Alcoholic Beverage Tax on a Craft Brewery
A craft brewery in San Diego produces 50,000 barrels of beer annually. It sells 30,000 barrels to wholesalers in California, 10,000 barrels directly to consumers at its taproom, and 10,000 barrels to out-of-state distributors. The brewery also operates a small distillery producing 5,000 gallons of spirits per year, sold only within California. The brewery is uncertain about its alcoholic beverage tax obligations. It has not filed any excise tax returns, believing that as a small producer it is exempt. The California Department of Tax and Fee Administration (CDTFA) conducts an audit for the past three years. The brewery argues that its beer sold out-of-state should not be subject to California excise tax, and that its small distillery operation should qualify for a reduced rate. The brewery also claims that sales to wholesalers are exempt because the wholesaler pays the tax.
1. Is the brewery's beer sold to out-of-state distributors subject to California excise tax? Explain.
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Under California law, the excise tax on beer is imposed on the first sale in California, which is typically the sale from the manufacturer to a wholesaler or retailer. Beer that is sold and shipped to a point outside California is generally not subject to California excise tax if the sale occurs in interstate commerce and the property is delivered outside the state. However, the brewery must maintain proper documentation to substantiate that the beer was exported. For beer sold to out-of-state distributors, if the brewery transfers title or delivers the beer to the distributor in California, the sale may be considered a California sale and subject to tax, unless the contract specifically provides for out-of-state delivery and the brewery arranges shipment. The brewery should review the terms of sale and shipping documents. If the beer is shipped by the brewery to an out-of-state location, it is exempt. If the distributor takes possession in California, the sale is taxable. Therefore, the 10,000 barrels sold to out-of-state distributors may or may not be taxable depending on the facts. The brewery should not assume exemption; it must prove exportation.
2. Does the brewery's small distillery operation qualify for a reduced excise tax rate? What is the tax rate for spirits?
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California imposes an excise tax on spirits at a rate of $3.30 per gallon (as of 2023). There is no reduced rate for small distilleries; the same rate applies to all producers. However, there is a credit for certain small producers? Actually, California does not have a small distiller exemption for excise tax purposes. The federal government has a reduced rate for small distillers, but California does not conform. Therefore, the brewery's 5,000 gallons of spirits are subject to the full $3.30 per gallon tax, amounting to $16,500 per year. The brewery must file returns and pay the tax. The brewery's belief that it is exempt due to small size is incorrect. Additionally, the brewery must be licensed and comply with reporting requirements. Penalties and interest may apply for late payment.
3. Are the brewery's sales to wholesalers exempt from excise tax because the wholesaler pays the tax? Explain.
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No, the excise tax is imposed on the manufacturer or importer at the first sale. The wholesaler does not pay the excise tax; the manufacturer does. The brewery is liable for the excise tax on beer sold to wholesalers in California. The tax is included in the price and may be passed on, but the legal liability rests with the brewery. The brewery cannot claim exemption simply because the wholesaler is licensed. Therefore, the 30,000 barrels sold to wholesalers are subject to excise tax at the rate of $0.20 per gallon (for beer). The brewery must report and pay the tax. The audit will assess tax on all taxable sales, including those to wholesalers, plus penalties and interest.