Drafts & Taxes 

As Idaho craft brewing evolves, state and federal taxes stay stuck in the past

That the U.S. beer industry has undergone a 21st century seachange is beyond dispute. In 2000, the Brewers Association reported there were 1,566 breweries nationwide, up from a post-Prohibition low of only 89 in 1978. By 2015 that number had risen to 4,269—beating the historic high of 4,131 breweries recorded in 1873.

We are living—and drinking—amid the greatest abundance of microbrewing in five generations, and the trend has been borne out in Idaho. Today, Gem State beer drinkers can choose from more than 50 homegrown brands—twice the number of craft breweries in the state in 2011.

While the industry has grown by leaps and bounds, it faces a handful of regulatory and tax structures that are as flat as a day-old pint of IPA.

"Even just here in Idaho and Boise, the number of breweries you've got today compared to 20 years ago when Sockeye started, it's exponential," said Sockeye Brewing Business Manager Janice Skinner, who has been with the company for 14 of its 20 years in operation. "Unfortunately, the laws haven't changed or grown with that industry."

Federal excise taxes on beer have remained particularly stagnant. Under the current statute, breweries that produce fewer than 2 million barrels of beer per year pay $7 per barrel on their first 60,000 barrels. For breweries that turn out more than 60,000 barrels, the tax jumps to $18 per barrel—the same rate paid by monster facilities that might move as many as 97 million barrels in a year.

Those taxes haven't changed since the '70s, even as the number of small- to mid-sized independent beer producers has skyrocketed. Now, there's a new legislative push to adjust those rates to ease the way for craft and micro-breweries.

The Craft Beverage Modernization and Tax Reform Act was introduced by Oregon Democratic Sen. Ron Wyden in June 2015, and seeks to change those rates to $3.50 per barrel up to 60,000 barrels and $16 per barrel for producers who churn out between 60,000 and 6 million barrels per year. The result, backers say, would put $37.5 million back into the smallest brewers' pockets, and cut costs for those mid-size operations by $36 million.

"The federal tax rates and the proposal to lower those could have a significant impact on the breweries here in Idaho," Skinner said.

To illustrate, she said if Sockeye brews 12,000 barrels this year—which it's on track to accomplish—taxes on that product would amount to $84,000.

"If you cut that in half, you're at $42,000 back into our company profits that enable us to hire an additional sales person, hire an additional staff member, invest in additional equipment, increase the salaries of our current staff," Skinner said. "That's a significant dollar amount that gives us a lot of opportunities to expand our business."

Mike Francis, owner of Payette Brewing, told a similar story.

"Based on our production last year, that would cut our excise tax bill from about $70,000 to $35,000," he wrote in an email.

As executive director of Idaho Brewers United, Sheila Francis is the state's representative to the Brewers Association. For the past four years she has worked on some kind of tax reform for breweries, but the effort goes back to at least 2010, when Idaho Republican Sen. Mike Crapo and Massachusetts Democratic Sen. John Kerry teamed up to start gathering support for a similar measure.

Republican Rep. Mike Simpson is the only member of the Idaho congressional delegation so far to sign on as a co-sponsor of the CBMTRA but, as recently as late September 2016, the legislation gained majority support in both the U.S. House and Senate. It's a rare show of bipartisanship, which Sheila Francis said has much to do with the wider effects of giving breweries the opportunity to reinvest in their businesses.

"It affects a lot of the agriculture here in Idaho. We've got a ton of barley and a lot of hops here, so it's a win-win," she said. "It also affects glass manufacturers, packaging companies. It's more than just brewers."

That said, should the legislation pass, it would support a rapidly growing—and profitable—Idaho industry. Based on 2014 figures, Idaho's craft beer industry churned out 67,597 barrels, a staggering increase from 43,073 in 2013 and amounting to $318 million in economic impact.

But the federal tax burden is only one of the hurdles facing Idaho craft brewers. State taxes on beer are also antiquated.

According to Sheila Francis, Idaho code imposes a two-step tax structure on beer: for beers under 4 percent by weight—equivalent to about 5 percent alcohol by volume—the state takes 15 cents per gallon. If a beer clocks in at more than 5 percent ABV, which is the case with the majority of all craft beers, the tax rate bumps up to 45 cents per gallon—equivalent, by law, to wine.

"It's considered, and therefore taxed as, wine; so it's almost three-times the rate," Francis said. "The code was written quite some time ago when beers weren't that strong, and encouraging beers at that low threshold made sense at the time. Obviously, the beer industry has grown and evolved, so 6 percent beer, 7 percent beer—some beers go up to 14 percent—are not uncommon, whereas previously they were very, very uncommon."

Skinner, with Sockeye, said the state tax on so-called "strong beer" can add up fast.

"For the lower [15 cents per gallon] rate, that's $4.65 a barrel. At the higher [45 cents per gallon] rate, which the majority of our beer truly is brewed at, that's $13.95 a barrel," she said. "Then you add another $7 a barrel on that for federal taxes, and that's a significant amount that's being taxed."

According to Idaho State Police Alcohol Beverage Control records, Sockeye paid $13,955.19 in state tax on its 31,011.55 gallons of strong beer produced in August 2016, while Payette paid $13,271.42 on 29,492.06 strong beer gallons.

So far no efforts have been made to alter the Idaho statute—in part because no legislator has taken up the cause, but also because Francis said there's some trepidation about broaching the issue with the Legislature.

"There might be some who are keen to increase it even more," she said, "so it's a balancing act of addressing it so it's a little more fair toward beer. However, we don't want it to backfire."

At the same time as state and federal tax rates are combining to "slow the growth cycle" of breweries, as Francis put it, another recent law has opened craft brewing to a larger audience: families.

In July 2016 a new Idaho statute went into effect allowing minors into breweries and taprooms when accompanied by an adult. Payette owner Mike Francis and Skinner both said the change has been positive.

"Allowing kids to come into the brewery is a benefit in addition to just letting them see the brewing process—but we're a pretty cool manufacturing process in its own," Skinner said. "I've had kids who are interested in engineering or design or production operation management. Young people that are interested in a lot of different fields can come in and look at a full production facility and become excited."

As Idaho adds to its robust growth in brewery facilities, its bounty of beer-related agricultural crops continues to be widely recognized and more people are now permitted to experience the process of brewing, beer advocates say it makes sense laws should be updated to reflect the increasingly strong role craft brewing plays in state and local economies.

"I think it's wonderful that boise is starting to become this burgeoning craft beer scene," Skinner said. "The more breweries that are opening up and coming out with a great, quality product and convincing a customer to come in and try their beer and fall in love with it and decide 'I'm going to try a craft beer the next time I'm out,' it's just going to create that much more synergy for the industry as a whole here in Boise."

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