Dreading tax season? It never ends for winemakers
Readers of a certain age will recall a 1960s TV series called “The Untouchables” featuring Robert Stack as Elliot Ness, a Prohibition agent in Chicago in the late 1920s.
Ness, under the aegis of the then-Bureau of Prohibition, was credited with breaking mobster Al Capone’s hold on Chicago by destroying Capone’s extensive bootlegging network.
Photos of Ness and his hand-picked team smashing huge vats and beer tanks and pouring illicit booze out into the streets helped viewers forget Ness was not simply an axe-wielding, anti-alcohol Carry Nation but a federal tax agent, making a case against Capone for tax evasion.
Ness and Capone are gone but the feds, through the Alcohol and Tobacco Tax and Trade Bureau (TTB), still keep a sharp eye on who pays their excise taxes.
Wines are taxed at state and federal levels at varying rates according to the wines’ alcohol-by-volume content (it’s similar for beer and spirits). The higher ABV, the higher tax per gallon. The rates goes from $1.07 a gallon (21 cents per .750 ml bottle) for wine with up to 14 percent ABV up to $3.15/gallon for wine with 21-24 percent ABV.
Wineries can either pay the taxes as they come due (see below) or post a bond, an insurance policy of sorts, against the tax bill.
Bonds are fairly cheap, as low as $100-$200 for the smallest wineries.
“The concept of a bond was the feds having some assurance you will pay your excise taxes,” said Bob Witham of Two Rivers Winery and Chateau on the Redlands.
Once a wine is “produced”, meaning fermentation is done, it is subject to excise tax. A winery doesn’t have to pay the tax until the wine is ready to be sold or consumed. By storing (aging) the wine in bottle or barrel in specially designated bonded areas, the winery can delay paying these taxes.
Once the wine moves out of the bonded area, which may be somewhere in the winery or an offsite storage unit, the excise taxes are due.
Witham has designated the entire Two Rivers Winery as his bonded area (except for the lawn and the chateau, which has a separate tavern license). Other wineries may designate a portion of their winery or wine cellar as bonded storage.
In some places, a line drawn across the wine cellar floor is all that separates the bonded area from the ready-for-consumption area.
“Our whole cellar is bonded while the winery is licensed” for sale and consumption of wine, said Steven Smith of Grande River Vineyards. He also has an offsite warehouse where wines are stored in a bonded area.
“Wines being aged in barrel or bottle are in our bonded area, and no taxes are paid,” Smith said. “But once we move them out, say to our tasting room, the tax becomes due.”
The federal taxes are paid every two weeks while state excise taxes are paid monthly.
Wineries also must track their production and report this number, since taxes also are based on production. Some incremental losses, such as through evaporation, spillage or the removal of stems and seeds, are accepted by the government.
“But if you end up with noticeably less wine (than initially reported), that could trigger an audit,” Witham said.
Another factor Colorado winemakers deal with is the climate. Taxes go up as alcohol levels go up, but Colorado’s sunny climate often causes sugar levels, which ultimately determine alcohol level, to reach optimum before the desired acidity and pH levels are attained.
“If you continue to build up the sugars while waiting for the acids and pH to get to the level they need to be, if you were to ferment the higher sugar to dry, that would give you a higher percentage of alcohol,” Witham said.
Wineries are allowed to “water back” the grape juice to reduce sugar levels, but Witham prefers to manage sugar levels in the vineyard.
“In our view, it always is far better to manage the alcohol the best you can before harvest and not compromise what you’re doing” in the winery, he said.
Because accurately determining alcohol levels is convoluted, there is some wiggle room. Most winemakers acknowledge the ABV on the label can be within 1.5 percent of the actual alcohol content and not be questioned.
A recent release from TTB, courtesy of Ann Reynolds at Wine Compliance Alliance, said starting next year (2017) all wineries owing up to $50,000 per year in excise taxes can qualify for a “no TTB wine bond necessary” status.
That may provide some relief for small wineries, said Mary Beth Williams, president of Williams Compliance and Consulting Group near Richmond, Va.
“With small wineries, often the winery owner is the grapegrower and the winemaker and the sales person in the tasting room,” Williams noted. “Every little bit helps.”