Beer Taxes Set To Jump

As if times aren’t tough enough, beer may get more expensive. This is because the temporary federal excise tax cuts on alcoholic beverages are set to expire at the end of the year, unless Congress acts. 

The loss of these excise tax credits will hit the beer industry hard, as shutdowns and curtailed re-openings due to the pandemic are exacting a heavier toll on brewers and beer importers compared to others in the alcohol industry.   

Alcohol Excise Tax

Alcohol producers and importers pay federal excise taxes to the Alcohol Tobacco Tax and Trade Bureau (TTB) on beverage alcohol that is imported or “removed” from federal tax bond for consumption or sale in the U.S. This is on top of other taxes that any business pays, like income, state, and local taxes.

The Craft Beverage Modernization And Tax Reform Act

The Craft Beverage Modernization and Tax Reform Act (CBMTRA) portion of the 2017 Tax Cuts and Jobs Act temporarily lowered the alcohol excise tax rates paid by producers and importers on beer, wine and spirits. 

The lower excise tax rates enabled new and small alcohol industry members, including brewers, to use their money to grow their businesses rather than for paying higher taxes. 

Excise tax credits allowed new craft breweries to more easily begin operations with reduced overhead costs. According to the Brewers Association, the number of new craft breweries has grown since the tax credits became effective, from 6,661 in 2017 to 8,275 in 2019.

• As of January 1, 2018, the CBMTRA affords the low tax rate of $3.50 per barrel (31 gallons) on the first 60,000 barrels of beer produced and removed for consumption or sale by a U.S. brewery that produces less than 2,000,000 barrels of beer per year.
• The CBMTRA tax rate for that same domestic craft brewer is $16 per barrel for every barrel removed beyond the first 60,000 barrels. 
• The CBMTRA provides large brewers and beer importers a $2 per barrel tax reduction. These businesses pay $16 per barrel in excise taxes on the first 6,000,000 barrels of beer removed, and then $18 for every barrel above 6,000,000.

Because most U.S. breweries produce less than 60,000 barrels per year, the Beer Institute calculates that 99% of U.S. breweries’ excise tax payments were reduced by 50% directly as a result of the CBMTRA.

According to Kelly Luzania, an alcohol regulatory attorney at Davis Wright Tremaine LLP, if Congress does not act to extend or make permanent the tax credits, tax rates will increase for all breweries and beer importers.

• Most U.S. craft breweries will pay double their current excise taxes on the first 60,000 barrels of beer produced to $7 per barrel. 
• A craft brewery that produces 10,000 barrels per year will add an additional $35,000 per year to their costs, just in federal excise tax.
• The $16 tax rate will be eliminated, and craft brewers will have to pay $18 per barrel on any beer above 60,000 barrels. 
• Large U.S. brewers and beer importers will likewise pay an additional $2 per barrel, or $18 per barrel, for any and all beer these businesses remove from bond or import, beginning with the very first gallon.

The Beer Institute estimates that the failure to extend the CBMTRA excise tax credits will cost the beer industry an additional $130 million per year just in excise taxes for the same volume of beer.

Compounded Harm to Beer Industry

While wine and spirits excise tax credits will also expire if the CBMTRA is not extended or made permanent, the financial impact will be felt hard by the beer industry because it has been disproportionately hurt by the pandemic. 

Before the pandemic, the Brewers Association estimated that approximately 40% of craft brewery sales came from “on-premises” consumption at restaurants, bars and brewery taprooms. Most states shut down all in-person dining and large events in mid-March, just before traditionally high beer sales events such as St. Patrick’s Day, March Madness, and spring break. Breweries, bars, restaurants and distributors were left with many gallons of kegged beer that quickly became stale and unsalable.

Even with recent limited reopening of restaurants, brewpubs and bars in many parts of the country, sales are still down for in-person dining. And in some states that have reopened for in person dining and drinking, surges in COVID-19 cases are closing those businesses back down.

Many breweries pivoted to canning and bottling their products for off-premises consumption, and have begun offering home delivery or curbside pickup. “Off-premises” alcohol sales from grocery stores, bottle shops, and online sales have risen since the start of the pandemic.  

Yet Nielsen data shows that these higher off-premises sales do not fully compensate for the financial losses of on-premises beer sales. The number of grocery store beer SKUs has diminished in the past year, so even with breweries switching to canning and seeking other off-premises channels, there are fewer available retail slots for those canned products.  

Unless Congress acts, the higher alcohol excise taxes set to come back at the end of year may be the last call for many struggling beer businesses.