Tax Reform Means Breaks for Wine Industry — For a Few, and For a While At Least

By Ross Boissoneau | June 16, 2018

 

Death and taxes, and tax breaks in the wine industry … maybe. That’s what we all have to look forward to, though the lattermost is not yet set in stone.

The 2017 Tax Cuts and Jobs Act — aka the Trump tax cuts — is impacting virtually all areas of the economy, and northern Michigan’s wine industry is not exempt.

But what initially seemed like a gift to small producers when the federal excise tax legislation was signed into law just before Christmas has since revealed itself to be somewhat more complicated.

Here’s what happened: The Trump tax cuts took the 1991 Small Producer Tax Credit, which lowered the rate winemakers were taxed from $1.07 to 17 cents per gallon, and promised to lower it even further, to 7 cents per gallon.

“When it passed, everyone was excited,” said Karel Bush, head of the Michigan Grape and Wine Council. “But [it excluded] certain business models.”

That’s because on March 2, the Tax and Trade Bureau released guidelines creating a totally different scenario: Wineries that totally control their production and sales from start to finish would get the full benefit (an effective rate of 7 cents per gallon on the first 30,000 gallons produced), while those using custom-crush or remote bonded wine cellars will have to pay the full excise tax rate ($1.07 per gallon) on the wines subject to those scenarios.

According to an open letter sent to wine producers from Jim Trezise, president of WineAmerica, the trade association of wineries across the country, that was not the intent of the 2017 legislation; all American wineries were supposed to benefit from reduced federal excise taxes.

But with the new guidelines, wineries that depend on outside sources to make their wine would be precluded from sharing in the tax breaks. That’s particularly devastating for many small and medium-sized wineries. For many smaller wineries, and especially for those just entering the business, purchasing their own equipment is a huge financial challenge; relying on other sources and their equipment to fulfil some steps in the wine-making process enables smaller producers to get in the game with a smaller investment. 

“In Michigan and elsewhere, many have someone else making their wine under their direction. Then they transfer to the licensee who sells it with their label. That goes on all over the country. Most start out that way because [purchasing equipment] is a huge capital expense. It’s a way to get started without that huge outlay,” Bush said.

In particular, there was a problem with disallowing wines that employ custom crush services to take advantage of the tax credit, said Bush. “That was a huge burden on small wineries, especially startups.”

Wineries that produce 250,000 gallons of year or less, which is a majority of the industry, can take some form of tax credit. The biggest benefits are reserved for wineries producing 100,000 gallons or less annually.

Marie-Chantal Dalese, CEO of Chateau Chantal, said for her winery, the act is good news. Chateau Chantal produces around 50,000 gallons per year onsite. “Here, it is good news. There are savings,” she said.

“The small producer credit is extremely helpful to many wineries. They all will benefit to some level; the higher the production, the greater the benefits,” said Bush.  

Nevertheless, smaller wine producers are hoping they can now exhale. Although it hasn’t happened yet, it looks likely the tax law will be amended to ensure that all the wine producers will get a tax break. What’s still unclear is when, and how long the benefits will remain in place, as they are scheduled, at this point, to end Dec. 31, 2019.

Bush said that craft alcohol organizations across the country are trying to work together to ensure that the benefits are put in place, if not permanently, at least on a longer-term basis. “WineAmerica distilling and brewing organizations — a beverage and alcohol coalition — are trying to get something more permanent in place,” she said.

We’ll toast to that.