Federal Excise Tax and my thoughts

[Dehner Distillery]

Hello, 

The Federal Excise Tax will help use all out, no doubt.  Here are some things you want to think about. 

1. It is on the first 100,000 Proof gallons per DSP. I do contract bottling, each DSP is worth $1,080,000 if maxed out. I will be applying for another DSP to take advantage of this. I will be applying for more if I come close to maxing out my first 2 DSP's.

2. My bond for my DSP lets says is $80,000 @ $13.50 a proof gallon I could only have 5925 Proof gallons on hand at any time. But now $80,000 bond I can have 29,629 proof gallons on hand at any time. So for people that have no bond or a $20,000 they can have 7407 proof gallons.

3. If this is not made permanent by 2020. I highly suggest to have cash stock piled and remove as much finished product as you can to your unbounded area even if it a storage unit before the end of December 31, 2019 so you can pay the $2.70 a proof gallon.

4. This was made to help out the little guys, correct? Well I can tell you if I was Brown Forman, or Diago, or any of the big guys I would take full advantage of this new law. If I was them I would build an industrial park with 200, 10,000 sq ft bays. I would then have a main tank farm in the middle feeding each bay, or feed off a tanker truck outside. I would set up 3 bottling lines on skids. Each of the 200 bays would have there very own DSP. I would start with bay 1 and reach the 100,000 pg limit and start the next bay, meanwhile move the filling equipment to bay 4 and keep staging equipment until all 200 DSP's were used up. 200 DSP's is worth $216,000,000. To me that would seem like easy money.

 

I have made it my mission to help other distilleries out. I talk to people all over the country everyday. I offer my thoughts and suggestions with a grain of salt.

Take Care:

Joseph Dehner

515-5594879

joseph@dehnerdistillery.com

 

[Silk City Distillers]

I only briefly read the language in the bill, but I believe there are provisions covering ownership structure that addresses the loophole.

[John Bassett]

I am in shock.   I presume the expectations are for distilleries to invest in themselves and/or share with the public.    

[Jedd Haas]

1 hour ago, Silk City Distillers said:

I only briefly read the language in the bill, but I believe there are provisions covering ownership structure that addresses the loophole.

Exactly. Read the section on "controlled groups." I also haven't read it in great detail, but it appears that the purpose is to prevent precisely the kinds of schemes Joe theorized about.

However, the idea of paying tax at the end of 2019 and moving product to unbonded storage may work.

[Silk City Distillers]

Other major changes to chat about...

We can deduct expenses for production at the time of manufacture, huge for those of us laying down spirits for aging.  Not only that, but massively simplifies reporting/recording for tax purposes.

One year expensing for capital investments, some big incentive to invest and upgrade ASAP.

For those of us structured as pass-thru entities, big tax reduction.

[Dehner Distillery]

1 hour ago, Jedd Haas said:

Exactly. Read the section on "controlled groups." I also haven't read it in great detail, but it appears that the purpose is to prevent precisely the kinds of schemes Joe theorized about.

However, the idea of paying tax at the end of 2019 and moving product to unbonded storage may work.

Does anyone have a link that they could send?

[Jedd Haas]

The final bill has now been signed into law. You can google "pdf of tax bill" or similar to download a copy.

Here is the portion on FET:

SEC. 13807. REDUCED RATE OF EXCISE TAX ON CERTAIN DISTILLED SPIRITS.

(a) IN GENERAL.—Section 5001 is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection: ‘‘(c) REDUCED RATE FOR 2018 AND 2019.—

‘‘(1) IN GENERAL.—In the case of a distilled spirits operation, the otherwise applicable tax rate under subsection (a)(1) shall be—

‘‘(A) $2.70 per proof gallon on the first 100,000 proof gallons of distilled spirits, and

‘‘(B) $13.34 per proof gallon on the first 22,130,000 of proof gallons of distilled spirits to which subparagraph (A) does not apply, which have been distilled or processed by such operation and removed during the calendar year for consumption or sale, or which have been imported by the importer into the United States during the calendar year.

Here is the portion on "controlled groups."

‘‘(2) CONTROLLED GROUPS.—

‘‘(A) IN GENERAL.—In the case of a controlled group, the proof gallon quantities specified under subparagraphs (A) and (B) of paragraph (1) shall be applied to such group and apportioned among the members of such group in such manner as the Secretary or their delegate shall by regulations prescribe.

‘‘(B) DEFINITION.—For purposes of subparagraph (A), the term ‘controlled group’ shall have the meaning given such term by subsection (a) of section 1563, except that ‘more than 50 percent’ shall be substituted for ‘at least 80 percent’ each place it appears in such sub section.

‘‘(C) RULES FOR NON-CORPORATIONS.—Under regulations prescribed by the Secretary, principles similar to the principles of subparagraphs (A) and (B) shall be applied to a group under common control where one or more of the persons is not a corporation.

‘‘(D) SINGLE TAXPAYER.—Pursuant to rules issued by the Secretary, two or more entities (whether or not under common control) that produce distilled spirits marketed under a similar brand, license, franchise, or other arrangement shall be treated as a single taxpayer for purposes of the application of this subsection.

[Jedd Haas]

Also, TTB appears to be on top of this. The following notice has been added to the TTB web site:

Congress has passed the Tax Cuts and Jobs Act of 2017, which makes extensive changes to the Internal Revenue Code of 1986, including provisions related to alcohol that are administered by TTB. The Tax Cuts and Jobs Act will become law when the President signs it. We are currently assessing the impact of these changes on TTB forms, regulations, and systems, and will issue guidance and information in the coming weeks.

[Dehner Distillery]

[Dehner Distillery]

So now we can transfer spirits in bottles? It looks that way.

 

 

 

[Roger]

I'm just curious:

For those of you who are actually distillers, are you planning on lowering the prices of your products to allow yourselves to be more price competitive with Big Gulp pricing, or are you going to maintain status quo with pricing and hope to keep the savings ? 

What would be great is if we could fund an advertising program with a small portion of our savings, to try and educate the public about the difference between True Craft Single Distillery Spirits, and bulk produced warmed up commodity spirits.

 

 

[indyspirits]

1 hour ago, Roger said:

For those of you who are actually distillers, are you planning on lowering the prices of your products to allow yourselves to be more price competitive with Big Gulp pricing, or are you going to maintain status quo with pricing and hope to keep the savings ? 

We're planning to add staff.

 

[Skaalvenn]

100% of our tax savings is allocated towards equipment and employees.

[whiskeytango]

Hookers and blow!   Party like its the 80's again. 

 

[bluefish_dist]

Right now I don't plan on lowering prices.  If/when it becomes permanent, I would consider a reduction, but not with a 2 year window.  Too hard to raise prices.   

[Foreshot]

I'm with BlueFIsh, don't lower your prices. Your customers are buying a premium product and they aren't going to buy significantly more on a small price drop. (If you lower your price 10% they aren't going to buy 10% more). If your customers were price sensitive they would be buying a cheaper product anyhow. I'm assuming most of you are charging $30-$50/bottle, so a $2/bottle price drop won't introduce significantly higher sales. This is where marketing comes into play. Where is price when it comes to the most important reasons your customers buy? If its not the top 2-3 reasons then a small price drop won't increase sales. It might feel good to do it but business wise it's better to hold the line.

This is a helper, not a game changer. Keep the money and invest it so that when the 2 years is up you have less debt, more production capabilities, or do some marketing.  Though WhiskeyTango's idea seems the most fun.

Technical term here: https://www.investopedia.com/terms/p/priceelasticity.asp

[Dehner Distillery]

If you lower your prices, your sales had better shoot through the roof. I don't plan on lowering my prices. That 100,000 pg is worth far to much.

[Sator Square Distillery]

Pay down some debt and invest in more equipment. I don't imagine a lot of price reduction going on. This is a gift to producers to help them out, not to consumers that are already paying for products they want.

[bluestar]

On 12/22/2017 at 10:16 AM, Jedd Haas said:

Exactly. Read the section on "controlled groups." I also haven't read it in great detail, but it appears that the purpose is to prevent precisely the kinds of schemes Joe theorized about.

However, the idea of paying tax at the end of 2019 and moving product to unbonded storage may work.

Not only that, but the TTB always has the option of not granting the DSP's request under such ownership and physical plant structures.

[bluestar]

I can see an advantage to lowering prices for product at the lower end, that is otherwise competing with bigger brands, like vodka, and where you can easily ramp up production to meet the growth in demand. For limited production high end product, it probably doesn't make sense, unless you are competing head-to-head with another local producer.

[Dehner Distillery]

I am looking to buy more equipment, and hire lots more people.

[Shilling]

If you are considering lowering your prices, you might also consider that you don't really set your prices (except for onsite sales and a few very minor cases). Prices are set by distributors, retailers and state governments. Most people, it seems, will be adding staff and/or production capacity.

[Dehner Distillery]

My thought is that if you lower your prices then why did you even fight to get this passed? The Idea was so we all could make more money.

Also, until this is permeant you had better hoard your nuts. Pay off loans, any and all debit, get different equipment, ect. if two years rolls around and if goes away your going to feel like a dumb butt lowering your prices.