Updated May 17: The Alcohol Tax and Trade Bureau has agreed to extend the deadline for the "alternate procedure" from June 30 to Dec. 31, 2019, allowing wineries to keep receiving their tax credits through that date. Get the full story.
"They say you shouldn't look a gift horse in the mouth, but this horse came with a pretty mean kick," said Mike Officer, co-owner of Carlisle winery in Sonoma. Like many small-winery winemakers, he expected that last year's tax-cuts package would deliver … tax cuts. The law included significant federal excise tax reductions on alcohol for both small and large wineries.
But language in the bill complicated matters: Many small wineries are now facing sizable tax increases. That's left winemakers and their advocates appealing to Congress and the Alcohol and Tobacco Tax and Trade Bureau (TTB), the federal agency in charge of alcohol regulation, hoping a solution can be found before a June 30 deadline.
How did this all happen?
The Tax Cuts and Jobs Act, a sweeping bill signed by President Donald Trump on Dec. 22, 2017, included a separate bill, the Craft Beverage Modernization Act, as an amendment. This bill rewrote the excise-tax code by scrapping the Small Producer Tax Credit (SPTC), which wineries making less than 250,000 gallons (around 105,000 cases) of wine could deduct from their excise taxes, and creating new tax credits for all wineries, no matter how big or small the operation. (For more details on how these credits work, see our companion coverage of the bill.)
Proponents argued that these tax cuts would help wineries reinvest in their business, and do away with a code that many viewed as archaic. What they didn't predict was months of chaos and uncertainty.
The original text of the Craft Beverage Modernization Act did away with the SPTC but created new credits, while specifically noting that businesses that used to take the old credit could take the new credit. When the beverage bill was added as a provision to the larger tax-reform bill, language was introduced that implied a business had to have complete control over the wine production in order to receive the tax credit.
In an Industry Circular published March 2, the TTB stated: "For calendar years 2018 and 2019, any wine that is removed by a wine premises that did not produce the wine is not eligible for the new tax credits."
This poses a big problem for wineries that use bonded wine cellars or custom-crush facilities to store or make their wine. Many U.S. wineries, particularly small- and medium-size operations that used to qualify for the SPTC, opt to store their wine elsewhere.
"We have absolutely no storage space in our winery for case goods," said Janie Heuck, managing director of Brooks Winery in Oregon, which uses a bonded wine cellar for its entire production. (Heuck is also on the board of WineAmerica, a trade organization that supports U.S. wineries.) Some vintners have wine brands but no winery of their own, and use custom-crush facilities to make their juice from start to finish.
Before the new law, the facility that stored the wine in bond would pay the tax on any wine that was moved out, receive the tax credit themselves, and then bill the winery for what was paid. Under the March regulation, because the facility storing the wine did not produce it, they were unable to accept the tax credit on behalf of the client. For the client—the winery—that tax credit is lost, effectively making them pay the full excise tax.
Michael Kaiser, vice president of WineAmerica, believes this drafting error happened because the excise-tax cuts expire, or sunset, on Dec. 31, 2019. Republican lawmakers introduced the sunset as a way to keep the overall tax bill within a certain 10-year budget. That allowed them to pass the bill under budget-reconciliation rules, averting a possible filibuster by Senate Democrats.
"This is a two-year amendment to the tax code, so it's taking a strict application for the rules for filing taxes." Kaiser told Wine Spectator he had expressed concerns about the language of the final bill before and after passage, but was assured that fixes would be made later, and that it would not be interpreted this way when formalizing the regulations.
Tom Hogue, the TTB's director of the Office of Congressional and Public Affairs, declined to comment for this story.
Brooks Winery makes around 26,000 cases of wine a year and formerly qualified for the SPTC. Last year, its excise taxes were about $43,000, but it received a credit of about $34,000; the winery's effective tax rate was just under $9,000. The tax bill's sponsors believed that Brooks would have gained an extra savings of $3,000 under the new rules. Based on the March circular, the winery stands to lose that $34,000 in credits.
A solution—sort of
There were only 10 days between the passage of the law on Dec. 22, 2017, and its implementation on Jan. 1, 2018. (The original Craft Beverage bill provided a transition period to give the TTB time to write the regulations, as well as additional budgetary resources, which the final amendment did not do.)
The TTB, in its March 2 Industry Circular, recognized the short implementation time and came up with an "alternate procedure" that would allow affected wineries to collect the tax credits up until June 30. It saves the wineries a lot of money, but also creates a lot of headaches.
The regulation allows for "on-paper" transfers that let wineries virtually move their wine in bond back to the winery, and then out again, taxes paid, from the bonded wine cellar, without having to physically move any wine. But rather than receiving a bill from the bonded premises for the tax paid in a given month, the winery has to determine what will be coming out the following month, and then go through reconciliation if they paid too much or too little. So far, this has proven difficult to do.
"We're trying to take advantage of the regulation and the new excise-tax rate, but it's just a nightmare trying to figure out exactly what the inventory [is] that we need to do the paper transfer on," said Carlisle's Officer.
His winery, which used to be eligible for the SPTC, also uses a bonded cellar. Monthly shipments are very variable, in terms of volume but also the type of shipments. Wineries don't pay the same excise tax if the wine is going inter-state, out-of-state or to another country. Having bonded premises pay tax on a winery's behalf is very convenient, because they pay as wine is going out and know where the wine is going.
While these transfers are saving money in taxes, they are generating compliance-consultant costs and hours of additional paperwork for small staffs. The extra savings on taxes were supposed to be used for investing in better equipment and hiring new staff, not administrative and compliance costs. "My guess is we'll probably just forget it … give the government the extra money," said Officer. "At some point you've got to say, is it really worth the time and effort?"
"This was not the intent of the law," Rep. Mike Thompson, a Democrat who represents Napa County and parts of Sonoma, Lake and Solano counties, told Wine Spectator. "But it is yet another clear example of the unintended and dramatic consequences that happen when you write a bill with a partisan process under the dead of night and you have no hearings or expert testimony."
Sen. Rob Portman of Ohio, a Republican member of the Senate Committee on Finance who was instrumental in adding the beverage amendment to the Tax Cuts and Jobs Act, could not be reached for comment despite multiple attempts.
"There's a very low probability that [the TTB will] overturn their decision on this, so what we're hoping is they will consider extending the alternate procedure up through Dec. 31, 2019," said Kaiser. This date is when the new tax credits were set to expire. The original hope was that organizations like WineAmerica would start their lobbying to make the credits permanent—now, they have a more urgent fight on their hands.
"I have already heard from constituents facing unexpectedly higher tax liabilities under the new law and guidance, and this issue will only get worse if the temporary guidance allowing credits to be claimed from 'on paper' transfers of wine in bond expires," wrote Rep. Thompson in an April 25 letter addressed to John Manfreda, the administrator of the U.S. Treasury Department, which oversees the TTB.
If the extension is granted, this will give some cover for affected wineries until a broader solution is reached. But that will require a legislative fix to correct the language that created this unintended interpretation by the TTB. In an election year, explains Kaiser, it's unlikely that Democrats—none of whom voted for the larger tax bill—will help Republicans fix a bill that in their minds is bad legislation.
And if a solution is not reached until the Dec. 31, 2019, sunset? Well, the wineries caught in the crossfire will get their Small Producer Tax Credit back.