority of breweries in America. The Fair BEER Act would provide lowest tax rates of all.

What do the federal beer tax bills look like, whose interests are we looking at here, and why should you care? Let’s start with how federal brewery tax law operates right now. Then, I’ll walk through each of the proposed bills, and wrap up with examples comparing tax rates for different-sized brewing operations under all three schemes. Let’s dig in.

Brewery TTB Tax Law Part I

How Beer is Taxed Right Now at the Federal level

Presently, the Alcohol and Tobacco Tax and Trade Bureau taxes beer at two different per-barrel rates. There’s the Regular Rate of $18. Then, there’s the Reduced Rate of $7. Here’s how those rates are applied:

Small Breweries60,000 bbl or less? Pay $7/bbl
If you brew 60,000 bbl or less in a year, like the vast majority of breweries, you pay the Reduced Rate of $7/bbl (in addition to whatever your state tax rate may be).

Medium Breweries
If you brew more than 60,000 bbl but less than 2 million bbl (such as a brewery like New Belgium or Dogfish Head, for example), you pay a mixed rate. You get to take advantage of the $7/bbl rate for your first 60,000 bbl ($420,000, which is up to a discount of $660,000 off the regular rate). After that, you must pay the Regular Rate of $18/bbl for the rest of your lot.

Large Breweries
If you brew more than 2 million bbl (so, the two big guys, and also a brewery like Boston Beer Co. (Sam Adams) or D.G. Yuengling & Son (Yuengling)), you pay the Regular Rate of $18 for everything. The prime point being, they’re paying $11 more per barrel on the first 60,000 bbl than everyone else (that’s $660,000 more on those barrels).

As we all know, everyone would love to pay less, and that’s what this is about.

Brewery TTB Tax Law Part II

Fair BEER Act – Backed by the Beer Institute (Which includes the interests of Anheuser-Busch InBev and MillerCoors)

This bill would offer the most tax advantages to the vast majority of breweries out there, eliminating federal excise tax altogether for the typical neighborhood brewery and most that are engaged in community-wide distribution. At the same time, this bill would make even the biggest of brewers eligible for tax breaks. Essentially, it’s a graduated scale that applies to all breweries—and almost all breweries (90%) are at the bottom of the scale, which would mean zero excise taxes. Take a look.

The first 7143 bbl: Pay $0/bbl.
-Thus, if you brew under 7,144 bbl/year, you’d pay no federal excise tax. $0. This would mean roughly 90% of American breweries would pay no federal excise tax. This sounds pretty good for all of the small breweries and start-ups out there. Keep in mind that 7,144 bbl/year is more than 137 bbl produced per week. That’s a lot of headroom for most of our breweries today. Indeed, likely far more than the wildest dreams of many of the family-owned breweries we’re seeing nestle into our neighborhoods. Just to ground the numbers, that’s more than 13 brew days a week on a 10bbl system. Not possible.

The 7144th bbl/year to 60,000th bbl: Pay $3.50/bbl. 
-If you brew more than 7144 bbl/year and up to 60,000 bbl/year, you’d see your federal excise taxes cut in half. It’d be just $3.50/bbl. To ground that bbl/year figure, 60,000 bbl/year would translate to more than 1153 bbl/week. If you had a 100bbl system, that’d be more than 11 brew days a week. Again, not possible.

From the 60,001 bbl/year to 2 million bbl: Pay $16/bbl.
-So, this is a cut for the “medium” breweries noted above—eligibility for the lower breaks, with $2 off per barrel thereafter up until the two millionth bbl.

Everything after the 2 millionth bbl in a year? Pay $18/bbl.

-No change. This is the current rate, just that it only starts applying at your 2 millionth bbl. Before that, all breweries are eligible for the reduced rates on initial bbl leading up to it.

The Wrap-up on the Fair BEER Act:

Federal excise tax would be eliminated for nearly all craft breweries, putting an extra $7/bbl back into the brewery’s pocket. Most notably, huge breweries would get a break on beer leading up to the two millionth bbl. We’ll see how this plays out when we crunch the numbers later.

Brewery TTB Tax Law Part III

The Small BREW Act backed by the Brewers Association:

Craft Breweries – <6,000,000 bbl/year
-Change the definition of Small Brewery from those that produce under 2 million bbl/year to those that produce under 6 million bbl/year. So, sweep in folks like Boston Beer Co., just like the Brewers Association definition does by its definition.
-Create the following tax structure for all Small Breweries:
$3.50/bbl on the first 60,000 bbl (That’s the current reduced rate cut in half)
$16/bbl on the next bbl leading up to 1,940,000 bbl (a reduction of $2/bbl, but also a reduction on the quantity of barrels it applies to.)
$18/bbl on everything beyond 1,940,000 bbl.

Not Craft Breweries – >6,000,000 bbl/year
-$18/bbl on everything.

The Wrap-up on the Small BREW Act:

For most breweries, federal excise tax would be cut in half. The biggest winners are the folks like Boston Beer Co., who would become eligible for the reduced rate on the first 60,000 bbl and also a $2/bbl cut on a bunch of beer, too. Huge savings here, as we’ll walk through in a second. Though, again, for the majority of breweries in the United States, the tax breaks are not as dramatic under the Small BREW Act as they are under the Fair BEER Act.

Brewery TTB Tax Law Part IV

The three tax programs compared (Current, Fair BEER Act, and Small BREW Act):

Before providing a look at real numbers below, the gist is this. The Fair BEER Act would result in the lowest taxes of all strategies, and it impacts the majority of breweries in the United States by eliminating federal excise tax entirely. The biggest difference in federal brewery tax policy with the Fair BEER Act is that the biggest of the big remain eligible for significant tax breaks. In contrast, the Small BREW Act would result in more even-handed savings for craft breweries, no matter the size, but provide no benefits to the big guys. Nevertheless, the Small BREW Act lets a swath of extremely-big-but-still-considered-to-be-craft brewers get in on the tax breaks, while keeping things the same for the biggest of the big. (Side note here about conglomerates, just so no one is confused. These are called “controlled groups” and tax rate eligibility is calculated by adding up all of the production rates of all of the breweries within the group. So, just because A-B InBev owns Elysian now, they wouldn’t get tax benefits off of Elysian’s production rate.)

Check out the numbers below—note that I’m using formulas, but they were formulas made by this human whose best skills undoubtedly tip on the verbal side. The figures should give you the big picture of the competing bills, what’s at stake, and why different breweries at different sizes feel the way they do. If you spot any errors, please let me know—and I invite someone to make a fluid graph of all of the equations, which is beyond the time I have for this project at the moment:

If you brew 100 bbl/year:

Current Federal Excise Taxes on Beer: $700
Federal Taxes Under the Fair BEER Act (FBA): $0
Federal Taxes Under the Small BREW Act (SBA): $350

If you brew 500 bbl/year:

Current: $3,500
FBA: $0
SBA: $1,750

If you brew 1,000 bbl/year:

Current: $7,000
FBA: $0
SBA: $3,500

If you brew 5,000 bbl/year:

Current: $35,000
FBA: $0
SBA: $17,500

If you brew 7,000 bbl/year:

Current: $49,000
FBA: $0
SBA: $24,500

If you brew 7,143 bbl/year:

Current: $50,001
FBA: $0
SBA: $25,000.50

If you brew 7,145 bbl/year:

Current: $50,015
FBA: $7
SBA: $25,007.50

If you brew 10,000 bbl/year:

Current: $70,000
FBA: $9999.50
SBA: $35,000

If you brew 20,000 bbl/year:

Current: $140,000
FBA: $44,999.50
SBA: $70,000

If you brew 50,000 bbl/year:

Current: $350,000
FBA: $149,999.50
SBA: $175,000

If you brew 59,999 bbl/year:

Current: $419,993
FBA: $184,996
SBA: $209,996.50

If you brew 60,001 bbl/year:

Current: $420,018
FBA: $185,015.50
SBA: $210,016

If you brew 80,000 bbl/year: (Deschutes at approx. 89,000 bbl)

Current: $780,000
FBA: $504,999.50
SBA: $530,000 

If you brew 100,000 bbl/year:

Current: $1.14 million
FBA: $824,999.50
SBA: $850,000

If you brew 150,000 bbl/year: (Dogfish Head at approx. 175,000 bbl)

Current: $2.04 million
FBA: $1.62 million
SBA: $1.65 million

If you brew 200,000 bbl/year:

Current: $2.94 million
FBA: $2.42 million
SBA: $2.45 million

If you brew 250,000 bbl/year:

Current: $3.84 million
FBA: $3.24 million
SBA: $3.25 million

If you brew 300,000 bbl/year:

Current: $4.74 million
FBA: $4.02 million
SBA: $4.05 million

If you brew 500,000 bbl/year: (New Belgium at approx. 712,000 bbl; Sierra Nevada at approx. 800,000 bbl)

Current: $8.34 million
FBA: $7.22 million
SBA: $7.25 million

If you brew 1,000,000 bbl/year:

Current: $17.34 million
FBA: $15.22 million
SBA: $15.25 million

If you brew 1,500,000 bbl/year:

Current: $26.34 million
FBA: $23.22 million
SBA: $23.25 million

If you brew 1,939,999 bbl/year:

Current: $34.26 million
FBA: $30.26 million
SBA: $30.29 million

If you brew 1,940,001 bbl/year:

Current: $34.26 million
FBA: $30.26 million
SBA: $30.29 million

If you brew 1,999,999 bbl/year:

Current: $35.33 million
FBA: $31.22 million
SBA: $31.37 million

If you brew 2,000,001 bbl/year:

Current: $36 million
FBA: $31.22 million
SBA: $31.37 million

If you brew 2,500,000 bbl/year: (approximately Boston Beer Company)

Current: $45 million
FBA: $40.22 million
SBA: $40.37 million

If you brew 5,999,999 bbl/year:

Current: $108 million
FBA: $103.22 million
SBA: $103.37 million

If you brew 6,000,001 bbl/year:

Current: $108 million
FBA: $103.22 million
SBA: $108 million

If you brew 67,000,000 bbl/year: (approximately MillerCoors)

Current: $1.206 billion
FBA: $1.201 billion
SBA: $1.206 billion

If you brew 100,000,000 bbl/year:

Current: $1.8 billion
FBA: $1.795 billion
SBA: $1.8 billion

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Why You Should Care About Indiana’s Problematic Beer Regulations – Part 1 of 4.

Why should Indiana's beer laws matter to brewers across the states (and the globe)? Stick with us in this four-parter for some background, and why evenhanded laws are good for the brewing industry (and safe under the U.S. Constitution).
Why should Indiana’s beer laws matter to brewers across the states (and the globe)? Stick with us in this four-parter for some background, and why evenhanded laws are good for the brewing industry (and safe under the U.S. Constitution).

So, why’s a Seattle-based craft brewery law firm like Reiser Legal pontificating about Indiana beer laws? Actually, it’s because we represent Washington breweries that we care. And, no matter which brewers’ guild you belong to or which state of bountiful craft brews you call home, I’ll explain why this issue of federal constitutional law is worth your attention.

First, a little background. I’m an Indiana native. That means I grew up in a place where you couldn’t buy booze on a Sunday. Technically, you could buy it on a Sunday, but only if you (1) drove to a different state to get it or (2) were okay going to a bar or restaurant to enjoy some libations there. In other words, until 2010, you could not go into the market, buy brews, and bring them home on a Sunday.

What changed in 2010? In that magical year, the legislature made an exception for just about all craft breweries. (It’s no coincidence that in the years leading up to 2010, Indiana breweries were opening at unbelievably awesome rates.) The 2010 exception gave breweries a unique advantage. Suddenly, the only way to buy carryout beer on a Sunday was to stop by your local craft brewery.

As a consumer, the change in the law rocked. For starters, you no longer had to strategically plan your grocery shopping, planning ahead to stock up on swill before Sunday’s game. The change also affected the good folks of Ohio, as us Hoosiers no longer had to visit their glorious drive-through Sunday beer operations by force, but by choice. However, it wasn’t until, from a legal perspective, I started digging into federal constitutional issues affecting the brewing industry that I realized the problem with Indiana’s freshly-changed regulatory scheme.

Indiana’s scheme means that 100% of carryout beer sold on Sundays is made in the state. Put another way, out-of-state brewers have no access to Indiana’s booming Sunday carryout market. I thought about it, researched it, wrote about it, and put it all together into a Law Review Note called “Brewing Tension: The Constitutionality of Indiana’s Sunday Beer-Carryout Laws.” If you’re ambitious, you can read the note now. But, over the next couple of days, I’ll quickly (and painlessly) take you through why Indiana’s beer laws need deeper change, and why laws like these are bad for the entire industry—and might even affront our Constitution.

Stay with me this week as we talk a bit about beer history, including (1) things you might know, such as the bummer of a time that was Prohibition; or things you might not, such as (2) the crime that abounded during those “dry” years; and (3) the aims of the Twenty-first Amendment, as interpreted by the United States Supreme Court throughout the decades. Along the way, I’ll cover some need-to-know background about the common three-tier distribution system, including how far states can go in regulating booze shipped into and out of the state. We’ll touch on the landmark case of Granholm v. Heald, some decisions in the 7th Circuit interpreting it, and we’ll wind up on why Indiana’s law, as it stands, might not be constitutional. Through it all, I’ll pass along key takeaways for those seeking change in their own states.

See you next time.

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In the News: Reforming Beer Franchise Laws

handshake-36806_640If you haven’t checked out the “Free Craft Beer!” New York Times Op-Ed from March 29, 2014, it’s worth a read here. Steve Hindy from Brooklyn Brewery, in collaboration with the gang at the Brewers Association, put out thoughtful commentary on so-called “franchise laws,” asking for change. Following up in the last couple of days, Brewers Association president and homebrewing papa Charlie Papazian released further commentary here.

For those not living in a strict franchise law state, or for those who refer to these laws under a different name, here’s an overview, though we encourage you to check out Hindy’s and Papazian’s pieces. Effectively, a franchise law forces breweries into single-distributor relationships, while making it very difficult to get out of those relationships. Imagine the too-common scenario of being signed with one distributor, then watching while your distributor lights up tap handles and shelves with a competitor’s brand, yet your beer sits on the warehouse shelves. Even if your contract has a “with or without cause” provision to terminate the relationship, state law can trump and require only certain kinds of “cause” for you to get out. Even if you have a good case—say they’re putting outdated beer on the shelves— it’s not going to be a fun case or a cheap one to duke out in court if your distributor pushes back. For start-up breweries, litigation cost may make it wholly impossible.

Now, we’ll come right out and say that many, many brewers have awesome relationships with their distributors—but just like any relationship in life, not every one is going to be a perfect fit, especially considering the close relationship brewers forge with their distributors. In seeking reform, most brewers aren’t asking to bypass distributors and take on full-blown self-distribution. To that, we can understand why states have a mega interest in holding onto in-state distribution channels to safeguard a massive tax-revenue stream. For example, imagine if all products sold over the Internet with no sales tax instead had to go through an in-state distributor before reaching your door. With that funneling effect, you can bet the state would raise more tax revenue than asking people to self report those out-of-state purchases, like most states do right now. It’d be a pretty sweet deal for the state, but an unconstitutional one, thanks to the Commerce Clause. Alcohol is different, though, by interpretation of the 21st Amendment, and states can force this in-state funneling effect. Again, we get why states want to keep doing so, since they can. But whether it’s this funnel or that funnel, it seems to matter much less, especially when one party wishes to terminate an agreement, and the negotiated agreement—but for the trumping state law—says the party can do so.

At any rate, given that states seem acutely aware of the jobs our breweries are creating (so long as their delicious beer keeps getting put out on the shelves and purchased), and the public is more aware than ever when brewers choose not to distribute in their states (many breweries skip states to avoid these wonky laws), it’s a prime time to put franchise-law discussion on the table. We applaud Steve Hindy, Charlie Papazian, and the BA for bringing these issues up in such a thoughtful manner, especially as some state legislatures recently have been considering bills that would make it practically harder to escape a relationship that’s just not working the way a brewery hoped, planned, or even agreed it would.

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Stone Brewing in the News: Trademark Tussle & SC Bill Passage

Stone Brewing was in the news this week, both for its rapid expansion and its trademark and branding practices that—from our outside vantage—appear to help fuel and sustain that growth.
Stone Brewing was in the news this week, both for its rapid expansion and its trademark and branding practices that—from our outside vantage—appear to help fuel and sustain that growth.

Big brewing operations can sometimes be divisive, even ones with great senses of humor and solid reputations to match, like California’s Stone Brewing—the 10th-biggest brewer in the US. On the one hand, South Carolina is on the verge of making momentous changes to their beer laws, spurred in part to attract Stone Brewing in the brewery’s plans for eastern expansion. Indeed, the “Stone Bill” is awaiting the SC Governor’s signature as we type this morning. On the other hand, however, out west in Colorado, at least one small brewery appears to feel a bit differently about Stone. Initially reported on here, a recently-opened Boulder, CO brewery had selected the name “Kettle & Stone Brewing,” which Stone found likely to cause confusion with its brand. That CO brewery announced a new name this week, dubbing itself “Vindication Brewing,” suggestive of how it feels about the dispute.

That Kettle & Stone brewery trademark dispute, though, wasn’t a Big Brewer v. Little Brewer matter, as sometimes these things can be made out to be. Rather, Stone’s need to actively monitor its trademarks is a consequence of the smart steps Stone seems to have taken to carve out space and select a distinctive name in the first place, obtaining a federal trademark registration. To fuel unbelievable growth, like a $31 million eastern expansion plan, or to have an entire legislative effort named in your honor—something every brewer must look at with at least a tinge of awe and, deep down, maybe some good-natured envy—Stone’s continued success, or any brewery’s, flat-out depends on consumers’ ability to recognize them in the marketplace. Stone was first to the word Stone on beer, and they’re actively making sure no one else uses the word in a way that would cause confusion. We can’t fault them for that; just as no brewery wants to get a call about a potential trademark issue, no established brewery really wants to make that call, either.

We’re excited about the “Stone Bill.” In fact, watching Stone’s success as a fan from the outside, we get bright-eyed thinking about all the possibilities and opportunities for our own clients’ growth, as more and more consumers just keep falling in love with beer in all its forms and styles, a beautiful, beautiful thing. And, maybe that’s why we’re equally passionate about helping our own clients with brand protection, about carving out branding turf and then politely protecting that turf. After all, thanks to Stone’s continued efforts on the trademark front, all of us consumers know exactly who the “Stone Bill” refers to, and that’s the sort of successful branding we believe any brewery—be it new, established, and especially soon to open—might admire, applaud, and aspire to create.

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Brewing on Campus: California Legislature Considers Allowing Underage Sampling to Aspiring Brewers and Vintners

Tasting1In the past decade, rapidly growing interest in brewing has certainly been great for the industry. But, whereas many if not most of us made our first hop additions after college or at least after attaining drinking age, these days college-age students are seeing the brewing biz as a potential professional career path. We applaud them. Of course, the prospect of learning to brew in college has its legal obstacles, among them for not-yet-21-year-olds, not legally being allowed to sample your wares—or top commercial examples you might aspire to contend with.

As university brewing programs and beer-appreciation classes have made their way onto campuses, California is among legislatures reacting, paving the way to encourage these programs and would-be brewers who are still underage. Right now, the California legislature is considering AB 1989, which affects students in winemaking and brewery science programs. The revised law would define the terms “qualified academic institution,” “qualified student,” and “taste,” allowing certain students the ability to experience tasty ABV-ed libations. Unfortunately, though, the law does not allow swallowing the brew under any circumstances, however controlled. AB 1989 would definitely be a welcome change to the law, in a state where making beer and wine is big business. If passed, though, we hope campus programs can encourage the legislature to keep pushing the law to best develop its future producers.

Indeed, yesterday, over a delightful extra pale ale from Two Brothers, good friend / BJCP Master Judge / scientist / lawyer extraordinaire Sandy Cockerham suggested what may well be the case. That is, California legislators and AB 1989 appear to be wine savvy, in that wine can be a sip-swill-spit sort of beverage. A student could understand the bulk of what makes a wine a wine by giving it a “taste” under California’s proposed law: “‘Taste’ means to draw an alcoholic beverage into the mouth, but does not include swallowing or otherwise consuming the alcoholic beverage.” We don’t purport to be wine experts, but we do know that beer, on the other hand, can’t be fully understood without sending it down the hatch, experiencing the finish and other qualities that reveal themselves at the back of the mouth, back of the tongue.

Certainly, a law that unlocks underage “drinking” to any degree would be a controversial one, but California could be just the state to lead the way. Hopefully, down the road, future brewers in legitimate brewing programs can get the opportunity to legally experience the full profile of the goods they’re learning to make. Perhaps making a per-day quantity cap tied to ABV would let professors and instructors get creative with small sampling sizes, and best help students learn. After all, these young folks may well start up shop and bring dollars and jobs to an economy that is not as peppy as everyone would like—and, dollars and jobs is always the sort of thing legislators can drink to.

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