The Ticking Time Bomb of the Excise Tax Increase
As you are probably well aware if you run a distillery, the prospect of an increase in the excise tax for distilled spirits is hanging over the industry’s head. In December 2017, Congress passed a bill that included a provision to temporarily lower the federal excise tax (FET) on spirits Distillers pay $2.70 per proof gallon (PG) on the first 100,000 PG. The reduction is set to expire on December 31, 2020 unless Congress acts. If it does expire, craft distillers will be faced with a 400% increase in FET to $13.50 per proof gallon. This uncertainty puts craft distilleries in a difficult position—unable to plan for the future.
So what actions should a distiller take? First, you should call the office of your senators and congressional representative and let them know how the FET increase will affect your business. Yes, I get it, “call your congressperson” is practically a mantra, but this is one time where your voice, as a small business person in their district or state calling about a nonpartisan issue, might actually breakthrough. What else can you do to prepare for the future? If the reduction isn’t renewed, it will affect every aspect of your business. If the reduction is renewed, you can breathe a sigh of relief and go about your business.
But if it isn’t….Here’s a thought: create more product now while the rates are still low.
Sound good? I will caution you upfront that this solution isn’t necessarily a great fit for every distillery and depends on your business’s specific circumstances.
Here’s how it would work: you ramp up production now so that you are paying the lower FET on 2020’s proof gallons—that you plan to sell in 2021. This plan only works if you can be sure you will be able to sell the spirits in 2021. You don’t want to have a lot of excess stock on your hands and need to pay tax on spirits you can’t sell.
However, there is an additional wrinkle. The CARES Act that Congress passed in March 2020 allows distilleries to delay payment of FET by 90 days. If you bottle spirits in November and December, you can delay paying the taxes until February or March 2021—by which time you will hopefully have sold those bottles. In essence, you would be borrowing against your future taxes.
Obviously, this plan is chancy. If you end up with excess bottles, you might need to offer a sales incentive to move that stock. But it might be worth weighing the pros and cons to see whether you think the risk is worth it. As we approach the end of 2020, now is the time to think about your plans for 2021. The excise tax time bomb is ticking away; you don’t want it to explode in your face.