Wanted to pass this along, an open letter from Mark Stutrud, CEO of Summit, regarding the proposed state legislation on the table to increase excise taxes by 144% on Minnesota brewers producing more than 25,000 barrels per year. In financial terms, that means brewers will have to pay $11.21 in tax on every barrel they sell to a distributor above and beyond the 25,000 barrel threshold instead of the current $4.60.

I don’t know about you…but if the legislators have their way, I see a prohibitively challenging environment for breweries to thrive in this state that could potentially spell the significant erosion of what is currently a growing craft beer industry and culture. Call it a penalty for success…because any brewer who grows enough to produce 25,000 barrels annually will start getting hit with this exorbitant tax. If I’m a Surly, Flat Earth, Brau Brothers or any other brewery under that threshold, I’d be very interested in this legislative outcome if my business plan includes visions of growth.  

Oh, and did I mention they’d also like to double the existing retail sales tax on alcoholic beverages? Nice.

Also check out Mark’s op-ed in the St. Paul Pioneer Press for additional context.

_________________________________________________

Dear Friends and Family of Summit Brewing:

It is time to take some action. As you know, many members of the Minnesota Legislature are planning to increase excise taxes and retail taxes on beer and other alcoholic beverages. The most recent attempt was House File 885. This bill was vetoed by Governor Pawlenty before the fishing opener. However, Legislators are working on a veto override and are determined to raise revenue through the consumption of beer.

This proposed legislation is described as a “dime a drink” tax. Sounds affordable, doesn’t it? I would consider erasing the State deficit by leaving a dime at the bar each time I ordered a beer. But this political position (read “spin”) is not straightforward or true.

First, most legislators or citizens do not really understand or recognize the significant amount of taxes that breweries pay today. Summit Brewing Company’s gross sales for 2008 were $15 million. Paid federal and state excise taxes totaled $1.04 million. This level of taxation represents 7% of the brewery’s total cost!

So, let’s compare this 7% cost of tax to other operating costs. Packaging, our largest cost, is 22%. Labor, with benefits, is 11%. Utilities and energy are 5%. You have read about the cost and availability of hops and malt. Our cost of raw materials, as a percentage, has increased from 11% to 17% over the past two years. This dramatic increase in cost has battered margins and profitability. The brewery projects sales of 88,000 barrels for 2009. Assuming that 88% of the company’s sales would be in Minnesota, the level of sales would be 77,000 barrels. Therefore, a tax base of 52,000 barrels is calculated considering the state excise tax exemption for the first 25,000 barrels sold.

The proposed legislation containing a 144% excise tax increase would mean a tax jump from $4.60 to $11.21 on every barrel of Summit beer, bringing the company’s annual state excise taxes from $244,000 to $594,000. Federal excise taxes would be $924,000, totaling $1.52 million paid taxes. Projected sales for 2009 are $16 million. Total excise taxes would become 10% of the brewery’s cost – almost the same cost as labor! Can you think of any other industry that is taxed to this extent?

This 144% increase on state excise tax would eliminate the brewery’s projected net profitability for 2009, 2010 and 2011. The brewery’s growth would cease, projected new employment would be eliminated, cash would be diverted away from capital expenditures and operations would contract to survive.

It is obvious that we cannot simply pass off these increases to you and other Summit drinkers.

And by the way, the 25,000 barrel per year tax exemption mentioned above, known as the “small brewer’s tax credit” is being spun. Legislators are stating that “small” brewers will not be harmed by this proposed legislation because of the tax credit. These legislators are simply honoring an existing tax exemption.

Secondly, these federal and state excise taxes are marked up twice. The taxes are a part of our price to the beer distributor as they pick up Summit at the dock. The retail account, restaurant, bar or liquor store, purchases the beer at wholesale. The retail account adds their margin to cover their costs before you buy that 12 pack of Extra Pale Ale. And finally, retail sales tax and an additional retail tax on alcoholic beverages are put on your tab. This is why excise taxes are described as hidden and regressive. Again, most people do not think about the taxes paid by the brewery. And most people do not think about these taxes as being marked up and taxed again!

Third, this legislation proposes to double the rate of the alcoholic beverage retail tax from 2.5% to 5.0%!

Does this still sound affordable to you? According to the Star Tribune and other media, 80% of Minnesotans support tax increases on beer, wine and liquor. I believe that the majority of Minnesotans do not understand the full picture. It is vital that you contact your legislators and educate other Minnesotans on what is going on.

Some other thoughts to share with your legislator: 

  • Minnesota is currently taxed higher than our neighboring states of Wisconsin, Iowa, North Dakota and South Dakota.
  • Almost 40% of the retail cost of a beer in Minnesota is tax.
  • When the U.S. government doubled the rate of excise tax on beer in 1991, 60,000 jobs were lost in the brewing industry and the related industries.
  • 65% of beer consumers earn less than $45,000 annually.
  • Excise taxes affect the middle to lower income individuals the most.
  • The proposed increase of excise taxes on beer unfairly targets a single industry. (Neo-prohibitionists actively support these efforts.) 

Take action now:

– Sign the petition

– Talk to your legislators ( click here to find their contact info )

– Join the Facebook group Minnesotans Against the Beer, Wine and Spirits Tax Increase

– Follow this issue on Twitter.

As always, thanks for supporting Summit beer.

Skoal!