PROPOSAL TO REDUCE FEDERAL EXCISE TAXES FOR SMALL PRODUCERS

[Paul45]

Melkon, thank you for your work on the behalf of all small producers. We at 45th Parallel Spirits pledge our support to the proposed change of the Fed Excise Tax rate applied to small producers.

Paul A. Werni

[Gwydion Stone]

I fully support this effort and I'm grateful for the work that has been put into it so far. Thanks!

Gwydion Stone

Gnostalgic Spirits, Ltd.

Portland, Oregon

[Jonathan Forester]

I support this. We are in the licensing process and should be up and running in a month or two or three...

Penobscot Bay Distillery

Winterport, ME

[BlackwaterTM]

Blackwater Distilling, Inc. supports this proposal. Jon Cook

[absaroka]

Cold Smoke Distillery, Inc. supports this measure (our DSP is pending, should be licensed very soon)

-Bryan & Kari Schultz, Owners

[Zac Triemert]

As a follow up to the discussion from the DEFINING "CRAFT" DISTILLERY thread, here's a one-page position document for all of us to discuss, finalize, gather support for from fellow spirits makers and take to our federal legislators ASAP to create a new, lower federal excise tax tier for small-scale spirits maker. The structure below closely follows the TTB's existing format.

As I only had a short window to put this together, please double-check all facts and figures before we take this to broader audiences.

______________________________________________________________________

Small Spirits Makers' Equal Tax Act

Goal

Encourage the growth of hand-crafted spirits production in the U.S. by creating a reduced federal excise tax rate for small-scale distilled spirits makers, similar to the current reduced tiers for beer and wine producers.

Background

The distilled spirits industry has enjoyed a renaissance of local, artisan production of unique spirits over the last five years. Our numbers have swelled from less than 40 licensed makers in 2003 to more than 150 in 2008. Because of our efforts, U.S. and even some overseas consumers are beginning to experience innovation and quality in spirits products they can find in the marketplace that mirror what beer lovers enjoyed with the birth of micro-brewers in the 1980s-1990s and wine lovers with the emergence of the independent winemakers in the 1970s-1980s.

What made the growth of small beer and wine makers possible -- other than hard work and passion -- was a reduced federal excise tax rate that allowed them to compete with much larger producers who benefited from the economies of large-scale production. Today, small-scale beer producers pay 39% of the $18 per barrel in federal excise tax for the first 60,000 barrels they make if they produce less than 2 million barrels per year. Similarly, small producers of average-proof wine (<14% alcohol) pay 18% of the $1.07 per gallon in federal excise tax for the first 100,000 gallons they remove provided they make no more than 150,000 gallons per year.

To put this in context, small beer producers pay $0.02 vs $0.05 in federal excise tax per 12 oz can, while small wine producers pay $0.04 vs $0.21 per 750 ml bottle.

By contrast, spirits makers -- large or small -- pay the same $13.50 per proof gallon or $2.14 per 80-proof 750 ml bottle of spirits.

Proposal

Small-scale spirits producers need a similar reduced-rate federal excise tax structure to continue to innovate and compete effectively with large-scale producers. We the undersigned producers propose the following structure to bring balance to small distilled spirits producers that mirrors the excise rates of small beer and wine producers: Tier one/regular -- 100% rate, Tier two/small-scale -- 20% rate.

Proposed Distilled Spirits Excise Tax Rates

Distilled Spirits.............Proof Gallons*.............750ml Bottle

Regular Rate................$13.50.......................$2.14 (at 80 proof)

Reduced Rate**............$2.70.........................$0.43 (at 80 proof)

* A proof gallon is a gallon of liquid that is 100 proof, or 50% alcohol. The tax is adjusted, depending on the percentage of alcohol of the product.

** Reduced Rate -- For the first 60,000 gallons of spirits if producers make no more than 100,000 gallons per year.

Producers who support this legislation

1. Modern Spirits LLC 168 W Pomona Ave, Monrovia, CA 91016

I am in complete support of the proposed excise tax legislative change and am willing to help however I can.

Thank you,

Zac Triemert

Co-President

The Solas Distillery

17070 Wright Plaza

Omaha, NE 68130

403-763-8868

[Melkon Khosrovian]

Thanks for everyone who's voiced support! We've got 27 so far. Still missing many...

Current Producers

1. Modern Spirits LLC 168 W Pomona Ave, Monrovia, CA

2. Colorado Gold LLC, Cedaredge, CO

3. Tuthilltown Spirits, Gardiner, NY

4. Dry Fly Distilling, Spokane, WA

5. Ellensburg Distillery LLC Ellensburg, WA

6. Dynamic Alambic Artisan Distillers LLC Mattawa, WA

7. Great Lakes Distillery LLC, Milwaukee, WI

8. Drum Circle Distilling, Sarasota, FL

9. Grand Traverse Distillery, Traverse City, MI

10. Mystic Mountain Distillery, Larkspur, CO

11. Pacific Distillery LLC, Woodinville, WA

12. Delaware Phoenix Distillery, Walton, NY

13. Heartland Distillers, Fishers, IN

14. Fat Dog Spirits, Tampa, FL

15. Harvest Spirits LLC, Valatie, NY

16. Cascade Peak Spirits, Ashland, OR

17. New Holland Brewing Co. and Artisan Spirits, Holland, MI

18. Newport Distilling Company, Newport, RI

19. 45th Parallel Spirits LLC. New Richmond, WI

20. Gnostalgic Spirits, Ltd., Portland, OR

21. Penobscot Bay Distillery, Winterport, ME

22. Blackwater Distilling Inc., Annapolis, MD

23. Cold Smoke Distillery Inc., Bozeman, MT

24. The Solas Distillery, Omaha, NE

25. Parched Group LLC, Richmond, VA

Producers In Licensing Process

1. Sherman in KY

2. Paul in CA

[Melkon Khosrovian]

NEXT STAGE: Defining the Bill's Scope

Now that we have the ball rolling, let's open up the guts of our proposal and talk through the two key pieces that legislators will need to be nailed down to turn our idea into reality:

- Which producers qualify for reduced excise rates

- How much production qualifies for the lower rate

As a general observation, we need to keep a couple of process and context issues in mind:

- Complicated legislation takes a long time and lots of money to pass --> we should keep this simple and easy to implement

- We're in a recession --> we should limit our proposal's scope because lawmakers will kill it if the loss of excise revenue is too high

1. Type of Producer

Ralph Erenzo of Tuthilltown Spirits, who started the thread on defining craft producers, recently posted the upshot of six months of discussion on this topic, which I'd propose as a jumping off point for us:

Craft spirits makers produce beverage spirits primarily from agricultural raw materials. A Craft Spirits Producer utilizes a variety of technical skills in the preparation which substantially changes the character of the original material, including but not limited to: infusion, batch distillation and/or redistillation.

2. Size of Production at Lower Rate

Brent Ryan of Newport Distilling Company made a keen observation that when the brewers were going through this very exercise they set 15,000 bbls as their utmost limit because they never imagined going beyond it. "Brewers like Boston Beer (~1,300,000 bbls now) and Sierra Nevada (~700,000 bbls now)," Ryan writes, "were part of these very discussions." We may get one chance to set a lower bar -- let's not shoot ourselves in the foot by aiming too low.

Reduced excise tax rates apply to the first 150,000 proof gallons of spirits if producers make no more than 250,000 proof gallons per year.

Please weigh in on the substance of these two issues. Some specific questions that come to my mind:

- Should blenders be included in the producer class? John Glaser of Compass Box comes to mind. He buys and blends whiskies to create incredible vatted malts.

- Subcontract produced brands (dba's) -- should this type of production qualify? Lots of small brands fit this profile but the actual producers tend to be large outfits.

- What about column distillers?

Lastly, I'd like to thank Paul McCann of Parched Group, LLC, a former government policy analyst, who's volunteered to perform a simple financial analysis of this proposal to show how much revenue loss reduced excise rates may generate vs positive impact of more U.S. job creation (as most of our products compete with imports, not domestic brands).

[Jonathan Forester]

I feel that dba's and sub-contractors do not fit the scope of the organization or legislation. You must distill, or infuse, re-distill, or blend the product yourself. I think that blenders are on the borderline, but they are an artisanal and craft business. They are making decisions, and substantially increasing the quality of the product. If someone else does this for you, then they are the producer, not you. To paraphrase what has been said before: Distillers, distill... and so Producers, produce.

What do you mean by column producers? Continuous column distillation?

Or do you mean a "hybrid" still? A batch process still with plates in an attached column (Carle or Hotstein) that can be controlled (turned off or on) to increase or decrease reflux, but no compounds are taken of at the plates, just the final condensate?

I feel that batch processing stills that are hybrid are fine. But continuous stills are not. [Note: I mean in the context of the large GNS producers]

NEXT STAGE: Defining the Bill's Scope

Now that we have the ball rolling, let's open up the guts of our proposal and talk through the two key pieces that legislators will need to be nailed down to turn our idea into reality:

- Which producers qualify for reduced excise rates

- How much production qualifies for the lower rate

As a general observation, we need to keep a couple of process and context issues in mind:

- Complicated legislation takes a long time and lots of money to pass --> we should keep this simple and easy to implement

- We're in a recession --> we should limit our proposal's scope because lawmakers will kill it if the loss of excise revenue is too high

1. Type of Producer

Ralph Erenzo of Tuthilltown Spirits, who started the thread on defining craft producers, recently posted the upshot of six months of discussion on this topic, which I'd propose as a jumping off point for us:

Craft spirits makers produce beverage spirits primarily from agricultural raw materials. A Craft Spirits Producer utilizes a variety of technical skills in the preparation which substantially changes the character of the original material, including but not limited to: infusion, batch distillation and/or redistillation.

2. Size of Production at Lower Rate

Brent Ryan of Newport Distilling Company made a keen observation that when the brewers were going through this very exercise they set 15,000 bbls as their utmost limit because they never imagined going beyond it. "Brewers like Boston Beer (~1,300,000 bbls now) and Sierra Nevada (~700,000 bbls now)," Ryan writes, "were part of these very discussions." We may get one chance to set a lower bar -- let's not shoot ourselves in the foot by aiming too low.

Reduced excise tax rates apply to the first 150,000 proof gallons of spirits if producers make no more than 250,000 proof gallons per year.

Please weigh in on the substance these two issues. Some specific questions that come to my mind:

- Should blenders be included in the producer class? John Glaser of Compass Box comes to mind. He buys and blends whiskies to create incredible vatted malts.

- Subcontract produced brands (dba's) -- should this type of production qualify? Lots of small brands fit this profile but the actual producers tend to be large outfits.

- What about column distillers?

Lastly, I'd like to thank Paul McCann of Parched Group, LLC, a former government policy analyst, who's volunteered to perform a simple financial analysis of this proposal to show how much revenue loss reduced excise rates may generate vs positive impact of more U.S. job creation (as most of our products compete with imports, not domestic brands).

[cowdery]

What do you mean by column producers? Do you mean a continuous distillation process with a rectification column with different compounds taken off at the different points along the column?

There may be some misunderstanding about how column stills are used by American straight whiskey producers. "Different compounds" are not "taken off at the different points along the column," unless I misunderstand what you mean. What you are describing sounds like an oil refinery, not a bourbon distillery's continuous beer still. The rectification section of a bourbon beer still operates exactly the same way a rectification column operates on a so-equipped pot still. I will acknowledge that there is a very narrow distinction between batch and continuous, and that operating in a batch environment is a different kind of crafting, but I don't see why a small scale bourbon distillery, like the one Steve Nally is building in Wyoming (or was it Montana?) would be excluded from small producer status because he does his first distillation in a small continuous column still. Especially since his way is the way Americans have made American whiskey for about 150 years. You would be excluding anyone who wants to make bourbon or rye whiskey in the usual way, but on a smaller and more hand-crafted scale. Do you really want to do that?

[Jonathan Forester]

When I made my comment I wasn't referring to whiskey, but GNS. I may have misunderstood the question since I was exhausted after a long week.

I've only seen and used batch, pot and hybrid stills. So, to educate those of us like me who don't know much about how the large scale whiskey industry works, or continuous column distillation on a large scale in general. Tell me a bit more about continuous whiskey distillation. I have seen refineries, and read about the giant continuous alcohol stills producing GNS and I thought that they take off the ethanol, methanol, and other compounds the same way as do refineries.

So the continuous whiskey still just a beer stripper, then is it batch processed in a spirits run? Wouldn't there a lot of waste in a continuous column? And a lot of flavor loss? Does all the alcohol get extracted?

In general what would be the differences in production, besides quantity, between batch and continuous, to say whether the spirit is craft/artisanal, or not?

There may be some misunderstanding about how column stills are used by American straight whiskey producers. "Different compounds" are not "taken off at the different points along the column," unless I misunderstand what you mean. What you are describing sounds like an oil refinery, not a bourbon distillery's continuous beer still. The rectification section of a bourbon beer still operates exactly the same way a rectification column operates on a so-equipped pot still. I will acknowledge that there is a very narrow distinction between batch and continuous, and that operating in a batch environment is a different kind of crafting, but I don't see why a small scale bourbon distillery, like the one Steve Nally is building in Wyoming (or was it Montana?) would be excluded from small producer status because he does his first distillation in a small continuous column still. Especially since his way is the way Americans have made American whiskey for about 150 years. You would be excluding anyone who wants to make bourbon or rye whiskey in the usual way, but on a smaller and more hand-crafted scale. Do you really want to do that?

[cowdery]

I will frankly admit that to answer your questions will push me to the limit of my expertise, but I will tell you what I know. Dave Scheurich, who runs Woodford Reserve, had a good article about it in a recent issue of DISTILLER.

Jonathan wrote: "So the continuous whiskey still just a beer stripper, then is it batch processed in a spirits run?"

Yes, exactly. The heated beer enters the still about 2/3 of the way up the column. Everything below beer entry is the stripping section (about a dozen plates). Everything above is the rectification section (0-6 plates). There are some design variations in the rectification sections. All vapor goes out at the top, spent mash goes out at the bottom. Then the vapor is either condensed in the conventional way before going into an alembic still, called a doubler, or flash condensed in a type of doubler called a thumper, which also is an alembic.

Jonathan wrote: "Wouldn't there a lot of waste in a continuous column? And a lot of flavor loss?"

I don't know.

Jonathan wrote: "Does all the alcohol get extracted?"

Yes.

I have been learning during this discussion. For example, I now accept that there is a distinction, albeit a small one, between the manipulation you can do with a batch process, compared with a continuous still. The significance of that distinction will be for someone with more expertise than I have to say, but I don't think it's dispositive, as in continuous bad-batch good.

So my basic contention hasn't changed much. When the average person hears "pot still" they think alembic. If you are saying "pot still" and not using a traditional alembic, you may be misleading people. The fact that a column-equipped pot still can be operated without using the column seems irrelevant to that issue.

[delaware_phoenix]

It's my understanding that there's a clear difference between continuous distillation and a fractionating column. They are often confused. Google "coffey patent still" for a lot of info.

[Denver Distiller]

I have been learning during this discussion. For example, I now accept that there is a distinction, albeit a small one, between the manipulation you can do with a batch process, compared with a continuous still. The significance of that distinction will be for someone with more expertise than I have to say, but I don't think it's dispositive, as in continuous bad-batch good.

A beer stripper that is used in typical large scale US whiskey distilleries is used for efficiency, yes.....but also because the whiskey wash is loaded with solids. Mr. Cowdery will no doubt tell you that Woodford Reserve has tried to use pot stills for bourbon production, and the burn on in those massive stills affected the spirit, and not in a positive way. Now they blend, blend, blend. You've got all the corn, rye, and malt husks together with the yeast coming in direct contact with steam-filled pipes.

A beer stripper, continuous still, or whatever you wish to call it, makes a softer spirit because there aren't any heated surfaces.

I don't see how using a beer stripper, (or even a continuous vodka still IMHO), is any less of a craft than a regular ol' potstill. You have to know what you're doing regardless of what you have.

I do think, though, that you should at least have a still of some kind to qualify for this tax break. Kinda defeats the purpose a bit to call someone a craft distiller if they don't have a still. Those that don't have to fire up the still are saving a bunch of $$ in labor, so why give them a tax break?

Make a ceiling for proof gallons, and make the distiller have to own a still. Nice and easy, cut and dry, and the smaller distiller gets the tax break, while the larger distiller does not. Even a US Congressman should be able to figure that legislation out.

Just my opinion.

[Melkon Khosrovian]

I do think, though, that you should at least have a still of some kind to qualify for this tax break.

This proposed tax tier is for all craft spirits makers, not just distillers.

Kinda defeats the purpose a bit to call someone a craft distiller if they don't have a still.

That's why we need to define the category more broadly with the emphasis on craft vs tools.

Those that don't have to fire up the still are saving a bunch of $$ in labor, so why give them a tax break?

Those who don't have stills have sometimes invested as much or more in blending and aging containers, barrels, filtration equipment, bottling lines, etc. -- nearly identical capital costs with similarly low economies of scale as operations that use stills. Plus, there are no labor savings when you hand zest a thousand pounds of lemons, slice and scape hundreds of pounds of vanilla beans or cut hundreds of pounds of green walnuts by hand. All small craft makers should benefit from a lower tax tier because we're all similarly hindered in pricing power and operational efficiency compared to large producers.

[Charles@AEppelTreow]

All small craft makers should benefit from a lower tax tier because we're all similarly hindered in pricing power and operational efficiency compared to large producers.

Well Said!

The winery small producer tax credit does not make any attempt to favor estate vineyards over truck and press operations or grapes over cider over mead. Likewise, any complicated strings you try to tie onto this to try to limit it will make the TTB's job harder. They'll have to collect the info to enforce it. They probably won't appreciate the extra work, and you might not appreciate the extra scrutiny.

Keep it simple.

Regarding the high jump in effective tax rate across the eligibilty threshold, I think the wine producers credit avoids the problem by diminishing the size of the credit between 150,000 gallons and 250,000 gallons on a sliding scale.

I'm in favor of the proposal, though I'm currently just a simple cidermaker.

Charles McGonegal

AEppelTreow Winery

Burlington, WI

BW-WI-66

DSP-WI-10000

[Denver Distiller]

Plus, there are no labor savings when you hand zest a thousand pounds of lemons, slice and scape hundreds of pounds of vanilla beans or cut hundreds of pounds of green walnuts by hand. All small craft makers should benefit from a lower tax tier because we're all similarly hindered in pricing power and operational efficiency compared to large producers.

Others were discussing whether or not the use of a column still constitutes a 'craft'. My apologies for adding my own views, as apparently this is not the time or the place for such things.

I support the proposed legislation as proposed. Thank you for working on it, Mr. Khosorovian.

Todd Leopold

Leopold Bros. Small Batch Distillers

[Melkon Khosrovian]

Thanks for your support, Todd.

Your point is absolutely valid, but in a different context. For our efforts to create a lower excise tier, we need to keep things broad and simple to even have a chance to get a bill proposed.

[Penn]

Please add:

The American Distilling Institute

and

The Brewers of Indiana Guild

Thanks!

Penn Jensen, VP, ADI

Executive Director, B.I.G.

[Gwydion Stone]

I'd like to get some clarification on the intent of the legislation. In a nutshell, it appears to be about giving the small guys a break because economy of scale is not in our favor and we are thereby inequitably penalized by the same taxes the big guys pay. Am I understanding that correctly?

If that's the case, we're arguing at cross purposes to revisit the "what qualifies as craft distilling" discussion. I believe that's a very important, in fact vital, discussion to have, but I don't think it's relevant to the reduced tax issue. We appear to be talking about scale, and anyone who is paying the excise tax is a part of the issue. Means of production has nothing to do with it. The likelihood that craft diminishes as scale increases has little to do with whether a particular small producer deserve a tax break.

If you want to get into incentives for particular processes, supporting local ag, etc., that's a different topic as I see it. If the idea is to give a guy a break for using local raw materials, then scale is not as relevant and a big producer deserves the incentive as much as the small guy. Maybe more so, since the scale of his production could have a profound impact, whereas a small producer... not so much.

For perspective, who are the big guys who deserve or can afford to pay a higher tax? Big Liquor? Hood River? They produce millions of cases a year. HRD does around 12,000,000 (twelve million) gallons a year if I read the stats correctly. No matter how you look at it, the federal tax paid by all microdistillers combined doesn't compare to what the few huge companies are paying. They could lose our taxes in the gutter and never notice. We are all tiny, every one of us. I support a much higher ceiling; one that encourages rather than penalizes growth, yet still gives an incentive to stay relatively small and local. Somewhere around 100,000 to 150,000 gallons per year.

Interesting chart:

[Melkon Khosrovian]

I'd like to get some clarification on the intent of the legislation. In a nutshell, it appears to be about giving the small guys a break because economy of scale is not in our favor and we are thereby inequitably penalized by the same taxes the big guys pay. Am I understanding that correctly?

This nails it on the head! We're trying to create a level playing field for small, innovative producers. How they produce -- while relevant in other contexts -- is secondary for this effort.

Interesting chart:

This is a very interesting chart. What's the source? This type of data will be useful in making our case. Could you share the raw data?

[delaware_phoenix]

I'd have to go look, but TTB has stats on their web site. Probably just raw data, but could be useful.

I remember when I was working on the business plan, I found a figure that the liquor industry was $37 Billion big in direct sales of alcoholic beverages (I think that was all beer, wine and spirits). That's just the US.

[cowdery]

The purpose of the reduced tax rate is to encourage rapid development of a new, young, domestic industry.

[Andrew]

The purpose of the reduced tax rate is to encourage rapid development of a new, young, domestic industry.

This is a great sentence, clear and concise. I'd like to suggest its addition or integration to the Goal line of the Proposal.

[Melkon Khosrovian]

Thanks for everyone who's voiced support! We've got 34 so far. Still missing many...

Current Producers

1. Modern Spirits LLC 168 W Pomona Ave, Monrovia, CA

2. Colorado Gold LLC, Cedaredge, CO

3. Tuthilltown Spirits, Gardiner, NY

4. Dry Fly Distilling, Spokane, WA

5. Ellensburg Distillery LLC Ellensburg, WA

6. Dynamic Alambic Artisan Distillers LLC Mattawa, WA

7. Great Lakes Distillery LLC, Milwaukee, WI

8. Drum Circle Distilling, Sarasota, FL

9. Grand Traverse Distillery, Traverse City, MI

10. Mystic Mountain Distillery, Larkspur, CO

11. Pacific Distillery LLC, Woodinville, WA

12. Delaware Phoenix Distillery, Walton, NY

13. Heartland Distillers, Fishers, IN

14. Fat Dog Spirits, Tampa, FL

15. Harvest Spirits LLC, Valatie, NY

16. Cascade Peak Spirits, Ashland, OR

17. New Holland Brewing Co. and Artisan Spirits, Holland, MI

18. Newport Distilling Company, Newport, RI

19. 45th Parallel Spirits LLC. New Richmond, WI

20. Gnostalgic Spirits, Ltd., Portland, OR

21. Blackwater Distilling Inc., Annapolis, MD

22. Cold Smoke Distillery Inc., Bozeman, MT

23. The Solas Distillery, Omaha, NE

24. Parched Group LLC, Richmond, VA

25. AEppelTreow Winery, Burlington, WI

26. Leopold Bros. Small Batch Distillers, Denver, CO

27. The American Distilling Institute

28. The Brewers of Indiana Guild

29. Sweetgrass Farm Winery & Distillery, Union, ME

30. Downslope Distilling Inc., Littleton, CO

31. North Shore Distillery LLC, Lake Bluff, IL

Producers In Licensing Process

1. Sherman in KY

2. Paul in CA

3. Penobscot Bay Distillery, Winterport, ME