Microdistilleries prepare for worst as tax relief set to expire

A few weeks before the champagne corks pop to usher in 2020, one branch of the liquor business is viewing the New Year with trepidation: craft spirits.

Federal excise tax relief for small distillers included in the $1.5 trillion tax reform bill in 2017 is set to expire at the end of the year. If it is not renewed by then, the distillers could see their excise taxes go up fivefold, potentially setting back much of the growth the industry has experienced over the past two years.

Chris Montana, president of the American Craft Spirits Association and owner of DuNord Craft Spirits in Minneapolis, said the end of that tax relief could mean trouble for microdistilleries in Minnesota and across the country. They may have to cut workers, raise their prices or shut down altogether, he said.

"If we get there and fall off the backside of that cliff, I think it will be devastating for our industry," Montana said last week. "For these smaller distilleries that are just trying to get out to the market … it's going to get even worse for them because their costs will go up significantly."

Excise taxes are set on specific goods, such as tobacco and alcohol, and paid for upfront by businesses and indirectly by the customer.

Montana has spent the past year traveling to Washington, D.C., lobbying legislators to extend the tax relief and ultimately make it permanent. There is widespread bipartisan support to do so — including the entire Minnesota delegation — but he has not seen the political will to take it across the finish line, he said.

The 2017 tax reform bill included several provisions that would phase out over the coming years, said Kyle Pomerleau, a tax economist at the American Enterprise Institute, a D.C.-based think tank. "This, I think, set up a lot of these uncertainties that now a lot of industries are facing, [distillers] being one of them," he said.

Montana said it's hard for Congress to move on the extension, especially with all eyes being focused on the impeachment proceedings for Trump. "It cannot possibly be the excuse though. This has got to get done," he said.

Distilleries have cropped up across Minnesota since the so-called Surly Bill passed in 2011, drastically lowering the distiller's license fee. Thirty-three distilleries were operating in the state as of 2018, and more are planned.

Montana started DuNord in 2013 as part of the first wave of new distilleries. Back then he was paying the same federal excise tax as the largest liquor companies, such as Diageo, which makes Smirnoff vodka and Johnnie Walker whiskey.

Noticing that small distillers were paying more in excise taxes than small breweries or wineries, the alcohol industry pushed for a tiered excise tax system. Instead of having to pay $13.50 per proof-gallon, the tax would only be $2.70 per proof-gallon for the first 100,000 gallons sold, according to the American Distilling Institute.

In Minnesota, where Montana said most distillers sell about 5,000 proof-gallons a year, it made a massive difference. Montana tripled his full-time staff, bought more equipment and increased production. He knew the tax relief would eventually expire, though he hoped Congress would have acted by now.

"We didn't really think it was going to get this far," he said. He worries he will have to cut his staff if taxes rise again.

Larger local distilleries are also concerned.

Tattersall Distilling in northeast Minneapolis, which opened in 2015 and distributes to 25 states, could owe $400,000 more in taxes and slow down production next year, co-founder Jon Kreidler said.

The tax relief, Kreidler said, is necessary to compete against larger companies and support small businesses. Distilleries are also strong supporters of other Minnesota industries, he said, buying grains from farms and barrels from state coopers.

"If you look at what has happened to the craft spirits industry since those laws were enacted, it's been massive growth," he said. "For the wholesaler, for the retailer — they're all better off."

Mark Schiller, president of the Minnesota Distillers Guild and co-founder of Loon Liquor Co. in Northfield, said renewing the tax relief would "dramatically impact the profitability for microdistilleries in Minnesota."

"It is going to have great impact for the businesses themselves, but it is not going to make any kind of negative impact for any other kind of players," he said.

The delay might be caused by "intense negotiations" between lawmakers as they put together a package of provisions, Pomerleau said. If the tax relief is extended in February or March, it could be retroactively applied to start at the beginning of the year, he said.

However, Montana feared it wouldn't take long for distilleries operating on slim margins to feel the difference. He is headed back to D.C. this week, where he hopes legislators will be able to tack the extension onto a bill with a high likelihood of passing by the end of the year.

Miguel Otárola • 612-673-4753