NY Breweries Get Hammered by New Tax Ruling – Is It Fair?

Until a couple of weeks ago, breweries in the Empire State had a pretty sweet deal worked out with the Tax Man. As of April 10, that deal is no more. A lawsuit brought against the New York State Liquor Authority (NYSLA) forced the end of a huge tax break for small breweries within the state. The former excise tax exemption (Section 424 of the Alcoholic Beverage Control Law) applied to the first 200,000 barrels of beer brewed by in-state brewers. No matter how big the brewery was they did not have to pay tax on the first 200,000 barrels of their beer, so long as it was sold in New York.

To put that in to perspective, there are only two breweries in New York State that brew more than 200,000 barrels each year, so until now, almost every craft brewery in New York paid nothing to sell their beer in their home state.

Furthermore, section 107-a of the Alcoholic Beverage Control Law imposes a fee of $150 for each brand label registration in New York. Until a couple of weeks ago, in-state brewers were exempt from that fee and did not have to pay to register labels for small batches of 1,500 barrels or less.

Both exemptions have been lifted, as a result of a lawsuit filed by Massachusetts-based beer importer, Shelton Brothers.

Way back in November of 2006, the NYSLA banned the sale of six holiday-themed beers imported by the Shelton Brothers, saying that their labels encouraged underage drinking. Shelton Brothers claimed this rejection violated their First Amendment rights.

Some feel that Shelton Brothers simply used the incident to attack what they deemed to be "unfair" tax exemptions for New York based breweries.

Below are the six labels that were rejected by the NYSLA for encouraging underage alcohol consumption:

Rejected Beer Labels

In a press release delivered shortly after the ban, Shelton Brothers stated that not only had the NYSLA violated their First Amendment rights, but they were simply putting up a façade, pretending to care about underage drinking. They asserted that the NYSLA was only attacking them because they assumed that Shelton brothers were too small to protest. But protest they did.

That complaint had nothing to do with small brewers in New York State, until an angry Daniel Shelton decided to attach a separate complaint alleging that the "SLA’s steep label registration fees and excise taxes unconstitutionally disadvantage small out-of-state beer suppliers and prevent them from selling rarer, high-quality, hand-crafted beers in the state." This quote was taken directly from a Shelton Brothers’ press release dated November 24, 2006.

The case was originally brought to court in April of 2006, and has returned multiple times without any definitive rulings. Two weeks ago, in an effort to resolve the lawsuit, the SLA issued their new rules lifting the excise tax exemption and the bottle registration waiver.

Now every brewery in New York will be forced to pay 14 cents on every gallon of beer sold within the state. That’s right, 14 cents-per-gallon, which is $4.34 per barrel.

Let’s break it down and take a look at what this means for New York’s brewers. Below are 6 examples of the taxes that will now be imposed on beer sold within the state.

Number of Barrels Amount Due in Taxes
500 $2,170
5,000 $21,700
10,000 $43,400
100,000 $434,000
150,000 $651,000
190,000 $824,600

According to the New York State Brewers Association, about 700,000 of the 1.1 million barrels of beer brewed in New York in 2010 would be subject to this tax for the first time. Combined, that makes an extra $3 million paid in excise taxes that would have been considered profit or operational costs before, or maybe as Dan Shelton believes, bonuses for the big guys.

Even further, the small craft breweries that self-distribute to New York City are facing an additional excise tax of $3.72 per barrel, on top of the $4.34, making the total taxes due $8.06. There was previously no tax for self-distribution in the city.

Let’s break it down again, this time looking at breweries self-distributing to NY. Keep in mind these quantities are smaller because most breweries will not self-distribute more than 20,000 barrels.

Number of Barrels Amount Due in Taxes
100 $806
500 $4,030
1,000 $8,060
5,000 $40,300
10,000 $80,600
20,000 $161,200

In regards to the label registration fee, there are many craft breweries in New York State that have never paid to register their bottle labels. Now every time a brewer comes out with something new, like a holiday or seasonal brew, they will be forced to pay an extra $150, on top of the new taxes imposed.

Many bloggers and beer geeks believe these changes will undoubtedly come with very unfortunate consequences; it’s been said they will drive up costs for consumers, while simultaneously driving select brewers out of the market. The ones who can stay will likely be forced to reduce their offerings, decreasing the craft selection for consumers across New York.

Some argue that Shelton Brothers went through all of this trouble just to guarantee that smaller breweries in New York State would no longer receive the tax exemption.

Daniel Shelton sees it differently, though. He feels that bloggers and in-state breweries are demonizing his company because they refuse to see the big picture. He says his end goal is to work with in-state brewers to get new constitutional legislation passed, but he can’t do that so long as people continue to vilify his company.

I spoke personally with Daniel Shelton and he made it very clear that his original intention was not for the label registration fee to be imposed on in-state brewers, but rather for it to be lifted from brewers across the nation. He says New York is strapped for cash (no one can argue that) and that’s the reason the state has decided to apply the fee to everyone.

Shelton also points to the State on the excise tax – "We pointed out the inequity of it, but didn’t push the issue, and frankly, we were as surprised as anyone when we heard about the Court’s declaratory judgment knocking out the exemption."

What Shelton really wants to do, he says, is push for new legislation that will help all small brewers, not just small brewers in New York. He noted that the special treatment of in-state brewers comes at the expense of brewers small and large outside of New York.

He asks, "Why should out-of-state brewers, especially really small brewers like the ones we work with, be subject to this New York tax while New York brewers themselves pay nothing? It’s plainly unfair and anti-competitive, and the U.S. Constitution does not allow this kind of protectionism aimed at residents of other states (or countries)."

He further suggested that the new tax will hardly affect the brewers themselves, and that they should pass the extra cost (what he figures to be 2 cents-per-pint) down to the consumer.

Shelton also commented on the larger breweries in New York that may have received these exemptions and pocketed the money. He likened it to the investment banks taking taxpayer bailouts intended to help them survive, and then treating themselves to excessive bonuses. In a recent statement he specifically calls out Brooklyn Brewery for pocketing the savings, and that has caused a whole new kind of controversy.

Jon Mervine, co-owner and brewer at Roc Brewing Company in Rochester, NY, sees it a bit differently. He believes Shelton Brothers felt the squeeze from the ever-growing presence of local, homegrown breweries within New York, and didn’t appreciate the fact that in-state breweries were able to experiment with new beers at minimal costs.

Mervine further stated, "Their argument ‘favoring’ the state’s constitution is crafted in a way to seem almost patriotic while backhandedly squashing the efforts and quelling the growth of hardworking small breweries." He believes that "they are ultimately doing a disservice to New York’s craft beer drinkers by serving their own self-interests."

Shelton seems to think that it’s the NY breweries being selfish. He’s not pleased with the beer community’s reaction and notes, "I hope that most people will see this as a load of self-serving crap. It’s a common tactic these days: push a simplistic line that sounds superficially true with anger and indignation, and a good percentage of people will just repeat it without thinking about it at all."

A good percentage of people are certainly talking about it. Mervine spent this past weekend at Tap New York, a craft beer and food festival in the Catskill Mountains. He said most brewers are now brainstorming ways to keep cost increases for patrons at bay.

These events have come at an interesting time, considering recent efforts by US Sen. Charles Schumer (D – NY) to give local craft breweries a boost. In December of 2011, Schumer launched the statewide "I Love NY Brew" campaign, with the hopes of generating the same kind of support that the "I Love New York" campaign did for tourism.

The main goal of "I Love NY Brew" is to push New York restaurants, bars, and convenient stores to put locally brewed beers on their shelves and in their menus. Schumer also boasts that brewpubs across the State support nearly 60,000 jobs, and for that reason alone deserve local support.

A lot of New York brewers and others in the craft community, however, are now asserting that these efforts were all for naught, as many breweries will be struggling to get their beers on the shelves.

Is it a fair ruling that’s righting something that’s always been wrong, or an unfair attack on the little guy? We’ll let you decide – we just urge you to think before you discuss it with Daniel Shelton or a brewer from NY. Things tend to get a little bit tense.

[techtags:NY Breweries, Excise Tax, Beer News]

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