The Tennessee beer industry needs, well, a beer.
The burdensome beer tax policy established by the State of Tennessee in 1954 has wrought modern-day consequences for craft breweries, which have tried year after year to keep their heads (and taps) above water. The industry has won small victories here and there, only to be further threatened by legislation that could sink many of the state’s breweries.
The Beer Tax Reform Act of 2013
Tennessee-based brewers have been battling the beer tax policy—which levies a 17 percent wholesale tax on top of federal and state taxes—for some time. Linus Hall, founder of the nationally known, Nashville-based Yazoo Brewing Co., was one of many brewers who struggled to stay ahead of the taxation curve.
“I want to hire more people and invest more money in my business, but because of the tax, it makes it more difficult to do so,” Hall says. “We’re growing, but just not as fast as we could have to keep up with consumer demand. The margins are just too small because of the 17 percent tax.”
The policy has caused many Tennessee-based breweries, including Yazoo, to sell their beer in other states to gain higher profit margins. It also discourages investment and deters new breweries from opening up.
Enter the Beer Tax Reform Act of 2013, led by a coalition of Tennessee businesses aiming to reform the way the state’s local wholesale beer tax is structured, while maintaining the level of funds allocated to the state’s local governments.
The act was signed into law by Governor Bill Haslam in spring of 2013, effectively changing the 17 percent wholesale tax to a volume tax, similar to 48 other U.S. states. Even though the bill passed, Tennessee still finds itself topping the domestic beer tax chart (see the full map here to get a better visualization). As mentioned, the Reform Act changed the 17 percent wholesale tax to a $35.60 barrel tax for the local municipality. The brewery must then pay a barrelage tax of $4.29 on top of that fee to the State. Keep in mind that this is all before it gets to your favorite drinking establishment (like your local Tennessee Flying Saucer) where they pay 24.25 percent tax on all beer brewed with an ABV above 6.3.
The Beer Cap Reform Act of 2014
A new battle began the following year against Tennessee’s 5 percent alcohol by weight cap, the most restrictive beer cap in the Southeast. The “Fix the Beer Cap” movement encouraged consumers to lobby against this restriction in an effort to expand the state’s beer choices, remove limits on sales tax revenues to local and state governments and spur craft beer entrepreneurism.
Although the reform act proposed an increase to 12 percent ABW, it was brought down to 8 percent as part of a compromise, and the bill was unanimously approved. The bill doesn’t go into effect until 2017, which means a two-year wait until beer above 5 percent ABW will be available for purchase outside of liquor stores.
Close the Loophole (Saving the 3-Tier System)
One highlight for the Tennessee beer community is its 3-Tier System. This system was put in place to protect local businesses and consumers from unfair monopolies in the retailing, distribution and manufacturing of beer. By keeping these industries financially independent from one another, no large brewery can come into town, buy up distributors and force other smaller, local breweries to the curb.
But would you believe it? Now the 3-Tier System is also in jeopardy, courtesy of Senate Bill 426/House Bill 543. The removal of the 3-Tier System would diminish competition and take choices away from thirsty consumers. You can learn more about the 3-Tier System and the threat it’s facing here.
Conclusion
All this legislation slows down the influx and creation of breweries in Tennessee, a market where the average craft six-pack is under $10 in package stores. But, between the markups from taxes and distributors, bars and restaurants face a tough decision between eating the cost or marking up the price of a pint to help meet their margins. Someone is getting hurt either way. Of course, none of the markups find their way back to the breweries as extra revenue, therefore they have no extra incentive or reward for their efforts. At the end of the day either selection is hurt from a bar not wanting to pay for the craft beer or the customer is forced to pay a higher price to enjoy a beer while out with friends.
It’s not a bad situation for brewers and for beer enthusiasts. If the laws and taxes were reformed even more, Tennessee could get more and better craft beer. We’re in favor of that and you should be, too!
