Late last year, the President signed the Taxpayer Certainty and Disaster Tax Act of 2020, which made most of the Craft Beverage Modernization and Tax Reform Act (“CBMTRA”) provisions permanent starting January 1, 2021. The CBMTRA makes extensive changes to the federal excise taxes on wine, distilled spirits, and beer.
The CBMTRA radically changed the previous small producer tax credit that was available to certain small, domestic wine producers. Now, all producers may qualify for a tax credit, regardless of the size of the producer, rather than only small domestic producers.
Wineries may claim tax credits on the wine it produces and removes from its own bonded facilities. Production includes the volume of wine produced by fermentation, as well as the following activities (assuming such production is done in good faith, in the ordinary course of production, and not solely to obtain a tax credit):
- Sweetening – Sweetening material added after fermentation for the purpose of sweetening the wine.
- Addition of wine spirits – Certain brandy or wine spirits authorized to be used in wine production are added.
- Amelioration – Water, sugar, or a combination of both added to wine to adjust the wine’s acid content.
- Production of formula wine – Wine that may contain added flavoring or wine treating materials.
(Tax Reform (CBMTRA) – Craft Beverage Modernization Act, Alcohol and Tobacco Tax and Trade Bureau (last accessed June 24, 2021).)
When a winery blends wine, some of which it produces itself and some of which is purchased form another winery, only the percentage of wine the winery produced itself is subject to the tax credit. Production of sparkling and carbonated wine are considered “production” for the tax credit.
The credits are $1 per wine gallon on the first 30,000 gallons, $0.90 on the next 100,000 gallons, and $0.53 on the next 620,000 gallons. The current tax rate of $1.07 per gallon applies to wines containing 16% or less alcohol by volume. The CBMTRA continues to authorize the transfer of tax credits from domestic producers to other bonded wine premises that receive the producers’ wine in bond.
For wines produced outside of the United States, the reduced tax rate may be assigned by the person who produced the wine by making an election to any electing importer of the wine. After December 31, 2022, any imported wine removed from bond will be subject to a refund in lieu of tax credits, in the same amount currently available as a credit.
II. DISTILLED SPIRITS
Wines that contain more than 24% of alcohol by volume are taxed as distilled spirits. The CBMTRA provides the same lower tax rate for distilled spirits that was previously enacted on a temporary basis. The tax rates are $2.70 per proof gallon on the first 100,000 proof gallons, and $13.34 per proof gallon on the next 22.13 million proof gallons. In 2022, the definition of eligible processing will change to include only distilled spirits plant (“DSPs”) who perform processing activities other than bottling.
For imported distilled spirits produced outside of the United States, the reduced tax may be transferred from the distilled spirit operation to any electing importer of the spirits. After December 31, 2022, foreign produced distilled spirits are subject to refunds in lieu of reduced tax rates, in the same amount currently available as a credit.
The CBMTRA makes the previously enacted reduced tax rates for beer permanent. The reduced tax rate is $16 per barrel for the first six million barrels of beer produced by a brewer, and $18 per barrel for all remaining barrels. A significantly lower tax rate is available for small domestic brewers who brew less than two million barrels of beer during the calendar year. This reduced rate is $3.50 per barrel on the first 60,000 barrels produced by a small domestic brewer.
Beer is considered “produced” if it is lawfully brewed or produced at a qualified brewery premises, including beer brewed by fermentation or produced by adding water or liquids during any stage of production. Blending or combining multiple beers does not count as “production.” Beer that is merely bottled or that is removed from bond without any production activity is not subject to the reduced tax rate. Producers that own multiple breweries must combine production of all breweries to determine its total amount of production.
For foreign manufacturers and importers, the reduced tax rate may be assigned by the brewer to any electing importer of the barrels. After December 31, 2022, refunds will be provided for beer produced outside of the United States in lieu of reduced rates, in the same amount currently available as a credit.
IV. IMPLICATIONS OF THE CBMTRA FOR YOUR BUSINESS
The CBMTRA provides certainty and tax savings to the alcoholic beverage industry after years of temporarily enacted rules and rates. Significantly, the CBMTRA tax credits apply to small, independent producers and large producers alike, with special tax credits available for small, domestic beer producers. The quantity limits prescribed by the CBMTRA apply to controlled groups of DSPs, wine premises, and breweries.
Producers remain subject to the Alcohol and Tobacco Tax and Trade Bureau’s (“TTB”) same annual documentation requirements, and accurate recordkeeping and reporting is essential to realize the tax relief provided by the CBMTRA.
Stoel Rives’ Alcoholic Beverage practitioners continue to monitor developments with respect to the CBMTRA and regulation in the industry. If you have any questions on how the CBMTRA may affect your business, or other beverage regulatory compliance questions, please contact our Alcoholic Beverage attorneys.