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Craft Spirits Industry Aims For An FET Reduction, Reduced Regulatory Hurdles

November 1, 2017

The craft spirits category is expected to get some good news on the tax front soon, due to growing support for the Craft Beverage Modernization and Tax Reform Act (S. 236/ H.R. 747), which aims to reduce taxes and regulations for craft brewers, distillers and vintners. Introduced in January, the bill achieved majority support in both the U.S. House and Senate in recent weeks, and its backers are looking to ensure that FET reduction is included in the discussion as Republicans in Congress begin to launch their tax reform push.

The legislation is projected to reduce the federal excise tax on distillers’ first 100,000 proof gallons from around $13.50 a proof gallon down to $2.70. Margie Lehrman, executive director of the American Craft Spirits Association (ACSA), estimates that roughly 54% of the sale of each bottle of craft spirits currently goes toward taxes. The Distilled Spirits Council is also backing the effort. The trade group is launching a “call your representative” campaign in support of the bill on November 2, noting that “this would mark the first time that taxes on distilled spirits were reduced since the Civil War.”

ACSA president Mark Shilling said at a recent briefing, “We expect Congress to hopefully pass the tax reform bill by the end of this year. It would be a huge financial boon to our distilleries and put us in a much more economically viable place.”

Concurrently, the ACSA is pushing for an overhaul of Alcohol and Tobacco Tax and Trade Bureau (TTB) regulations. The trade group aims to modernize labeling and “standard of identification” rules for many craft spirits categories, including Bourbon, straight whiskey and vodka, among others.

“Having consistency on how rules are interpreted is always challenging, and part of that is because we’re such a young industry compared to others that the TTB or state commissions regulate,” noted Shilling, adding that while the ACSA and TTB were collaborating on a regulatory revamp over the past year, the current administration has put the project on hold indefinitely.

Despite growing demand, craft distillers continue to face challenges on the distribution front, with many smaller players struggling to achieve wide availability. As a result, some distillers are looking to sidestep the distribution tier, exploring alternatives such as direct-to-consumer and tasting room sales.

“The route to market is very challenging,” confirms Thomas Mooney, co-owner and CEO of Portland, Oregon-based craft distiller House Spirits. “But if you look at a winery with a half-million dollars in annual revenue, most likely they’re doing much of that out of a tasting room and wine club. They’re not going through a major wholesaler and distributing in 26 states. So I think we’ll see greater interest in the ways in which spirits producers—especially the smaller ones—can similarly participate in a direct-to-consumer business.”

Craft spirits still account for a relatively small percentage of the U.S. spirits sales, but the segment is well outpacing the overall market. Craft spirits volume rose 24% to 4.5 million cases last year, according to Impact Databank, and is projected to approach 5.5 million cases for 2017. Craft spirits producers are defined by Impact Databank as independent distilleries with a maximum annual volume of 250,000 nine-liter cases.—Christina Jelski

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