Extraordinary federal controls on alcoholic beverages are as American as Kentucky bourbon. At first, the federal government controlled alcoholic beverages because the excise taxes on beer and booze were the country’s chief source of revenue. Prohibition in 1920 ended that source of tax money. Thoroughly demonized in the process, alcoholic beverages remained the work of the devil for generations and were regulated accordingly. To this day, in certain ultraconservative corners of the country, beer, spirits, wine, and hard cider retain that sinful cache.
The craft movement is bringing alcoholic beverages out from under that shadow. Today’s regulatory battles are leveling a playing field tilted in favor of large multinational producers and distribution companies with outsized control of national markets. The real financial significance of progress on taxation and regulation reform makes membership in the Brewers Association, American Craft Spirits Association, or the U.S. Association of Cider Makers one of the best business investments an independent producer can make. The craft trade associations should be your first stop when planning to enter one of these business sectors.
The craft beer pioneers and the various groups that have lobbied Congress on their behalf over the past four decades—most notably the Brewers Association (BA)—have been remarkably effective in overhauling beer regulations. Associations representing craft distillers and cider makers are gearing up for similar congressional battles. “The best possible way to get legislation changed is to get the legislators into your distillery,” says Ralph Erenzo, founder of Tuthilltown Spirits in New York’s Hudson Valley. “This is a traditional American craft that disappeared, but it can come back. We are going up against big brands with deep pockets, and we’re trying to push them aside on a fixed store shelf.”
When Erenzo goes to Washington to lobby on behalf of the American Craft Spirits Association, he tells the same story the brewers started telling 20 years ago—craft producers create local jobs and become a lure for tourists to visit often overlooked regions. He is fighting for the same tax relief and relaxed controls on distribution and sales that have been instrumental to the growth of craft beer. “The tax consideration on a federal level is what allowed craft breweries to take off,” he says.
A similar tax break for craft distillers should happen. The large liquor companies “have realized we are not their enemy,” he says. “We are taking all of the chances, creating the brands, and creating the market. We are their next acquisition target,” which suits many craft distillers’ goals. When the larger spirits industry has to fight for a new law, “we’re in every state, a grassroots opportunity to transfer the image of spirits into a small business/tourism/farm support business.” The problem is the craft distillers themselves. “There is a certain wildcatter’s mentality. The lack of organization is a stumbling block to national regulatory reform.”
Craft hard cider makers also want tax relief. To get it, they believe hard cider needs to be recognized as a distinct category separate from wine and beer, according to U.S. Association of Cider Makers president Mike Beck, owner of Michigan-based Uncle John’s Cider. Today, it is regulated as wine. “Hard cider production is a direct benefit for growers. It’s a local product. We need to raise the profile of hard cider in America and explain what it is.”
Without the early and significant federal tax breaks for craft breweries, there might not have been a craft beer revolution. Tax relief for small spirits and hard cider producers is just as critical to the development of these sectors.
The federal fight is fairly straightforward. The more difficult battles are in the states over byzantine regulations controlling distribution and sales. The political compromise necessary for Congress to pass the 21st Amendment and repeal Prohibition in 1933 gave each state the power to impose its own restrictions on production, sales, and distribution of alcoholic beverages. Some states also allow localities to gild the lily and add a layer of regulation all their own.
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Before starting construction, learn which government agencies will need to approve your project—planning commissions, zoning boards, neighborhood associations, the fire department, environmental review boards. Meet with their staffs. Show them detailed plans early in the process. Respond to their concerns when a change only requires a new drawing, not a new building.
There is no quick way to know all of the regulations that might apply to your particular operation or to the building you plan to turn into your brewery/distillery/cider house. When shopping for a location, be aware of the local regulatory environment. There are federal/state/county/city requirements concerning the environmental impact of your operation, fire codes, water use, seismic standards, and zoning. Learn about all of the regulations governing your favorite location before you fall in love with the building. Your goal is to minimize surprises.
A hidden cost is wait time, says Ben Roesch, owner/brewer at Wormtown Brewery (http://wormtownbrewery.com), in Worcester, Massachusetts. “You are supposed to have a constructed facility before you submit your application to the Federal Alcohol and Tobacco Tax and Trade Bureau (TTB), who can take months to get back to you and then may want changes. You give the federal permit to the state, who may take months to approve your license. Then you make any necessary applications to your local government. All of this time you have mortgage or rent payments, equipment loans, employees to pay. And this is after you’ve paid tradespeople to install the equipment and had plumbers and electricians working.” So, be ready to hurry up and wait. Getting through the federal and state red tape can be frustrating.
“Read your state laws before you do anything,” says Erenzo. “Read them again and again until they make sense to you. Cities and counties have their zoning issues. Read those laws again and again. Then worry about the federal laws. It’s complicated but, in general, the feds control production and labeling, and states control distribution and sales.”
Federal Alcoholic Beverage Laws
The U.S. TTB sets the rules for the production, distribution, labeling, advertising, trade and pricing practices, credit, container characteristics, and alcoholic content of each alcoholic beverage. But, in the main, you need to focus on:
Operating permits, label approvals, formula approvals
Distribution
Taxes
Before you apply for your licenses and permits, know what you want to produce (including recipes), how you want to produce it (equipment and facilities), and how you will market and label it (claims you will make to the public). These must be in final form. You need to be ready to start production with construction completed and equipment purchased and installed. That’s a big capital investment to have hanging in the balance while you wait for a stranger to give you a thumbs-up. Do your homework, and don’t leave anything to chance.
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The TTB website—ttb. gov—does a great job detailing their rules and requirements. All of their forms are readily available. The hiccup is when you need to talk to these overwhelmed civil servants or are waiting to hear back from them on a filing. TTB’s budget has been slashed repeatedly during the last several congressional budget battles. And now, facing an avalanche of new applications for operating permits and approvals for formulas and labels, they are short-handed. Be prepared to wait.
“The problem with the TTB is they are underfunded and understaffed,” says Erenzo. “There were ten craft distilleries in 2003, now there are 700 new distilleries with individual labels for each product to be approved. The delays are holding back the economic power of the sector.”
Breweries and distilleries report wait-times of six to eight months for operating permits, even though ttb.gov suggests things move along at a faster clip. These permits involve not just a completed application. There are background checks of you and your key employees, field investigations, equipment and premises examinations, and other paperwork requirements. Label and formula approvals are separate and seem to move along a bit faster. And make sure you meet all requirements for bond coverage by covering all aspects of your plans with your insurance agent.
To sell products, the federally mandated three-tier distribution system requires licensed alcoholic beverage producers be separate from licensed alcoholic beverage distributors, which are separate from retailers. This was intended to end the practice of producer-owned retailers, which were considered anti-competitive.
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The counterbalance to the big distributors is the emergence of new craft-oriented distributors who are creating a parallel distribution track separate from the giant distributors to meet the demand for craft beverages. The opportunity for these new distributors is growing with the rise of craft. Consider hitching a ride to their stars.
Today, it seems an archaic and inefficient system that imposes undue burdens on small producers while giving excessive power to distributors. These state-based businesses have merged into national distribution giants with enormous power. Southern Wine & Spirits (www.southernwine.com), the largest of these distribution giants, dominates alcoholic beverage distribution throughout much of the country. While producers set their own prices, distributors are the gatekeepers to the market and have enormous influence on how various products are sold and at what price.
There are separate federal tax rates for each of the three craft alcoholic beverage categories. Whatever happens, do not fail to pay your federal taxes on time and in full. The “revenue man” DNA is still in the federal alcoholic beverage bureaucracy. They pay careful attention to tax receipts. Pay the Taxman, or he will surely shut you down.
Craft brewers making less than two million barrels of beer a year pay federal excise taxes of $7 per barrel (31 gallons) on the first 60,000 barrels they brew. They pay $18 per barrel on every barrel thereafter, which is the tax rate for larger breweries. So far the only craft brewer to outgrow this federal tax break is Boston Beer. The BA is lobbying for an even deeper tax break for very small breweries, and a slightly lower rate for midsize craft breweries.
Craft distillers receive no federal tax break and pay the same $13.50 per proof gallon (100 proof or 50 percent alcohol), or $4 per each 750 ml bottle paid by Diageo and Pernod-Ricard. New York Senator Charles Schumer and others in Congress are pushing legislation to lower the tax rate for craft distillers in a scheme similar to what craft brewers enjoy. Their argument casts craft distillers as job creators, bringing tourism to underpopulated areas, the same argument that worked so well for craft breweries.
By federal law, hard cider must be made primarily of apple juice and, in most instances, is treated like wine, taxed at a rate of $0.21 per 750 ml bottle or $1.07/gallon if less than 14 percent alcohol. But hard cider is naturally fizzy, which moves many artisan ciders into the “naturally sparkling” category, which is taxed at a rate three-times higher: $0.67 per 750 ml bottle or $3.40/gal. In some cases, depending on a technical analysis of the hard cider, a lower rate may be available for small cider houses. Confusion over which tax rate applies can be costly.
Once again, my friends at Entrepreneur are going to jump in here and fill you in on the details of an essential start-up function--hiring an accountant. They will cover what to look for in an accountant, dos and don’ts of hiring one, and how much to pay for their services.
You want to spend your time brewing the best beer, distilling the finest spirits, or pressing the purest cider. That’s why it is a good idea to hire out the numbers help. Don’t assume only big companies need the services of an accountant. Accountants help you keep an eye on major costs as early as the startup stage, a time when you’re probably preoccupied with counting every paper clip and postage stamp. Accountants help you look at the big picture.
Even after the startup stage, many business owners may not have any idea how well they’re doing financially until the end of the year, when they file their tax returns. Meanwhile, they equate their cash flow with profits, which is wrong. Every dollar counts for business owners, so if you don’t know where you stand on a monthly basis, you may not be around at the end of the year.
While do-it-yourself accounting software is plentiful and easy to use, it’s not the sole answer. Just as having Microsoft Word does not make you a writer, having accounting software doesn’t make you an accountant. Software can only do what you tell it to do—and a good accountant’s skills go far beyond crunching numbers.
In fact, perhaps no other business relationship has such potential to pay off. Nowadays, accountants are more than just bean counters. A good accountant can be your company’s financial partner for life—with intimate knowledge of everything from how you’re going to finance your next forklift to how you’re going to finance your daughter’s college education.
While many people think of accountants strictly as tax preparers, in reality, accountants have a wide knowledge base that can be an invaluable asset to a business. A general accounting practice covers four basic areas of expertise:
1. Business advisory services
2. Accounting and record-keeping
3. Tax advice
4. Auditing
These four disciplines often overlap. For instance, if your accountant is helping you prepare the financial statements you need for a loan, and he or she gives you some insights into how certain estimates could be recalculated to get a more favorable review, the accountant is crossing the line from auditing into business advisory services. And perhaps, after preparing your midyear financial statements, he or she might suggest how your performance year-to-date will influence your year-end tax liability. Here’s a closer look at the four areas:
1. Business advisory services. This is where accountants can really earn their keep. Since the accountant is knowledgeable about your business environment, your tax situation, and your financial statements, it makes sense to ask him or her to pull all the pieces together and help you come up with a business plan and personal financial plan you can really achieve. Accountants can offer advice on everything from insurance (do you really need business interruption insurance, or would it be cheaper to lease a second site?) to expansion (how will additional capacity affect operating costs?). Accountants can bring a new level of insight to the picture, simply by virtue of their perspective.
2. Accounting and record-keeping. Accounting and record-keeping are perhaps the most basic accounting discipline. However, most business owners keep their own books and records instead of having their accountant do it. The reason is simple: If these records are examined by lenders or the IRS, the business owner is responsible for their accuracy; therefore, it makes more sense for the owner to maintain them.
Where accountants can offer help is in initially setting up bookkeeping and accounting systems and showing the business owner how to use them. A good system allows you to evaluate your profitability at any given point in time and modify prices accordingly. It also lets you track expenses to see if any particular areas are getting out of hand. It lets you establish and track a budget, spot trends in sales and expenses, and reduce accounting fees required to produce financial statements and tax returns.
3. Tax advice. Tax help from accountants comes in two forms: tax compliance and tax planning. Planning refers to reducing your overall tax burden; compliance refers to obeying the tax laws.
4. Auditing. Auditing services are required for many different purposes, most commonly by banks as a condition of a loan. There are many levels of auditing, ranging from simply preparing financial statements from figures that you supply all the way up to an actual audit, where the accountant or other third party gives assurance that a company’s financial information is accurate.
The best way to find a good accountant is to get a referral from your attorney, your banker, or a business colleague in the same industry. If you need more possibilities, almost every state has a Society of Certified Public Accountants that will make a referral. Don’t underestimate the importance of a CPA. This title is only awarded to people who have passed a rigorous two-day, nationally standardized test. Most states require CPAs to have at least a college degree or its equivalent, and several states also require post-graduate work.
Accountants usually work for large companies; CPAs, on the other hand, work for a variety of large and small businesses. When dealing with an accountant, you can only hope he or she is well-educated and well-versed in your business’s needs. Passing the CPA exam, however, is a guarantee of a certain level of ability. Once you have come up with some good candidates, a little preparation is in order before you interview them. The first step in setting the stage for a successful search is to take an inventory of what you will need. It is important to determine beforehand just how much of the work your company will do and how much of it will be done by the accountant.
Accounting services can be broken down into three broad categories: recording transactions, assembling them, and generating returns and financial statements. Typically, the latter part—that is, the generation of returns and financial statements—requires the highest level of expertise. But though the other activities require a lower skill level, many firms still charge the same hourly rate for them. Given the level of fees you are prepared to pay, you must decide where your responsibility stops and where the accountant’s begins.
Once you have compiled your documentation and given some thought to your expectations, you’re ready to interview your referrals. Five candidates is a good number to start with. For each candidate, plan on two meetings before making your decision. One of these meetings should be at your site; one should be at theirs. Both parties need to know the environment the other works in. Your principal goal is to find out about three things: services, personality, and fees.
1. Services. Most accounting firms offer tax and auditing services. But what about bookkeeping? Management consulting? Pension fund accounting? Estate planning? Will the accountant help you design and implement financial information systems? Other services a CPA may offer include analyzing transactions for loans and financing; preparing, auditing, reviewing, and compiling financial statements; managing investments; and representing you before tax authorities.
Although smaller accounting firms are generally a better bet for entrepreneurs, they may not offer all these services. Make sure the firm has what you need. If it can’t offer specialized services, such as estate planning, it may have relationships with other firms to which it can refer you to handle these matters. In addition to services, make sure the firm has experience with small business and with your industry. Someone who is already familiar with the financial issues facing your particular avenue of the craft industry won’t have to waste time getting up to speed.
2. Personality. Is the accountant’s style compatible with yours? Be sure the people you are meeting with are the same ones who will be handling your business. At many accounting firms, some partners handle sales and new business, then pass the actual account work on to others.
When evaluating competency and compatibility, ask candidates how they would handle situations relevant to you. For example: How would you handle a change in corporation status from S to C? How would you handle an IRS office audit seeking verification of automobile expenses? Listen to the answers, and decide if that’s how you would like your affairs to be handled.
Realize, too, that having an accountant who takes a different approach can be a good thing. If you are super conservative, it’s not a bad thing to have an accountant who exposes you to the aggressive side of life. Likewise, if you are aggressive, it’s often helpful to have someone who can show you the conservative approach. Be sure that the accountant won’t pressure you into doing things you aren’t comfortable with. You need to be able to sleep at night.
3. Fees. Ask about fees upfront. Most accounting firms charge by the hour; fees can range from $100 to $275 per hour. However, there are some accountants who work on a monthly retainer. Figure out what services you are likely to need and which option will be more cost-effective for you.
Get a range of quotes from different accountants. Also try to get an estimate of the total annual charges based on the services you have discussed. Don’t base your decision solely on cost, however; an accountant who charges more by the hour is likely to be more experienced and thus able to work faster than a novice who charges less.
At the end of the interview, ask for references—particularly from clients in the same industry as you. A good accountant should be happy to provide you with references; call and ask how satisfied they were with the accountant’s services, fees, and availability.
Finding and hiring a reputable accountant will save you considerable money in the long run.
Just when you think the financial and regulatory fun is more than you can handle, here come the alcoholic beverage laws! Lest you think there is just one set of laws, each of the 50 states and the District of Columbia has its own distinct set of rules for each kind of alcoholic beverage.
With the repeal of Prohibition, the federal government got out of the business of regulating alcohol distribution and gave it to the states. The resulting state-specific regulations means a production facility may meet the requirements of its home state, yet fall short of the requirements necessary to sell products in the state next door. It is often easier to sell products overseas than it is to sell to another state. Below, we’ve detailed a few states and the ways in which they do business to show you just how diverse the business environment can be for the craft industry. See Figure 4–1 on page 59 for more information on craft beer in each state.
“We still had Prohibition marketing laws [in Texas] when we opened in 1994,” says Brock Wagner, founder of Saint Arnold Brewing Company (www.saintarnold.com) in Houston. “You could not have a pre-arranged promotion at a bar or restaurant. You could have a promotion, but you couldn’t tell anyone you were going to have it. It was like throwing a party without inviting anyone,” says Wagner. “If you opened a brewery, you couldn’t sell beer there. Taprooms are critical for a small brewery to survive.
FIGURE 4–1: Top 50 U.S. Craft Brewing Companies
(Based on 2014 beer sales volume) Credit: Brewers Association
“The legislature was in the pocket of the beer wholesalers. Mike McKinney was the evil player. [As head of the state association representing the beer distributors] he was the most powerful lobbyist in Texas. He had money and he threw it around. Politicians told me, ‘We love you but the wholesalers give us too much money. We can’t help you.’ He passed away a couple of years ago. We got the taproom law changed this year,” in 2014.
“The beer wholesalers are some of the wealthiest people in the country. One hundred percent of the alcohol in this country goes through their hands. Texas has thousands of alcoholic beverage suppliers, and thousands of retailers, and two or three [distributors] get a 25 percent cut of everything sold. Texas regulators acted as a collection agency for the distributors. You bounce a check to a distributor, the Texas Alcoholic Beverage Commission came after you,” said Wagner.
Ron Extract, founder of Jester King Brewery (http://jesterkingbrewery.com) in Austin, adds, “A lot of work still needs to be done to make Texas competitive with the rest of the country. But it’s gotten better. When we started four years ago, there were only 25 breweries in Texas. Now there are more than 100 and lots more are planned.”
In general, direct sales, brewery tours, brewpubs, microbreweries, excise taxes, packaging, and franchising regulations are more stringent throughout the southern half of the country. While craft producers are as likely to be Republicans as Democrats, progressive states have been more willing to roll back Prohibition-era laws, even when those rollbacks upset the interests of companies reliant on those established regulatory hierarchies. New York State is among the most aggressive states in this regard.
Undoubtedly, New York is the most craft-friendly state. Each year for the last four years, Governor Andrew Cuomo has taken further steps to support the state’s craft breweries, distilleries, cideries, and wineries. He has made on-site sales of both by-the-glass and packaged goods legal, simplified or eliminated state permitting, enacted tax cuts; abolished bond requirements, and provided grants for marketing support and self-distribution. The goal is to foster small business development and help the state recover from the recession. New York craft producers who source at least 51 percent of their ingredients in-state are the big winners. “They leap-frogged everyone,” says Rodewald. “It’s smart. They don’t have an industrial liquor industry, and they elevated their local grain and produce production out of the commodity market.”
“Within the liquor industry there is enormous opportunity for growth with the explosive interest in local products,” says New York State Liquor Authority chairman Dennis Rosen. “There are now some very big beer companies that started out very small. We are doing this to grow the industry and employ a lot of people, which is a wonderful thing. It’s not that New Yorkers are drinking more. We are cutting into the global companies’ share of the market.” New York State producers employing New York State residents are creating goods that supplant products produced in other countries. “The vibrations of that are felt down the line in wide-ranging ways,” he says.
“With things like self-distribution, we’ve carved out exemptions to the three-tier system for small producers. Generally, those tiers have to be independent of each other. We can’t extend the exemptions too far without getting sued for violating the commerce clause.” At this point, Rosen says the state has gone as far as it believes it can to support craft producers. The push back from large producers and distributors, he says, has become significant.
Rosen’s next step is to try to clarify New York’s alcoholic beverage laws. “We are operating with laws that were written as the nation was coming out of Prohibition. There are rules that don’t seem to make sense now. Everyone complains that the laws are anachronistic. One of the things very disappointing to me as we work on a top-to-bottom revision is that the larger interests oppose what we’re doing. No matter how flawed the system, it works well for them.”
New York’s holistic approach to nurturing the craft sector is having an impact. Between 2011 and 2014, the number of New York microbreweries increased 175 percent to 109 breweries; brewpubs increased 230 percent to 33; cider producers increased five-fold to 28; farm distilleries increased from 10 to 51; other small distilleries increased 164 percent to 37. There are 70 new farm breweries since that license was approved in 2012. Rosen points to New York City residents’ new awareness of the rest of the state and support for what’s happening outside the city as a positive result.
This progressive approach to supporting craft is spreading, particularly in the area of self-distribution and direct sales. Small breweries, distilleries and cider houses in more and more states are able to sell directly to customers, not just in their taprooms, but also by delivering kegs and packaged goods to restaurants and convenience stores. Even in Utah, which historically has had regressive alcoholic beverage laws, Park City’s High West Distillery (www.highwest.com) sells bottles of its Rendezvous Rye in its distillery store and serves drinks at a bar in the distillery.
States you would expect to be on the forefront of regulatory change, such as California, have been slower to buck entrenched alcoholic beverage companies.
In California, spirits producers are gearing up to fight for a New York-style regulatory overhaul. Currently, they are limited to selling a thimbleful of a maximum of six different products to distillery visitors. “We need to be able to sell from our distillery tasting room. It is the only way to tell your story to consumers and know that they understand what you are doing,” says Cris Steller, executive director of the California Artisanal Distillers Guild and founder of Dry Diggings Distillery (www.drydiggingsdistillery.com) in El Dorado, California.
FIGURE 4–2: State-by-State Map of Craft Distilleries
Reprinted with permission of Michael Kinstlick and ADI. © 2012 Michael Kinstlick. All rights reserved.
“Distributors are fighting back hard. California is one of the top five markets for spirits in the world, and they think they are going to give up market share if we can sell out of our distilleries. They cast it as ‘holding the line against demon booze.’ But when Utah looks progressive, you know you are behind. New York, Colorado, Washington, Oregon all leapfrogged us. California is down at the bottom with Alabama and Kansas,” says Steller, noting that when he lobbied Governor Jerry Brown on the issue, “he didn’t even know about the rules and called it ‘ridiculous.’ We’ll have this in another year.”
“There is no easy money in distilling,” he says. “What I’m doing makes no sense as a business. It’s hard work, time, effort, and luck. The industry is driven by bartenders and mixologists. If someone is going to pay me what my bourbon costs to make, they are going to want to meet me, come to my distillery, and taste it with me and ask lots of questions. People will spend the money. They just want to know why it is worth it.” See Figure 4–2 for a look at the country’s full range of craft distilleries.
States regulate the relationship between alcoholic beverage producers and distributors through franchise laws. You can enter a franchise relationship with a simple verbal agreement to move a single shipment through a distributor. But if your distributor turns out to be a disappointment, you may be stuck in a loveless relationship.
Franchise laws were designed to correct a perceived imbalance in bargaining power between powerful, national brewers, and the smaller state-specific wholesalers who serve them. In reality, consolidation has made both sides of that equation evenly balanced. The mice in the room are craft producers. Cancellations, failures to renew, attempts to modify a distribution agreement are all restricted by franchise laws written to protect the distributor.
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Keep your eye on the horizon when it comes to alternate formats for sales and shipping. Brick-and-mortar locations are the heart of the craft business, but many businesses are trading on a savvy online buyers’ market as well. The next regulatory hurdle? “Internet sales and direct shipments to customers will be huge,” Pak told the group. “Things are changing fast to make this happen.”
Worse, franchise laws vary by state. The BA has created a database of U.S. beer franchise laws governing beer sales in each state. Before entering a contract with a wholesaler, learn how specific states regulate this relationship because state laws may trump contract terms. With spirits, there are two types of state regulatory environments. Open states allow alcoholic beverages to be sold through private entities; control states sell through state liquor control boards. State franchise laws trump distribution contracts for spirits in open states just as they do for beer.
Eugene Pak, an attorney with the law firm of Wendel, Rosen, Black & Dean specializing in brewery law, suggests getting professional help before entering any distribution arrangements. Mistakes here are critical. “Set a term for your distribution agreements to expire. Most states prohibit termination without cause,” he says. And if they do allow you to walk away from an unhappy relationship, you will pay dearly—one to five times your net profits.
There is great disparity and volatility in state taxation rates. For beer, Tennessee has had the highest state excise tax at $1.17 per gallon followed by Florida and Georgia at 48 cents per gallon. Wyoming has the lowest at two cents per gallon. The U.S. average rate is about 19 cents per gallon.
There were no craft breweries in Springfield, Illinois, in 2010, when Chris Trudeau graduated from design school and convinced his mom they should work together and build one on the family farm near the city. Trudeau’s high school friend and his mom joined up to make it a team of four at Rolling Meadows Brewery (http://rollingmeadowsbrewery.com). After a course in beer making at Chicago’s Siebel Institute of Technology and then some classes at the University of California at Davis in their legendary brewery program, they drafted plans to build a seven-barrel brewery using the farm’s soft red wheat and wild hops.
As they were designing the new brewery, Anheuser-Busch In-Bev sued Illinois claiming Illinois’ small brewer exemption to the three-tier system was “thinly veiled economic protectionism” favoring in-state brewers and a violation of the Commerce Clause inhibiting interstate commerce. “Basically, Anheuser-Busch was trying to take away our right to self-distribute. They didn’t like the fact that Illinois craft brewers were allowed to sell directly to taverns and retailers while out-of-state brewers, like themselves, had to use a middleman,” says Trudeau. “If Rolling Meadows had to pay a distributor, it would have messed up our whole business plan. We thought we would have to sell our brewery equipment or switch to making soda. Then we decided to push back.”
Once the suit was filed, the judge stopped all self-distribution and asked the state legislature to take up the issue. “I was crapping my pants. We’re depending on the dysfunctional Illinois state government to do something quickly? I called my state representative, Rich Brauer. He asked me how much beer I made. I told him we make 15,000 barrels a year and self-distribute half of that,” Trudeau says, taking a stab at what those numbers would be if they ever got a chance to build the brewery then sitting in boxes.
“Suddenly I became a lobbyist, competing head-on with Budweiser’s lobbyists and the big distributors’ lobbyists, all people I had no intention of ever tangling with. I showed up for a hearing on the bill at the Capitol wearing a T-shirt and jeans with my hair all disheveled because I rushed over on my bike. I told them I just want my small family brewery to bring around a little beer to a few establishments and that at some point I would want to work with a distributor.
“Then the media gets ahold of the story and all of these people start calling their representatives and the bill passes and is signed by the governor. The new law enacted June 2011 permits breweries that produce 15,000 barrels or less a year to self-distribute up to 7,500 barrels.”
State and local excise taxes on spirits are equally random. The taxes can include fixed-rate per volume taxes; wholesale taxes that are usually a percentage of the value of the product; distributor taxes (usually structured as license fees but are often a percentage of revenues); retail taxes, in which retailers owe an extra percentage of revenues; case or bottle fees (which can vary based on size of container); and additional sales taxes (note that this measure does not include general sales tax, only those in excess of the general rate). In other words, always check with your state tax authority first—and don’t count on continuity.
