Everyone involved in a brewery is aware of the excise tax, but few really understand what it is, how it functions, and where it came from. I decided to do an in-depth study of the excise tax to provide a better understanding of this tax overall.
What is Excise Tax?
The excise tax is a tax on the “removal for consumption” of beer from the bonded premises. The government tracks the liquid from wort stage to finished beer stage. Every brewery has a defined location or “premises” where beer is created. Once the beer leaves the premise, it is taxed at a dollar amount per barrel. Smaller breweries are taxed at lower rates per barrel than breweries with larger production.
There is a distinct advantage in the tax towards smaller brewers. Small breweries who make less than 60,000 bbls only pay $3.50 per bbl (as defined as 31 gallons). Macro breweries pay a minimum of $16.00 per bbl of beer.
What does removal for consumption or sale mean?
Clients often ask me to explain when beer is subject to tax. That dividing line is one that every brewery decides for themselves. The technical definition is that beer is taxed once it leaves the bonded premise for “consumption or sale”. So, it is easy to see that selling a keg to a distributor is a taxable event. But what about beer that is donated to a charity? That is a removal for consumption but not sale…sadly, that beer is taxable. It was consumed, so tax is due. Some might argue that they didn’t make any money on that keg, so it shouldn’t be taxed. Taxing authorities see it differently. Not only is excise tax due, but state use tax is also due (if your state has a sales tax). That means that you’ve paid to make the beer, and now you have to pay the government to give the beer away.
The action of “tax determination” is also interesting and differs from brewery to brewery. If you are selling beer outside of the brewery (ie wholesale sales), beer is taxed once it leaves the finished goods cooler. I used to pull up invoiced sales (including beer given away) and calculate the barrelage that left the cooler in that time period. That is a pretty clear cut way to calculate the tax. But what if you are primarily a brewpub or sell pint on premise? Then there isn’t a list of invoices that you can rely upon to calculate the barrelage used. It is far easier to create a “tax determined” brite tank (or serving vessel) where the barrelage is calculated. But wait…doesn’t that result in a larger tax bill? Yes, you would be paying tax on beer that could be lost in transfer. A lot of breweries find that measuring volume in that tank is an easier method to use and would rather pay slightly more tax for the knowledge of knowing that the tax is correct (albeit a bit higher than required).
Brewing systems will do all of the calculations for you (remember the adding invoice lines?). That can be a real time saver. Once you convert to that system, make sure you agree with the calculation methodology. It seems at if every head brewer likes to calculate tax a bit differently (this stems from differences in field audit methodology), so continue to do your manual calculation until you have some comfort with the numbers.
Stay tuned for Part 2 of Excise Tax and You . . .