Posted on | April 26, 2012
Written by | BevNetwork
In a blow to New York’s growing number of small beer crafters, the state has quietly ended tax and fee exemptions for in-state brewers after it was sued by an out-of-state distributor.
The announcement stunned local brewers, many of whom learned in an email that two treasured exemptions-worth hundreds of thousands of dollars to some breweries-had been declared unconstitutional by a state court on March 28 in response to a lawsuit by Shelton Brothers, a Massachusetts-based distribution company.
All beer sold in New York will now be subject to state and city excise taxes, ending the exemption for the first 200,000 barrels of production. In addition, each type of beer released by a brewery will be subject to an annual $150 registration fee. Previously, New York breweries were exempt if they produced fewer than 1,500 barrels.
Brewers across the state worried that the changes could dim one of New York’s brightest industries, even as they admitted the decision wasn’t entirely unfair.
“We were caught by surprise, but I don’t believe that the decision is necessarily wrong,” said David Katleski, president of the New York State Brewers Association, who also owns Empire Brewing Company in Syracuse.
But he warned that the new costs would have a “major impact” on the ability of companies to continue expanding, noting that prices of ingredients had also spiked in recent months.
“The margins are getting thinner and thinner,” he said.
New York’s brewing industry has experienced dramatic growth in recent years. When the brewers association was founded in 2003, there were 48 breweries, Mr. Katleski estimated. Today there are 89-with 42 more in the planning stages.
Now, distributors will be charged 14 cents per gallon in state taxes and an additional 12 cents per gallon for beer sold in New York City. “Distributor” is defined as the first person to sell the beer, meaning that if a brewery sells beer to a distributor based in New York state, it is responsible for the state tax.
If the distributor then sells to a retailer in New York City, the distributor is responsible for the city tax.
Combined with the new $150 fee per label, the new charges cast an unusual pall on an industry that had been singled out by Gov. Andrew Cuomo as a pride of the state. Many new breweries specialize in producing small batches of carefully crafted flavors, sometimes cultivating six or seven variations on a single style such as India Pale Ale. Now there will be a penalty for such creativity, brewers said.
Barrier Brewing Company, which began selling beer in 2010, now produces 42 varieties, though it produces only 500 barrels of beer a year. “It’s potentially a tremendous charge,” said co-owner Evan Klein.
The excise tax “kind of makes sense” he said. “It’s unfortunate, but at least you’re being taxed on a certain production level.”
By contrast, the registration fee is “like you’re being punished for having diversity in your product,” he said. “It doesn’t make much sense.”
The State Liquor Authority has collected $584,550 in registration fees this year, said spokesman William Crowley. He defended the fee, saying it was designed “to protect public health and safety by ensuring the authenticity of the product; ensuring labels are not misleading or deceptive; to provide consumers with accurate information” and to fund the authority.
Many brewers blamed Shelton Brothers, which brought the suit. Initially, the company was contesting a ruling by the SLA outlawing a Christmas label that pictured Santa Claus, said company President Daniel Shelton.
During the course of the lawsuit, it added a claim that the registration fees were unfair, he said. “My goal was always just to get the label fees knocked out because there’s no reason for them,” he said, adding that his company works in 45 states and New York’s registration charges are the most onerous.
Mr. Shelton said he had been hoping to join with New York’s breweries to work to repeal the law. Instead, he said he received threats and was called the Antichrist in at least one email.
“We’re just saying, ‘Look, it’s only fair that we shouldn’t have to pay the tax while you don’t pay the tax.’ It’s that simple,” he said.
In three weeks, Barrier Brewing Company, based in Oceanside, is planning to open a new facility that will triple its capacity, Mr. Klein said. He estimated that the company could now be liable for $20,000 in additional taxes and fees.
The Captain Lawrence Brewing Company in Elmsford recently completed a $1.5 million expansion that increased capacity from about 9,000 barrels a year to more than 40,000, said owner and head brewer Scott Vaccaro. “Then we get hit with this,” he said, calling himself “disappointed.”
If the new brewery produces 20,000 barrels of beer next year, Mr. Vaccaro estimated the company’s liability at $87,000.
He criticized state officials for not alerting brewers earlier and working to have a program in place to ameliorate its effects.
“It’s a growing industry that’s adding jobs continually,” he said. “This is no way to keep it on the right track.”
By SOPHIA HOLLANDER