Craft breweries fight tax plan, adjust to tariffs
Craft breweries continue to pop up across Pennsylvania, but the industry is facing some sobering headwinds.
The pressure started this year with the Trump administration’s tariffs on steel and aluminum imports, which are affecting the price of beer cans and brewing equipment nationwide. The steel tariffs are 25 percent, while aluminum imports were hit with a 10 percent tariff.
Pennsylvania breweries that package their beer say the tariffs have raised the cost of purchasing cans, which have been growing in popularity because they are easier to transport and store. Eye-catching can designs, meanwhile, have allowed craft brewers to differentiate their products on crowded store shelves.
Some companies said their can costs have increased by about 10 percent already and they could rise higher given the uncertainty of the brewing trade war.
However, the bigger concern bubbling up in Pennsylvania is a proposal to levy state sales taxes on products sold in taprooms, a change slated to take effect in 2019.
The state Department of Revenue issued a sales tax bulletin this summer, saying it wants Pennsylvania breweries to start charging a 6 percent sales tax on all their taproom products, including draft beers served on site and six-packs and growlers sold to go. Revenue officials said they are seeking the tax in the wake of the state’s 2016 liquor reforms, which allowed breweries to sell to a larger pool of customers. The department said it believes breweries should pay more taxes after being allowed to sell directly to wineries, distilleries, other breweries and the public.
The proposal, however, is not going down well with brewers.
“This is the single most concerning issue we’re facing right now,” said Rob Metzger, co-founder of Chatty Monks Brewing Co. in Berks County. “Sales tax is probably going to put some people out of business.”
Collection was slated to begin Jan. 1, 2019, but lobbying efforts by the Brewers of Pennsylvania got it pushed back until at least July 2019.
Many craft producers rely on sales from their taprooms to cultivate their reputations.
“In this world right now with so many different beers, the brewpub is a way to allow customers to come in and show them how your products are different,” said Ted Zeller III, general counsel for the Brewers of Pennsylvania, an industry trade group.
But the added sales tax could force some owners to can plans for satellite tasting rooms and other investments in their breweries, he said, potentially limiting future growth opportunities.
Breweries make a nice profit from taprooms by selling pints of beer for $5 or $6. But as more breweries open, there is more competition.
Brewery taprooms also have to compete with bars and restaurants, which sell a variety of brands but would not be required to levy a sales tax. Bars and restaurants, which hold retail licenses, pay taxes when they purchase beer at the wholesale level.
So if a bar is buying a $140 wholesale keg of beer from a distributor, it pays $8.40 in state sales tax.
The state brewers association wants similar treatment.
But the current state proposal asks the brewery to add 30 cents on each $5 pint sold. With each keg producing 120 pints, a taproom would be collecting sales taxes totaling $36, or about four times what bars and restaurants would pay on the same keg.
“It hurts everyone across the board,” said Trevor Prichett, the CEO of Yards Brewing Co. in Philadelphia. “You’re talking about millions of dollars in unexpected costs to brewers.”
The state bulletin said breweries could include the sales tax in the advertised purchase price of a pint or takeout beer. They could still charge $5 per pint, for example, and then pull out the sales tax.
For Chatty Monks, the sales tax on pints could amount to $25,000 or $30,000 per year, Metzger said. He and his partners have been talking about potentially changing glassware in their taproom to give consumers more beer for their money.
The Department of Revenue said discussions with brewers are ongoing. The department also is looking at levying a sales tax on Pennsylvania wineries and distilleries that sell directly to consumers.
Effect of tariffs
For breweries that distribute a lot of beer, rising production costs from the tariffs could also mean higher retail prices, though that hasn’t happened yet.
Brewers could decide to eat higher costs, which could reduce their profits, or they may postpone hiring and expansion projects.
“It’s problematic, but brewers of all sizes are facing the same issue,” Prichett said. “So on a competitive standpoint, it’s a level playing field.”
Yards, which primarily bottles its beer, got into canning this year, hoping to reach people who prefer canned beer.
Cans could eventually make up about 10 percent of the production at Yards, which produced more than 40,000 barrels of beer last year. A barrel represents more than 330 12-ounce cans.
Prichett said the tariffs do not have Yards rethinking its decision to start canning.
“I don’t think people are making choices to go cans or bottles just on tariffs alone,” he said. “We’re in a pretty small footprint for a regional brewer. And some people also prefer cans, so we were missing out on potential sales.”
Cans also remain a preferred container for Lehigh County-based Funk Brewing, which has a taproom in Elizabethtown and uses only cans for some of its beer styles. Funk co-owner Jon Norman said he doesn’t expect anyone to suddenly ditch cans.
Norman said he prefers the cans for Funk’s heavy India pale ale styles because they protect better than bottles against light and oxygen exposure, which can compromise a beer’s flavor. He plans to stick with cans despite the higher prices.
But Funk is still being selective about which styles of beer it cans and how often it releases new batches as the brewery builds its brand.
Together, the sales tax proposal and the higher material costs associated with the tariffs could more than wipe out financial gains Pennsylvania brewers saw at the end of last year from federal tax cuts.
The federal tax reform package, effective Jan. 1, lowered the federal excise tax on beer.
For domestic brewers producing less than 2 million barrels of beer annually, the tax bill cut the excise tax to $3.50 per barrel down from $7, on the first 60,000 barrels. The tax was reduced to $16 per barrel from $18 on the first 6 million barrels for all other brewers and all beer importers.