For many years, beer distributors and their advocates have spoken about the important role distributors play in the collection of state and local excise taxes and how distributors are the most efficient way for states to collect these taxes. As more economic interests have litigated to try and bypass distributors in the supply chain, simply explaining the vital role distributors play in tax collection unfortunately is not enough to satisfy the courts.
To explain and quantify distributors’ important role in tax collection, NBWA contracted KPMG’s Washington National Tax Office in 2009 to conduct a study on the structure and administration of state and local taxes imposed on the distribution and sale of beer. The report, An Analysis of the Structure and Administration of State and Local Taxes on the Distribution and Sale of Beer, provides an extensive overview of the beer industry and the various types of taxes that are collected such as gallonage taxes, retail and special sales taxes and unique additional taxes some states place on beer. Authored by KPMG Tax Managing Director, State and Local Tax Harley Duncan, the report is based on independent research as well as interviews with tax administrators, state association executives and beer distributors in various states.
In 2014, a report from KPMG re-examines the state-based alcohol regulatory structure and the three-tier distribution system’s role in effective tax collection and compliance. While the 2014 report notes a number of excise, sales and other tax rate changes enacted in various states in the past five years, it reaffirms that “the three-tier system of brewers, distributors and retailers enables tax and beverage control authorities to establish an effective system of third party reporting to monitor product flows through the system and to aid in tax compliance.”
Lastly, a 2018 NBWA commissioned report by KPMG outlines the potential negative implications on tax compliance as an ever-growing number of brewers are selling direct to consumers and continue to advocate for more privileges and exceptions. The report highlights two aspects of the current craft beer explosion as it creates challenges for state agencies. First, that the dramatic increase in new, small brewers means a greater number of less experienced taxpayers and a greater risk of noncompliance. Second, that as states adopt measures in an effort to promote growth in the beer industry within their borders, deviations from a traditional three-tier alcohol regulatory system increase the challenges for state authorities to oversee the taxation of beer and increase the risk of lost revenue for the states.
It is important to note that, while beer distributors generally oppose tax increases, these reports do not make public policy recommendations on whether beer taxes should be raised or lowered. Rather, these studies examine how beer taxes are collected and delve into the general types of state and local taxes that are imposed on beer. There is much debate about the proper level of beer taxation, but there is little attention paid to how beer taxes are currently collected or how to ensure that the high rates of beer tax compliance continues if the system were to be deregulated.
While the reports detail many relevant topics and assesses numerous tax structures, one of the most relevant findings is about the role the alcohol regulatory structure plays in ensuring tax compliance. The report notes:
“Other features of the regulatory system governing the sale of alcoholic beverages, including the three-tier system of distribution, exclusive territories for beer wholesaling and various controls on the retailing of beer, significantly contribute to the administration of all types of taxes on beer. These regulations, taken together, create the opportunity to monitor the flow of alcoholic beverages in the state, provide state regulators and tax administrators with a limited number of points to tax and/or exercise control over the flow of alcoholic beverages, limit opportunities for contraband (i.e., untaxed) alcoholic beverages to enter the distribution chain and ensure compliance with the various tax systems. In particular, requirements that suppliers must sell only to licensed wholesalers and that retailers may purchase product only from certain licensed wholesalers is fundamental to ensuring compliance with beer taxes in an efficient manner. Without these controls, the level of resources necessary to achieve any given level of compliance would be substantially greater than at present.”