Multistate Tax Update -- May 7, 2015
States take different approaches to taxing alternative alcoholic beverages
Washington exempts hard cider from tax assessment
Hard cider is making a huge comeback, declared Jonah Keri in January. Keri is a contributor to Nate Silver's website fivethirtyeight.com. Nate Silver is the genius who predicted the last two presidential elections “with astounding accuracy” using forecasting models that “started out pretty simple…then gradually became more intricate.”
In the past three years, hard cider’s market share has grown more than fivefold, even though it has been around for more than 2,000 years. As Keri explains:
For a while, Vermont-based Woodchuck dominated the American cider scene, launching in 1991 and going mostly unchallenged for two decades. Then, the floodgates opened. In a span of just two years, scads of new players emerged, with major beverage companies Boston Beer Co. (makers of Sam Adams), Anheuser-Busch InBev (Budweiser), MillerCoors (Miller, Coors, many others) and Heineken staking their claims.
All of those moves have made hard cider the fastest-growing segment of the beer and flavored malt beverages landscape, by a mile.
Citing research by IRI, Keri notes that cider sales “zoomed 75.4 percent to $366 million” during the 12-month period ending November 2014. Although cider still accounts for just one percent of the market, industry insiders “speak breathlessly” about its growth potential.
Qz.com clarifies that technically, fermented apple juice––cider––is neither beer, wine, nor spirit, even though it is currently included in market share data for beer. Because all of these beverages are subject to taxation, the United States Association of Cider Makers (Association) is lobbying to have laws passed that keep taxes low. One example is the Cider Act. The Association reasons that “[u]nder current federal tax law, the definition of hard cider only allows for up to seven percent alcohol by volume before it is taxed at the more expensive rate for wine, and only a certain level of carbonation before it is subject to the extremely expensive champagne tax ($3.30 or $3.40/gallon).” The Cider Act would “allow cider makers to produce cider using the natural products available without the possibility of facing increased tax liability.”
States are doing their part to protect the emerging hard cider market. For example, Washington lawmakers recently passed a law that exempts the fruity spiked beverage from the eight cent per gallon tax assessment imposed on the sale of packaged Washington wines. The exemption will take effect on July 1, 2015.
Washington law defines cider as “table wine that contains not less than one-half of one percent of alcohol by volume and not more than seven percent of alcohol by volume and is made from the normal alcoholic fermentation of the juice of sound, ripe apples or pears. ‘Cider’ includes, but is not limited to, flavored, sparkling, or carbonated cider and cider made from condensed apple or pear mush.”
The legislature justified the exemption because “[t]he rapid growth and strong market potential of the Washington cider industry require[s] marketing efforts that are focused on cider products as a unique beverage category. The legislature intends to allow cider makers to support their own marketing efforts...”
The Northwest Cider Association cheered the move as “a step forward for cidermakers and the Northwest Cider Association’s mission to move cider into its own category…building upon the strength and tradition of Washington state apples, cidermakers see a unique opportunity to clearly distinguish cider as a premium beverage, to celebrate many cider styles and approaches, and to promote the Northwest as a world class cider region.”
Few states approve the regulation and taxation of powdered alcohol
In contrast to the excitement that hard cider is generating, several states are already taking steps to ban a new alcoholic beverage, powdered alcohol, before it even reaches the market, according to Foodsafetynews.com. The publication describes powdered alcohol as a product that mixes with water to produce a cosmopolitan, mojito, margarita, or lemon drop cocktail. Palcohol is the brand name of one such product that is anticipated to launch this spring.
Foodsafetynews.com notes that the Alcohol and Tobacco Tax and Trade Bureau (Bureau) approved Palcohol a year ago, but rescinded its approval over labeling issues. In mid-March, the Bureau approved four varieties. Pursuant to this approval, the powdered alcoholic beverage is subject to all the same laws that govern the sale and possession of liquid alcoholic beverages.
Despite the federal authorization, states are banning Palcohol because of concerns that it will increase underage drinking, and the possibility that it could be either smuggled into venues that ban alcohol or snorted. Palcohol’s inventor dismisses the snorting concern because “[i]t hurts and burns to snort it, and [i]t’s a slow method of inebriation as it would take an hour or more to snort one packet.”
The National Conference of State Legislatures (NCSL) reveals that as of April 2015, Alaska, Louisiana, North Dakota, South Carolina, Utah, Vermont, and Virginia statutorily prohibit the sale of powdered alcohol. On the other hand, Colorado, Delaware, Michigan, and New Mexico have included powdered alcohol in their statutory definitions of alcohol, so that the product is regulated under their existing alcohol statutes. The NCSL website provides a state-by-state status summary of 2015 legislation.
Wisconsin is one of the jurisdictions considering a ban. Foodsafetynews.com quoted State Sen. Tim Carpenter (D-Milwaukee), who has introduced a legislative prohibition, because “[t]he potential for abuse outweighs quite heavily the need for that type of product…[i]t would just make life a lot less complicated if we just didn’t go there.”
Missouri sets tax amnesty period for 2015
Late last week, Missouri Gov. Jay Nixon signed HB 384, which establishes a three-month tax amnesty period, from Sept. 1, 2015, to Nov. 30, 2015. The amnesty applies to tax liabilities due, and due but not paid, as of Dec. 31, 2014. As with all states’ tax amnesty programs, the opportunity is not available for any taxpayer party to a criminal investigation, or pending civil or criminal litigation stemming from tax delinquency, non-payment, or fraud.
In order to be eligible, a taxpayer must have filed a tax return for each taxable period for which amnesty is sought, and pay the entire balance by Nov. 30, 2015. Any taxpayer granted amnesty is obligated to comply with all Missouri tax laws for the next eight years, the failure of which will trigger the requirement to immediately pay all waived penalties, taxes, and interest. In addition, any amnesty recipient is ineligible to participate in any future amnesty for the same type of tax, and waives any right to an appeal.
The state will deposit most amnesty payments into a Tax Amnesty Fund to be used for the following:
- To increase the rate of reimbursement to MO HealthNet providers; and
- To increase the number of adults receiving dental coverage under MO HealthNet.
According to the News Tribune, researchers estimate that the amnesty program will bring in more than $60 million in Missouri’s fiscal year 2016, which begins on July 1, 2015.
Missouri will likely need this extra revenue. In March, the Missouri Budget Project reported that the state was on track to meet its revenue estimate, but even so, the amount is insufficient to cover last year’s budget. This means that the new year will start with a shortfall, so the first priority will be to compensate for “last year’s unmet services before adding to the budget.”
Fox2now.com reported that last year, lawmakers budgeted for an anticipated $50 million from a tobacco settlement that has not yet come, which is one reason for the shortfall. Another unanticipated circumstance occurring this fiscal year is increasing drug costs under the Medicaid healthcare program. Gov. Nixon responded by approving $82 million in general revenue for the Medicaid pharmacy program.
In his budget proposal summary, the governor acknowledged that he reduced the state workforce to its lowest level in two decades, but also put Missouri “back on solid financial ground,” evidenced by the fact that it retains its AAA credit rating with all three rating agencies. Anticipating moderate revenue growth of 4.6 percent and 3.6 percent respectively, in the remainder of fiscal year 2015 and 2016, Gov. Nixon “recognizes improved economic growth while safeguarding the state’s future fiscal health.”
Jurisdictions extend or offer tax credits to encourage sustainable practices
On April 30, 2015, North Carolina Gov. McCrory provided a safe harbor for renewable energy projects by signing HB 372 into law. The safe harbor delays the sunset of the tax credit for projects that are substantially completed by Jan. 1, 2017. The amount of the available tax credit varies by project and entity seeking the credit.
Taxpayers are eligible for the delayed sunset if they do the following:
- Apply for the extension by Oct. 1, 2015, and include information pertaining to the location and estimated total cost of the project, estimated credit that will be claimed, and total size in the megawatt capacity of the applicable project(s);
- Pay the application fee of $1,000 per megawatt of capacity (minimum fee of $5,000) by Oct. 1, 2015;
- Incur at least the minimum percentage of costs of the project on or before Jan. 1, 2016; and
- Complete at least the minimum percentage of the physical construction of the project on or before Jan. 1, 2016.
For projects with a total size of less than 65 megawatts of direct current capacity, the minimum percentage of incurred costs and partial construction is at least 80 percent. For a project with a total size of 65 megawatts or more of direct current capacity, the minimum percentage of incurred costs and partial construction is at least 50 percent.
District of Columbia
Another way of promoting sustainable practices is through agriculture policy, as lawmakers in the District of Columbia did when they passed the Urban Farming and Food Security Amendment Act of 2014 (the Act). It allows taxpayers to claim a non-refundable tax credit for donations made to a food bank or shelter, and claim real property tax abatement for unimproved property leased for small scale farming.
DCGreens.org, an advocacy group that supports food education, food access, and food policy in Washington, D.C., promoted the Act as a way of encouraging urban farming and food security.
The Act does this in the following ways:
- Benefits landowners who use their land for agricultural purposes;
- Increases the availability of land; and
- Provides tax credits for food donation.
More specifically, the Act offers certain businesses a non-refundable credit of 50 percent, up to $5,000, when they make food commodity donations––farm to food donations––to a food bank or shelter after Jan. 1, 2015. A food commodity is “any vegetables, fruits, grains, mushrooms, honey, herbs, nuts, seeds, and rootstock that are intended to be used as food in its perishable state…”
In addition, when an owner of unimproved land leases it to an unrelated party for the purpose of producing a food commodity through small-scale urban farming, the lessor is entitled to a 50 percent deduction from the real property tax imposed on the portion of the leased property actually used for small-scale farming. Among other conditions:
- The initial term must be for at least three years;
- At least 5,000 square feet of the property must be used and cultivated;
- The entire property subject to the lease must be dedicated to agricultural use; and
- There may not be any dwellings on the property.
A November 2014 committee report cited several benefits of urban farming that the Act encourages. For example, self-grown and local food is “inherently healthier in that it is not processed or treated with preservatives or other unnatural ingredients.”
Beyond this, locally grown commodities contribute to the green space and beauty of the natural environment, and help consumers appreciate the source of their food. People become “engaged with the earth and food cycle. Besides its poetic beauty, such engagement has important public health implications.”
For additional information regarding these subjects, or any other multistate tax issues, please contact:
David M. Kall
David H. Godenswager, II
Susan Millradt McGlone
Multistate Tax Services
Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.