Washington_state

Who Will Pay The New Beer Tax?

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As I’ve explained in a previous post, there will be some trickle-down that would reach consumers. But the reality is the breweries would pay this tax. That is important to understand, especially when you hear this statement: it gives out of state breweries a competitive advantage. I would like to explain that statement.

There has been some confusion about who, exactly, would be required to pay this tax. It’s simple, all breweries would have to pay this tax on the beer they sell in Washington. That includes out of state breweries. As it stands now, breweries only pay this tax if they sell more than 60,000 barrels of beer per year in Washington. With the new tax in place, all breweries would pay the tax regardless of how much beer they sell. The proposal is to extend this tax to all breweries large and small.

With the 60k barrel exemption removed, Foggy Noggin Brewing, Deschutes Brewing, Machine House Brewing, Sierra Nevada Brewing, and all others would have to pay this tax on all the beer they sell in Washington, even if they sell less than 60k barrels per year. (In the case of the out of state breweries, it is paid by the distributors, or something, but the tax does indeed get paid. Honestly, I am not exactly sure how the nuts and bolts work, but it does get paid.)

Remember that the additional $15.50 per barrel would be in addition to the already-high rate that Washington demands. Even without this new tax, Washington’s rates are already among the highest in the country. Massively higher than our neighbors.

When we talk about a competitive advantage, here is what we mean:

A brewery pays excise taxes to the states in which it sells beer. Such taxes are based on the amount of beer it sell in each state. An out of state brewery pays a lower rate on the vast majority of the beer it produces because the vast majority of the beer it produces is sold in its home state. (Or sold in states other than Washington.) It only has to pay the very high Washington rate on the little bit of beer it sells in Washington. This gives an out of state brewery a huge advantage over a Washington brewery because the Washington brewery sells most or all of its beer in Washington. The Washington brewery pays the Washington rate on all or most of its beer. It creates a home field disadvantage for Washington breweries.

None of this would matter if Washington’s excise tax rate was just a bit higher than the excise tax rate in other states. It does matter because Washington’s tax rate is already much higher than our neighbors. The proposed increase drastically broadens an already massive gap.

In other words, an out of state brewery can take a “hit” on the beer it sells in Washington. They don’t have to worry about making a normal margin on the Washington kegs/cases because it represents a small portion of overall sales. I admit, that’s all speculative, but it makes sense to me.

Note – Washington breweries only pay this tax on beer sold here in Washington. If a local brewery were to ship all of its beer to Oregon (as if), then they would not pay the Washington tax on it. They would pay the Oregon tax on it.

 

14 comments

  1. Let’s say Wa_Brew and Oregon_Brew both sell 100,000 barrels. As *might* be expected Wa_brew sells 9,000 barrels in WA and 1,000 in OR, and conversely Oregon_Brew sells 9,000 in OR and 1,000 in WA. The majority of WA_Brews revenue comes from WA and thus WA_Brew has to price its kegs accordingly for sale in WA. On the flip side, almost all of Oregon_brew’s revenue come from OR sales so it doesn’t *need* a *normal* profit margin on WA sales and can thus let the increase tax eat into its margins, giving OR_Brew an advantage.

    …. or maybe OR_Brew just doesn’t want to deal with us and pulls out entirely from the state like Russian River.

    Regardless, it’s a lose lose for WA_Brew and WA_Consumer.

  2. No doubt this is bad for everyone, but there are some offsets that help level the playing field.

    Agreed that a brewery that sells 90% of its beer locally with low tax will have an advantage on the 10% of the beer they sell in WA – overall better efficiency.

    On the flip side of the coin, beer sold across state (and country) lines would be (or should be) exempt from this, and would likely lead to WA breweries looking to get out of WA more for sales – something they’ve needed to do for awhile now and haven’t while out of state relative newcomers have experienced explosive growth by selling beyond their region. The same thing that can work for OR breweries in WA can work for WA breweries in OR.

    For both state imports and exports though, shipping is a factor regardless of which side of the border you’re on, and tends to help level the playing field where taxes are involved.

    I think it is a huge loss for breweries and consumers, but may not change the dynamics of competition so much internally in WA.

  3. I tell ya regardless of who pays the beer tax it is ultimately the consumers who suffer.

    1. Small out of state breweries can look for more in state sales or move on to other states where profit margins are higher. Some of these small out of state breweries are making amazing beers that WA could be keeping outside our state with this tax increase.

    2. Small guys in state will be adding 1/5 to a 1/3 more cost per barrel. That hurts overall profit margins for those people already competing with larger breweries who have high profit margins based on equipment size, bulk purchasing, etc.

    3. Market saturation is something that will happen and again the smallest breweries will need the support of loyal customers to keep them open. Everything cost more at a small size. Are consumers ready to make up the difference if pint prices go up $.50-$1.00 or the norm becomes a 10oz beer instead of a pint? If we lose our small breweries and start ups we could lose much of the innovation in beer in our state.

    Shouldn’t our government be aiding growing industries like craft-beer? Craft beer may not account for huge amounts of state tax income (comparatively), but all the breweries, taprooms, brew-pubs, bars and restaurants that sell WA beer pay taxes to the state and pay sales tax on top of that. Are we willing to find out how much blood our government can squeeze from craft beer till the bubble bursts and we no longer have a growing craft beer industry in WA?

  4. Jason: you propose that WA breweries raise the capital needed to keep up with distribution across state lines. Let alone the added cost of going to such a full distribution method.

    And you’re assuming that they wouldn’t have to pay a tax on the beer they are making in state just because they are selling it out of state. As if Washington’s government will allow such a loop hole to exist? I’m sure they’ve figured all the ways to patch the potential growth loop holes.

    The rich get richer, the poor get poorer.

    This is going to annihilate any potential growth plans for a lot of the small to mid size breweries.

  5. Alex the tax is messed up but I wanted to clarify; we don’t pay in state beer tax on beer sent out of state. With regard to your comment about rich and poor, sometimes I think our politicians would like everyone to become employees, rather than business people, which is what initiatives like these promote. Level playing field they say. Yeah right. The small businesses are not on the same level so the field must be tipped in their favor if we want them to exist.

  6. Thanks Greg. I added a note in the post about what you said. If a WA brewery sends ALL of its beer to Portland (as if), then they wouldn’t pay the WA tax on it, they’d pay the OR tax on it. Can you imagine that happening?

    There is another story here. Why does a brewery like Boulevard Brewing (from Kansas City) seek to sell beer in Washington? Why do Washington breweries of approximately the same size not seek to sell beer in Kansas City? In Seattle, you can get beer from anywhere in the nation, but you cannot get Seattle beer anywhere else in the nation. A blanket statement, but it makes a point. I don’t mean to call-out Boulevard. A great brewery making great beer. Just used them as an example because they popped into my mind.

    My theory? About 25 percent of all the beer we consume in the Seattle area is craft beer. Compare that to the national average of about 6 percent. This is a prolific marketplace for craft beer. Portland is the only metro area that drinks a higher percentage than we do, but we have more people. Portlandia is a highly provincial place – a tough nut for a non-OR brewery to crack. Most metro areas in the country drink a much, much lower percentage of craft beer than we do here. Even cities like Denver and San Diego don’t come close in terms of this percentage. So of course out of state breweries want to sell beer here.

    I admit, that might be oversimplifying it, but it’s something to think about.

  7. Where are you hearing that the 60k barrel exemption is being removed? SB 5039 does not alter the 60k barrel exemption in any way. Craft breweries will still be exempt from the $15/barrel tax, which means extending this $15/barrel tax to 2016 actually gives a considerable market advantage to the craft beer industry in WA state!

  8. Mike,
    SB 5039 has nothing to do with this. I strongly urge you to read previous posts here on the blog regarding this issue.

    YES, removing the 60k exemption is currently on the table in Olympia. You got some catchin’ up to do.

  9. I’m just now catching up with this issue and I appreciate your explanations. The thing I don’t understand is why this is focused on beer, rather than being applied universally to the “alcoholic beverage” industry. Is beer currently under taxed relative to liquor and wine? I can’t believe I am suggesting this, but, it seems like it would be more efficient, and fair, to just add an couple pennies for every serving of beer, wine, or liquor and collect it at the tap/retailer the way the existing taxes are collected. Why do we need multiple taxation points in a product’s life-cycle and different taxation mechanisms for product sub-categories?

  10. Chris, great questions. Like you, we’re all wondering the same thing: why target craft beer and small breweries? You bring up good points. Sorry, I don’t have answers.

  11. Confused on one item and it seems others I speak to don’t know either. Is this up for a vote? What are the steps that need to happen for this to go into affect in June?

  12. Right now, the House Finance Committee is working on a budget, this change would get written into a bill, then it would have to pass the legislature. Then the governor signs it into law. Because this is a budget thing, we can expect it to move quickly. Simplified version. If someone wants to go into detail, go for it.

  13. Alex, I’m a little late coming back to the party, but…

    Capital expenditures for brewery growth shouldn’t change, new tanks are going to still cost the same. Also, most breweries use distribution companies to go across state lines, they don’t self-distribute, so no need to have spendy outlays to set up in other areas.

    I can agree though that more tax will bring potentially lower sales, thus diminishing available cash for equipment purchases to fund that growth. I agree 100% that the tax will hamper growth for small to medium breweries.

    It isn’t an assumption that WA breweries are tax exempt for sales outside WA, they are. I import WA beer to Japan and those sales are exempt. Often sales across state lines are tax exempt, the tax at the destination being the one that takes effect.

    While this WA tax proposal is terrible, the duty I have to pay to bring WA beer into Japan is roughly $260 per barrel, or 10 times more than the proposed WA tax. A pint of American craft costs $11-$13 here, and the market pays it – sadly the politicians know that the market will bear the cost.

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