Ted Zeller: Well, I’m happy to drink out of the well and important occasions in my life. I like to go top shelf. If I’m a business owner going into a highly regulated industry, I think that’s an important time in your life to also consider in going top shelf. Welcome to Norris McLaughlin’s Top Shelf Legal, a limited podcast series where we break down the hard stuff on beers, distilleries, breweries, and spirits. I’m your host, Norris McLaughlin. Ted Zeller, Practice Group Leader of the Liquor Law Group at Norse McLaughlin. In this episode, I’m going to talk about the complicated world of taxation. In the beer world in Pennsylvania, it will touch on some items federally, because whether you’re a Pennsylvania brewery or any brewery in the United States, you also have a tax implication from producing beer and selling beer.
This podcast is not directed at. Income tax concepts or anything along those lines. And certainly, you should see professional accounting help for those types of things. But I am going into the world of what it’s like to produce beer and how it’s taxed. One of the things that’s the oddity in Pennsylvania and probably, um, in other States is this strange phenomena that the more Alcohol by volume you produce, the actual less tax and regulation you face.
That is quite an oddity. And what do I mean by that? Well, in Pennsylvania, you have a malt beverage excise tax. An excise tax is for the, when you produce an alcoholic beverage, you have to pay excise on, The gallonage of various different types of things in Pennsylvania, it’s barrels. It can also be by the pint.
It’s referred to in Pennsylvania as the penny-a-pint tax. But that is actually applicable to beer. Distilleries do not have an estate excise tax. As crazy as that’s sounds, wineries do not have a state excise tax. As crazy as that sounds. There’s one exception there is the, the new wine shipper permit that out-of-State wineries can get to ship wine directly to PA residents. And similarly, even if you’re a Pennsylvania limited winery and you could sell over the counter to your customer. If you’re shipping to a customer, meaning mail order to a location in Pennsylvania, you also have to get a wine shipper permit and you need to pay that by the gallon. All right. But beer is the only one that has the malt beverage excise tax.
So, the excise tax is 2 and 48 cents a barrel. And you pay that on PA sales. I don’t want to necessarily get into the concepts of what it means to remove beer from bond. That is a very nuanced discussion. It could probably be its own podcast, but technically you’re only required to pay PA excise tax or actually federal excise tax when you remove it from bond.
Okay. You will also for that same beer you produce and sell in Pennsylvania and are paying a Pennsylvania excise tax on, you are also paying a federal excise tax on. If you produce under 60,000 barrels, there’s a, there’s a small brewer rate at 3 and 50 cents a barrel. So, you know, when you combine, Your state excise tax with your federal excise tax.
You’re talking about seven bucks a barrel. Now, a lot of people listening to this podcast probably understand the industry a little bit. The barrel is 31 gallons. So, you know, that is for like the half keg. That’s a half a brewer’s barrel. You’re adding the 3 and 50 cents you’re paying too. Pick up from your beer distributor whatever is going to the government’s for the excise tax, Pennsylvania breweries are also regulated because although they’re, they can self-distribute and just a little heads up to the people out there, be very careful if you’re pointing distributor or beer wholesaler for distribution rights, because that implicates beer franchise laws.
That’s going to be a whole other podcast. I just like to give that heads up, but it’s one of the other kind of regulations and taxes that the other. Alcohol industries like wine and spirits in the state do not face, but now you also have other tax considerations when you are producing and selling beer direct the one quick note that excise tax that I’m mentioning to you, at least from the state level.
The Fed, it doesn’t matter, only applies to something with malt or brewed beverages. So, under your brewer’s license, believe it or not, you can produce cider under eight and a half percent mead and fermented fruit beverages. It’s all classified as a malt or brewed beverage under the liquor code, but under the tax code, the way the department of revenue has interpreted it, and this is always subject to change. So always stay tuned.
But they say, No malt, no tax. So actually, cider does not owe PA excise tax. Fermented fruit beverages do not owe PA excise tax. And Mead does not owe PA excise tax for those sales. Little kind of nuance there. So really the focus now for me is going to be kind of discussing the small brewers type of model. And when I say small brewers, you have to have some Perspective. Okay.
The big boys in the brewing world produce about 75, 80 percent of the beer. And I’m talking about, you know, Molson Coors, ABI, InBev, which was is the mega brewer of Anheuser Busch and InBev combined. And even also the, you know, emerging Constellation with Modelo and Corona and all those types of beers comprise a significant, significant market share.
In Pennsylvania, everybody thinks that Yingling’s the big brewery, right? Well, ABI. probably spills more beer a year than Yingling produces and sells. So, you can, you might be considered big brewery by some standards. It’s really a small brewery. Um, yes, they’re producing more than that 60,000-barrel rates.
So, they’re paying higher excise taxes, but they’re really just a jumbo shrimp in my opinion. Okay. So, what I’m about to talk about is going to be talking with that, talking about that 10 to 15 count all the way up to 35 count shrimp, you know, the victories, which is now owned by Southern tier, the trogues, they have great, great tap rooms.
So there’s implications on when you’re selling at a tap room, what you have to pay in tax. We’ve done a lot of work and working with the department of revenue. And I actually helped them write the reg that applies to sales tax for the sales of beer in the state. So, let’s just start off. You have a, you have a manufacturing license and you’re also producing for your friend in the neighboring town who also has a brewery okay.
If you have a contract production agreement in place, which you should, you really, really should. And that’s supposed to be filed with the Pennsylvania malt beverage office. When you’re selling that beer on the contract, there is no sales tax due. Now, when you’re selling it directly to consumers at your site, there is sales tax due, but it’s not really sales tax.
It’s a use tax is what we came up with. You know, there was some complicating factors that I don’t necessarily need to get into, but in short, if you were going to tax a brewer at 6%, which is the standard sales tax rate for each pint that they sold to consumers, you were really just going to load a whole bunch of tax into the thing.
Like you’re going to basically overtax it because when a brewer sells it to a distributor, your wholesaler, there is no tax due on that keg per se. But when the wholesaler then sells it to the retailer, they charge 6 percent on the keg and then at the restaurant consumers actually don’t pay any sales tax for buying a pint.
They don’t pay any sales tax for any alcohol. It’s, it’s a lot of people are surprised to hear me say that sometimes, but next time you’re at a, your favorite bar and restaurant, go check out your tab and you will see that there is no tax that you are paying for any alcohol. If you are, you might want to go talk to a manager and illuminate them because the tax is always loaded at a higher sale transaction from a business to a business.
And then you can’t tax the same thing twice. Well, the phenomenon in Pennsylvania is the brewery can act as the producer, the wholesaler and the retailer all at one site. So, we tried to come up with a fair tax rate that would apply to that product being sold to consumers at the site. What we came up with is that a use tax is going to be 25 percent of the sale amount.
All right. So, most of Pennsylvania is in what I call 6 percent land, meaning the sales tax is 6%. So it’s exactly one and a half percent. And you actually, when you’re giving the bill to the customer, you have to embed it in your price. You can’t show it as a tax. Now with the new my past system, there’s ways to fill out those forms on the use tax, and there’s a whole calculation based upon your sales directly to consumers.
That doesn’t apply. In other state tax lands, specifically what I’m talking about is Philadelphia and Allegheny County. Philadelphia is 8 percent tax land, so that makes your use tax air at 2 percent and Allegheny is a 7%. And you can do the math on the 25 percent of that. Uh, just also a note, this additionally, there’s local taxes.
Uh, there’s drink taxes in both, uh, Philly and Allegheny County, which are in it. Addition to those taxes that I mentioned for over-the-counter sales to consumers all right. Now, if you’re selling directly to a retailer, Pennsylvania breweries are allowed to self-distribute. You have to charge 6% Sales tax, and you can show that on your invoice to the retailer.
If you’re selling to an importing distributor, as I briefly mentioned before, you do not charge tax to them. They are what is considered exempt under the tax code. In addition, if it’s not technically a wholesaler, which is in the importing distributor, you’re selling to what’s called a distributor. We have these distributors and.
Pennsylvania, where you go by your case and kegs, that’s also tax exempt because they charge it ultimately to the customer, whether that distributors customer is another bar or someone walking into their retail facility. All right. Also, just one last final note. the tax is calculated from where you’re selling.
All right. So, if you own and operate your business in 8 percent land, Philadelphia, and you’re selling to a bar in Harrisburg, you have to charge the 8 percent cause that’s your sales tech rate. It doesn’t, it’s not calculated on where the beer is actually being delivered. So these taxes can be very complicated.
I get a lot of questions on these things. I am not a tax attorney. But I think I might be the only one in my firm that actually has written tax law. Um, it’s just, you know, with what I do. So be careful out there in filing your taxes that is connected to your license renewal, which comes up every year on, you know, by the first of the year. And if you haven’t paid your taxes or filed your reports is a, is what you need to do, which is going to be a whole other. Podcast on all the crazy reports you have to file. You’re going to be in trouble with your license renewal.
This has been a Norris McLaughlin top-shelf legal limited podcast series, where we run through the topics of beers, distilleries, breweries, and spirits. I want to thank you the listener for being a part of the conversation. Be sure to tune in next time for a brand-new episode. If you would like to learn more about our work, be sure to check out my legal liquor blog or email me at topshelflegal@norris-law.com. That’s topshelflegal@norris-law.com.