Alcohol Taxes and Incentives - The Spirit of the Law and What's Hoppin'

by Daniel G. Mudd *

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The Basics of the Federal Excise Tax on Alcohol

Federal taxation of alcohol generally follows the same tax structure and controls as are used with other commodities and products that are subject to excise tax (e.g., tobacco, gasoline, etc.). Accordingly, there are Federal Excise Taxes ("FET") related to the production, importation, and sale of alcohol. The FET includes three primary categories: distilled spirits, beer, and wine. [See27 CFR §1.10; 27 USCA § 211(5) ("The term 'distilled spirits' means ethyl alcohol, hydrated oxide of ethyl, spirits of wine, whiskey, rum, brandy, gin, and other distilled spirits, including all dilutions and mixtures thereof, for non-industrial use"), 27 U.S.C.A. § 211(6) ("The term 'wine' means (1) wine as defined in sections 610 and 617 of the Revenue Act of 1918 as now in force or hereafter amended, and (2) other alcoholic beverages not so defined, but made in the manner of wine, including sparking and carbonated wine, wine made from condensed grape must, wine made from other agricultural products than the juice of sound, ripe grapes, imitation wine, compounds sold as wine, vermouth, cider, perry and saké; in each instance only if containing not less than 7 per centum and not more than 24 per centum of alcohol by volume, and if for non-industrial use"), IRC § 5052 ("'beer' means beer, ale, porter, stout, and other similar fermented beverages (including saké or similar products) of any name or description containing one-half of 1 percent or more of alcohol by volume, brewed or produced from malt, wholly or in part, or from any substitute therefor").]

All three are governed by Chapter 51 of Title 26 of the Internal Revenue Code of 1986, as amended ("Code" or "IRC"). [IRC §§ 5001, 5041 & 5051 (providing imposition, rate and attachment of FET on distilled spirits, wines and beer, respectively). The Federal Alcohol Administration Act works in conjunction with the Code to provide the licensing and recordkeeping requirements for operating in these industries. [27 USC §201, et seq.]

A number of federal agencies oversee federal alcohol laws. Similar in structure to other FETs, the Alcohol and Tobacco Tax and Trade Bureau ("TTB") administers and enforces the imposition of FET on alcohol, while the Department of Justice's Bureau of Alcohol, Tobacco, Firearms, and Explosives administers the criminal and regulatory provisions of federal alcohol laws. [See Homeland Security Act of 2002, P.L. 107-296, sec. 1111(d); Treasury Order 120-01 (Dec. 10, 2013). More information on the TTB's role in the administration of FET on alcohol, as well as helpful information for complying with FET can be found at http://www.ttb.gov/.]

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Insights into State and Local Taxation of Alcohol

As is the case with all state and local tax issues, a business must be aware that most state and local jurisdictions have multiple types of taxes on the production, distribution, and the sale of alcohol, including excise taxes, sales taxes, property taxes, and other related taxes.

For example, two primary types of taxes are typically imposed by state and local jurisdictions on the sale and distribution of beer: a gallonage tax imposed on a volumetric basis (similar in nature to the FET discussed above), and either a general sales tax, or a special retail tax in lieu of the general sales tax, on the retail sale of these products. [National Beer Wholesalers Association, "An analysis of the structure and administration of state and local taxes on the distribution and sale of beer," KPMG (Apr. 2014), available at http://www.nbwa.org/sites/default/files/2014_KPMG_Tax_Report.pdf. This tax structure is not unique to beer, however, as states typically impose similar taxes on distilled spirits and wine. States vary in the rate of taxation of these products, but as a general rule, wine and beer are more lightly taxed than liquor. [See Billy Hamilton, "State Liquor Taxes: Still Crazy After All These Years", State Tax Notes: State Tax Merry-Go-Round (Mar. 2, 2015).] This tax structure is typical for products that are viewed by society as being "worse" or stronger than their counterparts (e.g., higher taxes on cigarettes than on other tobacco products).

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Pouring It Strong: Rise in Alcohol Taxes and Incentives for Booming Industries

Within the first few years after the downturn of 2008, several states began enacting legislation or amending laws already on the books to find new ways to tax the alcohol industry, with at least a dozen states initially choosing to raise the tax on these products. This trend will not be changing any time soon. [See Kim Severson, "States Putting Hopes in 'Bottoms Up' to Help the Bottom Line," New York Times (Sep. 28, 2011), available at http://www.nytimes.com/2011/09/29/us/alcohol-laws-eased-to-raise-tax-money.html?_r=0.]

These legislative changes include straight-forward increases in tax rates on alcohol, as well as changes to the entire alcohol distribution chain structure. For example, although many states have traditionally restricted alcohol sales to liquor stores and gas stations only, and prohibited these sales by groceries and convenience-type stores, some states have begun allowing certain alcohol sales in these other outlets, after many years of fighting. States like Pennsylvania have proposed legislation not only to allow non-liquor alcohol sales in grocery stores, but also to privatize its traditional state-run liquor stores. The goal is to boost sales, and most importantly, tax revenue. [2015 Pennsylvania House Bill No. 466 (introduced Feb. 13, 2015); Hamilton, supra.]

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Conclusion

The common criticism for all state and local tax incentive packages given to attract and retain companies is whether these lucrative incentives deals, and the significant changes in state tax laws to capture more tax revenue from these industries, will be successful for the jurisdiction overall.

One thing is for sure. No "last call" is in sight for those in the bourbon and craft beer industry, or for state and local jurisdictions relying heavily on these industries for revenue. So, sit back, relax, and drink it all in.

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Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

* Daniel G. Mudd, Esq., is a Managing Associate and tax attorney in the Louisville, Kentucky office of the regional law firm Frost Brown Todd, LLC. Daniel's practice focuses on controversy, litigation and planning relating to tax, primarily in state and local tax matters and incentives, with a focus on Federal and state excise tax, and Kentucky property and sales tax.

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RELATED LINKS: For more information on Daniel G. Mudd on federal, state, and local taxation in the alcoholic beverage industry, see:

• 2015-6 Lexis Federal Tax Journal Quarterly § 2.01 (Matthew Bender) (June 2015) et seq.