Following plenty of representation, there will be limited taxation on purchases made in brewery taprooms later this year in Pennsylvania.
Under a bill signed into law by Gov. Tom Wolf on Friday, breweries will be required to collect sales tax on products sold to consumers based on a purchase price of 25% of the full retail rate. So, for example, a $6 pint in the taproom will be assessed at $1.50, meaning a 6% sales tax on that purchase will be 9 cents.
That’s much less than was outlined in a sales tax bulletin issued last summer by the Pennsylvania Department of Revenue, which was set to go into effect Monday and would have had breweries collecting and remitting 36 cents on that same $6 pint.
Shortly after the bulletin came out, the state’s brewers and their trade organization, the Brewers of Pennsylvania, organized an effort to fight the sales tax, arguing the levy would be too much to absorb in an already low-margin business while also putting them at a competitive disadvantage with restaurants and grocery stores.
“The Brewers of Pennsylvania worked closely with the governor’s office to bring fairness and equity to sales tax collection among restaurants, taverns, grocery stores and brewery taprooms,” Ted Zeller, general counsel to the Brewers of Pennsylvania, said in a statement. “This legislation will allow breweries in Pennsylvania to continue to build their businesses and try to make Pennsylvania the best beer state in the U.S., if it isn’t already.”
Zeller, an Allentown attorney who chairs the Liquor Law Practice Group at Norris McLaughlin, said the law will become effective Oct. 1. The initial Department of Revenue bulletin is expected to be suspended and replaced with the new tax code language, he said. The tax code update calls for breweries to collect sales tax on transactions for on-premises consumption and to-go sales.
It all concludes a lengthy battle that boiled down to how the state’s Tax Reform Code was applied to a rapidly changing brewing industry. For example, in 2015, Pennsylvania craft brewers gained the ability to sell their beer for on-premise consumption, leading to an explosion in taprooms across the state. With those changes in the state’s liquor law, which allowed breweries to sell to a larger pool of customers without the need for special licenses, the Revenue Department felt it needed to clarify last year that brewers are required to collect sales taxes. Previously, brewers were not required to do so — or, at bare minimum, the state was not enforcing it.
The bulletin’s intent, the Revenue Department said, was to make things fair between each licensee. For instance, when a restaurant buys a keg from a distributor, the sales tax rate is 6%.
The problem with that logic, the Brewers of Pennsylvania argued, is that restaurants are buying at a wholesale price, while brewers are selling to consumers in the taproom at retail price.
In fact, sales tax on a keg — let’s say at a $140 wholesale price — amounts to $8.40. But if a taproom sold 120 pints — the number of pints in a keg — at $5 each, last summer’s tax bulletin would have put the total sales tax liability at $36.
Under the bill signed by Wolf, the tax liability in that scenario would drop to $9 for a brewery.
“The ultimate goal of the legislation is to create an equitable model for breweries to follow that is similar to the system in place that allows bars and restaurants to pay sales tax on their wholesale purchases,” Revenue Department spokesman Jeffrey Johnson said in an email.
Overall, according to a fiscal note from the House Committee on Appropriations, the bill is expected to bring in $1 million in sales tax revenues to the General Fund during the next fiscal year.
For breweries, a complication that could arise from collecting sales tax is appropriately programming their point-of-sale systems. For example, breweries are allowed to sell other Pennsylvania products in their taprooms, such as another brewery’s beer, but they remit sales tax on those products when they purchase them from the other establishment. So they will not have to charge sales tax on those products, but they will have to on sales of their own brews.
Curt Keck, CEO and brewmaster of Allentown’s HiJinx Brewing Co., said the amended tax is better but still not ideal. It does, however, more closely level the playing field, he said, since it would have been unfair to have bars paying sales tax on wholesale prices and breweries paying on pint prices — on top of the existing per-barrel state and federal excise tax that breweries already pay.
Keck had been concerned that enforcing a 6% sales tax based on full retail prices could have put some brewers out of business because the cost of a pint would increase. But Keck said Friday he plans to absorb or factor the sales tax into his pint prices, so consumers aren’t stuck paying $6.09 on a $6 pint.
Even though it’s a smaller tax than originally planned, it’s still another expense in a challenging industry, one that continues to get more crowded with more than 7,300 craft breweries operating in the United States at the end of last year.
Keck said he’s one of 17 breweries in the Lehigh Valley, with more in the pipeline. Come Oct. 1, those establishments will have to decide whether to absorb or pass the sales tax on to the consumer. The expectation, however, is that most will fold the more digestible tax into their pricing.
“It’s definitely more bearable,” Keck said. “It’s a lot better than what it was going to be.”
Morning Call reporter Jon Harris can be reached at 610-820-6779 or at jon.harris@mcall.com
