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by Daniel G. Mudd *
Basics of Federal Excise Tax on Alcohol
Federal taxation of alcohol generally follows the same tax structure and controls as is used with other commodities and products sold in the United States which 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, which includes three (3) primary categories: distilled spirits, beer and wine. [See 27 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 3 categories of alcohol are] governed by Chapter 51 of Title 26 of the Internal Revenue Code of 1986, as amended (“Code” or “IRC”). [See 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 by providing the licensing and recordkeeping requirements for operating in such industries. [USC §201, et seq.]
Insight into State and Local Taxation of Alcohol
As is the case with all state and local tax issues, it is vital for a business to be aware that most state and local jurisdictions have multiple types of taxes on the production, distribution and sale of alcohol, generally including excise tax, sales tax, property tax, and other related taxes.
For example, there are typically two (2) primary types of taxes 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, supra), and either a general sales tax, or a special retail tax in lieu of same, on the retail sale of such 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.] Such a 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 such products, but as a general rule, wine and beer are more lightly taxed than liquor [Hamilton, supra note 5 at 520], which is typical of products that are viewed by society as being “worse” or stronger than their counterparts (e.g., higher taxes on cigarettes than other tobacco products).
Pouring It Strong: Rise in Alcohol Taxes and Incentives for Booming Industries
Within the first few years post-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 such products – and there is no sign of this 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 such sales by groceries and convenience-type stores, after many years of fighting, some states have begun allowing certain alcohol sales in these other outlets, and states like Pennsylvania have not only proposed legislation to allow non-liquor alcohol sales in grocery stores, but also to privatize its traditionally state-run liquor stores – all with the goal of boosting sales, and most importantly, tax revenue resulting therefrom. [2015 Pennsylvania House Bill No. 466 (introduced Feb. 13, 2015); Hamilton, supra note 5.]
... Kentucky has begun liberally approving various state and local tax incentives to help build and expand bourbon distilleries throughout the state. [See e.g., Kentucky Business & Finance Review, Kentucky Bourbon Distilleries & Bourbon Production (2015) (providing up-to date list of all current or planned Kentucky bourbon distilleries and tax incentives approved for same) available at http://kyreview.com/bourbon.html (last visited Mar. 30, 2015); David Mann, “Angel’s Share Project Would Create 40 Jobs, Louisville Business First (May 30, 2013), Louisville Business First, available at http://www.bizjournals.com/louisville/news/2013/05/30/angels-share-project-would-create-40.html?page=all; “Kentucky Approves Distillery Construction Tax Incentives” (May 30, 2013) (regarding tax incentives for expansion of Maker’s Mark facilities and Angel’s Envy distillery ), available at http://whiskycast.com/kentucky-approves-distillery-tax-incentives/.] As a result, Kentucky’s tourism (and revenues resulting from same), particularly from the Kentucky Bourbon Trail, has skyrocketed. Similarly, Kentucky also recently reduced the tax outright on the wholesale of beer, wine and distilled spirits.
As is the common criticism of all state and local tax incentive packages given to attract and retain companies, it still remains to be seen whether these lucrative incentives deals, and significant changes in states laws to capture more tax revenue from these industries, will be successful for the jurisdiction overall. But, one thing is for sure, there does not appear to be any sort of “Last Call” in sight for those in the bourbon and craft beer industry, or for state and local jurisdictions relying heavily on same for revenue. So, sit back, relax and drink it all in.
* 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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1-2 Lexis® Federal Tax Journal Quarterly (June 2015) § 2.01