The team at Miles Consulting Group loves beer (and wine) and we especially love to help beer brewers with the challenges of reporting sales and use taxes.
Craft brewing is a highly competitive industry – California leads the U.S. with almost a thousand craft beer breweries; New York, Pennsylvania, Colorado, Washington and Michigan have about 400 craft brewers per state – that’s a lot of competition. So, with all that competition, craft brewers need to look for edges to stay in business by increasing profits and reducing operating costs. Miles Consulting Group can help craft brewers minimize their operating costs by reducing their sales and use tax burden, or “beer-den.” In this blog we are going to focus on the state with the most craft beer brewers – like the color of a crisp lager we will direct this blog to the Golden State – California.
Reducing Your Sales and Use Tax “Beer-den”
The business model for all craft brewers includes two departments – sales and production. Beer sales are either at retail or for resale, and the production happens behind the wall in the brewery. Let’s start with sales:
California expects that all sales are subject to tax unless you can show that the sales are not taxable – like sales of kegs of beer to pubs or bottles and cans to grocery and liquor stores. We can ensure that you report the correct amount of tax on your retail sales and just importantly that you have the proper documentation to support your exempt sales – the sales to pubs and stores. Remember, a tax auditor is going to assume that all your sales are taxable unless you can support that they aren’t.
We mentioned that we can help reduce your operating costs – we can do that by ensuring that you aren’t paying tax on purchases that aren’t taxable like bottles, caps, labels, ingredients, shipping containers, etc. And how about those beers you comp to your friends and family? Are you paying too much tax?!
Now let’s talk about how we can help craft brewers reduce their production costs. California has one of the highest sales tax rates in the country. But the state has a partial exemption for manufacturing equipment that can help reduce the operating costs on your purchases of beer-making equipment by reducing your tax rate by about four percent. This reduction can apply to kettles, boilers, bottling and canning lines, conveyors, cooling systems, storage tanks, fermentation tanks, filters and beer-labeling machines, piping and tubing, and refrigeration equipment. Building a new production facility or line? We can even work with your contractors to make sure they pass applicable tax savings on to you on the build.
Additionally, we can share our expert knowledge of the beer crafting industry and ensure that you don’t unnecessarily pay tax on supplies and ingredients that aren’t taxable in California. For example, chillproofers and foam stabilizers are considered incorporated into the final product and can be purchased without tax. If you are leasing kegs, tax is only due on the lessor’s first lease, subsequent leases are not subject to tax. We have a barrel full of ideas to reduce your sales tax. (See what we did there?)
We also want to make sure that you don’t have a bad outcome if you’re audited by the California Department of Tax and Fee Administration (“CDTFA”), so we will help you watch for “leaks” in your sales tax reporting systems that will result in a crisp, clean no-change audit – like a tasty pilsner on a hot day. When you don’t pay enough tax you can be subject to additional interest and penalties which will cause unexpected, additional operating costs. Examples of items that are subject to sales tax are products that are filtered out in the brewing process and don’t end up in the barrel, bottle or can – they are subject to tax.
States beyond California
If you are a larger brewer with operations in other states, you’ll also want to consider the ramifications of being a multi-state player. Here are a few select states with exemptions for equipment used in manufacturing that apply to beer producers.
Washington has a full exemption – that means no sales tax – for equipment used directly in the manufacturing process. The Washington exemption extends to charges for labor and services to repair or clean the machinery – cleaning, as any craft brewer knows is the most critical part of beer brewing – one speck of gunk and a whole batch of beer goes down the drain!
Idaho sales tax law provides a full exemption for equipment used in manufacturing. To qualify for the Idaho exemption, the business must be primarily devoted to qualifying production activities (spending more than 50% of the business’s working time and activities producing goods for sale). If you are operating with a taproom-focused model in Idaho, one way your business could satisfy the “primarily devoted” requirement is to claim the exemption on equipment charged to a cost center that separately tracks the costs associated with brewing – divide and conquer!
Utah also has a full exemption for equipment used in manufacturing. Beginning January 1, 2019, purchases or leases of machinery, equipment, normal operating repair and replacement parts, or materials (excluding office equipment and office supplies) are exempt from sales tax if used or consumed by a manufacturing facility located within Utah in the process of manufacturing tangible personal property for sale. Where manufacturing and non-manufacturing activities take place at the same location such as a taproom/brewery, the exemption will still apply to the manufacturing equipment provided the manufacturing operations are accounted for separately as a distinct manufacturing cost center. T
That was just a mouthful of sales tax information, which makes us think of beer – we could go for a mouthful of an IPA right now. Cheers!
How Can we Help?
Your focus should be on creating that perfect bottle of beer. Our team can make sure you are paying no more or no less California sales tax (or other state tax) than what is due. It all begins with a conversation. If you think your company might benefit from having a better understanding of the available California sales and use tax exemptions, please reach out to us at info@milesconsultinggroup.com to start the conversation.
