POWHATAN – After weathering an unprecedented first half of 2020 and all of the challenges it brought, a local distillery is speaking out about another looming threat on the horizon that endangers its continued existence.
Three Crosses Distilling Co. in Powhatan last week hosted a meeting Congresswoman Abigail Spanberger, D-7th, had with area distillers to discuss regulatory issues facing Central Virginia distilleries as well as the beverage industry nationwide.
The No. 1 goal for the industry professionals who met with the congresswoman was to discuss HR 1175, the Craft Beverage Modernization and Tax Reform Act, which they are desperately trying to push through Congress before the end of the year. This law would make permanent a federal excise tax (FET) cut that was enacted in 2017 and affects beer, wine, distilled spirits, and cider makers.
Without congressional passage of this legislation, the current tax cut would expire on Dec. 31, 2020, and craft distillers in Virginia would face a 400 percent tax increase in 2021, which would hinder the local industry’s recovery from the COVID-19 crisis, said Amy Ciarametaro, executive director of the Virginia Distillers Association.
Ciarametaro pointed out that the industry has grown so rapidly that more than 80 percent of distilleries nationwide were not in business before the temporary tax reform was put in place.
“There is this enormity of uncertainty for so much of the industry that doesn’t even know what the former rate was like. You couple that with the environment with COVID and onsite operations being scaled down significantly, it is a recipe for disaster,” she said.
Michelle Davenport, who co-owns Three Crosses with her husband John, said the state of Virginia currently taxes her business 54 percent on every bottle they sell. The federal excise tax reform in place now taxes the business at $2.70 a proof gallon. If it is allowed to expire at the end of the year, that will jump to $13.50 a proof gallon.
To put it in perspective, Davenport said Three Crosses has made 3,021 proof gallons since it opened in August 2018. At the current rate of $2.70, the federal tax bill would be $8,156. If the tax rate was increased to $13.50, the tax bill on the same amount would be $40,483.
“This would be on top of the state 54 percent tax per bottle. So, essentially it would put us out of business,” she said. “What it basically boils down to, is that if it lapsed back to $13.50, it is going to crush the craft distiller industry.”
Distillers would be looking at an increase of about $3 to $4 per bottle if the tax reform is not renewed, and then they would have to build it into their pricing structure, Ciarametaro said. That means they have to ask themselves if they would pass the cost onto the consumer and price themselves out of the market or absorb the expense.
Davenport said that Ciarametaro reached out and asked them to host the meeting with Spanberger, who is one of the co-sponsors of the bill. They wanted to share the challenges they face as Virginia distilleries currently and what having the tax reform lapse would do to the future of their industry.
“I wanted to get across to Congresswoman Spanberger the challenges we already currently face as a small craft distillery in the state of Virginia, and if we don’t get to keep the FET reform, it could potentially close our business,” Davenport said. “John and I have put our entire life savings into this, not to mention all the blood, sweat, and tears of opening and maintaining a small business.
“The challenges we are currently faced with COVID as a small business, then throw in the fact we might have our federal tax increased by nearly 400 percent on top of the 54 percent from the state. There is just no way you can operate a business that way,” Davenport said.
She added that she and her husband are very worried that “because of one tax reform lapse we could lose it all. It is extremely scary.”
Spanberger said one of the favorite parts of her job is talking to people and businesses about the impact of either ongoing legislative discussions or actual pieces of proposed legislation so she can understand the direct impact at home in Virginia.
There is a real urgency to address larger economic impact legislation that may not be at the top of everyone’s list as Congress is rightly and correctly focused on the continuing emergency related to COVID-19, both the economic and public health aspect of it, she said.
“So hearing from distillery owners and hearing from those who are creating jobs and growing businesses and innovating in our district is incredibly important,” Spanberger said.
Spanberger talked about places like Three Crosses as well as breweries and wineries providing gathering places for the community. In Virginia, these tend to be small producers who are owned locally by a family or individuals, create a very specific product, hire locally, and try to source local products.
“I think even when we are looking at the future of Virginia, we have seen breweries, wineries, and distilleries really blossom as a strong economic powerhouse within our community, and there is really no reason why Virginia especially can’t be the next Kentucky in terms of market share and business growth and development,” she said.
As far as making the tax cut permanent, Spanberger said she thinks it will be a matter of timing. Negotiations related to the next COVID-19 package have been painfully delayed and ineffective so far, which does have an impact on other pieces of legislation that might be taken up.
“Notably there are more than 300 co-sponsors in the House of Representatives, so if this bill were to get a vote, it would pass easily. One of the components of this that I don’t have as much purview into is what happens on the Senate side,” she said.
The best chance for the bill might be to put it into a package along with a variety of other bills related to economic growth that also appeal to other legislators’ economic priorities, but she added she can’t begin to predict the Senate’s actions.
Laura McFarland may be reached at Lmcfarland@powhatantoday.com.