By Michael Kaiser, Vice President
A two- year version of the Craft Beverage Modernization and Tax Reform Act (CBMTRA) was passed as part of the Tax Cuts and Jobs Act. The President signed the bill into law on December 22, 2017, and the new excise tax reforms were implemented on January 1, 2018.
TTB has been gradually issuing guidance on the reforms, including a proposal on March 2 concerning the tax credits being taken on bonded wine cellars (BWC). Under the existing small producer tax credit, bonded wine cellars were eligible to take the credit for the specific wineries they were storing the wine for, and would bill the wineries based on the taxes paid. TTB has ruled that the temporary tax credits are a suspension of the previous tax credits, and the new credits cannot be applied by a bonded wine cellar.
Under the new ruling from TTB, only wine that is produced by the taxpayer and is removed by the same taxpayer is eligible for the new tax credits. Any wine that is removed in bond from a winery and transferred to a bonded wine cellar or another winery is not eligible for the credits. Many small wine brands use what is known as a custom crush facility. That is, a wine brand will make their wine at another winery’s facilities because they do not have their own production space. Without the ability of a bond to bond transfer the smallest wineries in the country will face a substantial tax increase.
As mentioned above, the TTB will no longer allow bonded wine cellars to take tax credits on behalf of other wineries that are storing their wine at their respective facilities. This arrangement was previously allowed in the currently suspended Small Producer Tax Credit. The language of the two -year bill that was passed as part of the Tax Cuts and Jobs Act does not state that the Small Producer Credit was to be eliminated altogether. The original version of the Craft Beverage Modernization and Tax Reform Act stipulated this, and that all bonded wine cellars would be allowed to apply the new tax credits on behalf of wineries. The TTB is applying a strict interpretation of the law’s language, which led to this decision. TTB has permitted wineries to continue to allow bonded wine cellars to take the credits on their behalf until June 30, 2018 using “on paper” transfers of wine in bond (pre-tax).
Implications for Wineries
If this is not fixed regulatorily or legislatively, many wine producers will face sharp tax increases, rather than receive new tax savings as intended by the Craft Beverage Modernization and Tax Reform Act. There are several serious implications for wineries:
- Not all of the wine sold by a winery may be eligible for the new tax credits because it was produced at another facility, then transferred to and bottled at the winery that sells the wine.
- Many wineries store significant amounts of wine at bonded wine cellars. Many producers simply do not have the space to store all of their wine produced at that particular production facility. With bonded wine cellars no longer allowed to take credits on the stored wine, many wineries will face significant tax increases.
- Many wineries will face significant recordkeeping costs if a portion of their wine production does not qualify for tax credits.
- Small wineries that qualified for the Small Producer Credit who do not produce their own wine at their own facility will no longer qualify for any tax credits and will pay the full tax rate on their wine. A significant tax increase for many small businesses that was not anticipated and the exact opposite of the intention of the bill.
- A preliminary survey of wineries indicated that the vast majority intend to use their projected savings from the CBMTRA to invest in their businesses by hiring new people, investing in new facilities, purchasing new equipment, and expanding their marketing. If the current TTB guidelines were implemented, these investments would almost certainly disappear.
- A major economic impact study sponsored by WineAmerica showed that in 2017 the American wine industry generated $220 billion in economic benefits to the American economy. The vast majority of the roughly 10,000 American wineries in all 50 states are small, family businesses which would be severely hurt by implementation of these guidelines, as would the industry’s overall contribution to the U.S. economy.
WineAmerica is working with industry colleagues, the TTB and Congressional staff to remedy this situation. The first step is to request that TTB either reverse their decision or to extend the “alternative procedure” beyond June 30. They have the regulatory authority to do this.
Secondly, WineAmerica urges the House Ways and Means Committee and the Senate Finance Committee to pass a technical corrections bill as soon as possible. A legislative fix would negate TTB’s decision and would remedy the situation.