Taxation of Craft Distillers: A Call to Action

The natural response for most people when taxes are brought up is to tune it out. I certainly understand that, but I ask that you please hang with me for a few minutes. As a Bourbon fan, it is important that you be informed about this particular tax issue because your help is needed. It will not only save you money on your whiskey, but your actions could potentially help save hundreds of businesses and thousands of jobs in the process.

Background Information

In 2017, President Trump signed the Craft Beverage Modernization and Tax Reform Act (CBMTRA). This reduced the federal excise tax rate for distilled spirits from a flat $13.50 per proof gallon to a tiered taxation system. Under the new tiered system, the tax rates looked like this:

First 100,000 proof gallons: $2.70 per gallon tax rate
Above 100,000 proof gallons: $13.44 per gallon tax rate
Above 22.1 million proof gallons: $13.50 per gallon tax rate

These rates were in effect for 2018 and 2019 under the original act and were renewed in late 2019 to be in effect until December 31, 2020. Despite what looks like a huge tax break, the overall decrease in federal tax revenues collected by the government from these excise taxes was only about 2%.

First, what is a federal excise tax? It is a tax levied by the federal government on the sale of goods and services (in this case: whiskey). It is an indirect tax as it is paid by the producer instead of the consumer. Of course, those taxes likely do get passed along to the consumers in the form of increased prices.

Second, what is a proof gallon? A proof gallon is one gallon of whiskey at 100 proof. So, an 80-proof gallon of whiskey would be 0.8 proof gallons. A gallon of whiskey is equal to roughly five 750 ML bottles. It should be noted that the excise tax rate is not applied to gallons distilled. It is applied to what is called “taxable removals”. For simplicity’s sake we’ll just call this proof gallons sold.

By the numbers, the majority of distilleries in the country are small (10,000 proof gallons per year or less). For an example, let’s assume a distillery is at 10,000 proof gallons per year:

Under the old rates, the distillery would pay $135,000 in federal excise taxes.
Under CBMTRA rates, the distillery would pay $27,000 in federal excise taxes.
That’s a tax savings of $108,000 in one year.

If the rates are not renewed by the end of the year – or made permanent – the rates will revert to pre-2017 rates effective January 1, 2021. That would mean a 400% increase in federal excise taxes paid by craft distillers. To the large, mega-distillers the tax increase would be relatively meaningless due to their size. Most of what they produce falls into the higher rates anyway. To the small, craft distillers, however, this tax bill would be devastating.

So what does this tax savings mean to craft distillers? For the most part, craft distilleries are privately-owned (oftentimes family-owned), small businesses. They are an important part of their local economies and communities - many stepping up to produce much-needed hand sanitizer during the COVID-19 pandemic. There are nearly 2,000 craft distillers operating across the United States. I’ve reached out to just a few to get their response to the question: “How has the reduced federal excise tax rates impacted your business?”

Craft Distillers Tell Their Stories

Chrsitine Riggleman, CEO & Master Distiller

Silverback Distillery, Afton, Virginia

“The excise tax reductions have helped our distillery immensely. We felt the impact immediately. It allowed us to get in front of ordering supplies such as, bottles, grains, barrels, etc. We were also able to hire three additional full time employees.

Distilleries are one of the most highly regulated and taxed industries in the country. Within the state of Virginia we also have to give a profit transfer of 54% of every bottle sold to the Virginia Department of ABC. So this reduction on the federal level has been a great benefit to our distillery. If the rate goes back up we will have to lay off employees and scale back production.”

Adam Stumpf, Owner & Master Distiller

Stumpy’s Spirits, Columbia, Illinois

“The tax savings we realized the first year at the lower rate allowed us to hire our first full time sales representatives. Hiring that dedicated sales support allowed us to grow our brand substantially over the past 2 years. The incremental profits from our business’s growth have been reinvested in the business to hire additional high-caliber sales personnel, barrel more whiskey, and expand our facilities to where we are today. Without the current tax break in place, it’s questionable when or if we would have been able to justify hiring a sales representative. At this point, it appears to be the best decision we could have ever made for our business, BUT that decision would not have been possible without the lower FET. During our first years in business, when cash flow is most important, Federal Excise Tax was always in our top 3 expenses for the entire year. That kind of tax burden is absolutely crippling to a boot-strapped, family-owned small business that doesn’t have a padded bank account from investment groups, etc.”

Jonathan Likarish, Co-Owner & Master Distiller

Ironroot Repbulic Distilling, Denison, Texas

“The reduced excise tax rates we have experienced the past couple years have been integral to Ironroot‘s growth and expansion plans. In that timeframe, we have been able to purchase an additional building to expand our capacity, as well as invest in some new equipment. New blending tanks, chilling systems, and a new bottling line are all purchased and being installed. We are also expanding our current facility to create a new tasting room, and increase our production area. In addition to all these improvements, we have also completed a re-branding process for the Ironroot brand and should be launching a new collaborative brand focused on the art of blending by the beginning of next year. All these changes cannot be solely attributed to the reduced excise tax, but to put it into perspective: the most expensive cost going into producing a bottle of our 115 proof Harbinger Bourbon used to be federal excise tax. With the reduced rates we saved $2.46 per bottle. That is a cost that is no longer getting passed on to the consumer, and in a time of massive tariffs, pandemics, and rising raw material costs, we are still able to make whiskey and a living.”

Brian McKenzie, Owner & Master Distiller

Finger Lakes Distilling, Burdett, New York

“The excise tax break has been huge for us saving us several hundreds of thousands of dollars over the past couple of years. We've used the funds to reinvest in our business (most all distilleries have, as we are all in growth mode). We hired some outside sales people, boosted our production, and made some additional capital investments. If the CBMTRA doesn't get extended, I think there will be a lot of pain felt in our industry, particularly during these uncertain times”.

Royce Neeley, Owner and Master Distiller

Neeley Family Distillery, Sparta, Kentucky

“The CBMTRA had just passed when we opened our doors, so all of our business has been under the reduced rates. Had the old rates been in place, we probably wouldn’t be here. In the big picture, there isn’t a real loss of tax revenue to the federal government. The tax savings we’ve had under these new federal excise rates have all been invested in other things that are taxable: equipment, capital expansion and employees.

The threat of the excise tax going back to the old rates is something that is always in the back of my mind when I’m planning during the year. If the rates aren’t renewed or, better yet, made permanent then many of things we are doing to grow our business might have to come to a halt in order to pay the higher taxes. Losing the tax rates under CBMTRA combined with the impact of COVID would be devastating to craft distillers everywhere. Many would likely have to shut their doors permanently.”

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The tax savings provided under CBMTRA have allowed America’s craft distillers to drive growth in not only their businesses, but their local economies, too. In the last three years we have seen remarkable innovation from the craft segment that is having a ripple effect throughout the whiskey industry. As Bourbon fans we want to see that continue. As Americans we want to see entrepreneurship be rewarded.

Call to Action

What I’m asking you to do is this:

Spread the word. Let your Bourbon friends know about this issue. Talk to them about what is at stake. Share this article on your social media feeds.
Contact congress. There are two links below. One link you can use to find your United States Senators and one to find the Representative from your Congressional district. After clicking the links you’ll be able to enter some address information to find your Senators and Representative. If you click on your congresspersons’ profile it will take you to their official web page. There you’ll find a “contact me” link to e-mail them. Tell them you support making permanent the federal excise tax rates included in Craft Beverage Modernization and Tax Reform Act (CBMTRA). You can also tag them on social media posts.

Link to US Senators

Link to US Representatives

If these tax rates are not renewed or made permanent by December 31 the era of growth and innovation in craft whiskey that we have all enjoyed will come to an abrupt end. Sadly, many craft distillers may not even survive if hit with a 400% tax increase. Thank you for taking a few minutes of your time to act on this. I know craft distillers across America will appreciate it.

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I would like to thank Patrick Brown, a principal with Blue & Co. LLC , for his help with some of the technical information included here. Patrick leads the firm’s beverage/distilled spirits practice group out of Louisville, Kentucky.