United States: A Spirited Voyage: How To Avoid The Excise Tax By Exporting

As most distillers know well, Uncle Sam makes a pretty penny on each bottle of alcohol manufactured in the United States. Federal excise taxes, on distilled spirits in particular, are higher than those imposed on almost any other consumer good. When you add in state and local excise and sales taxes, domestic taxes can account for as much as one-half of a bottle's sales price. And since these taxes are passed on to the consumer in the form of higher prices, it's no wonder distillers are looking to foreign markets for their products. This is because the federal excise tax is waived when alcohol is exported.

While distillers can catch a break by shipping their products abroad, they should be sure to investigate whether the receiving countries impose importation or other taxes. Indeed, deciding whether to export American-made spirits can be a balancing act. Shipping costs and taxes in other countries may offset the tax-savings realized by exporting. Nevertheless, as domestic taxes continue to remain high, it is certainly worthwhile for distillers to explore exportation as a path to financial savings.

The Federal Excise Tax

  The federal government imposes excise taxes on various goods, services and activities. Unlike state sales taxes, which are imposed on nearly all goods as a percentage of the sales price, excise taxes are paid when purchases are made on a specific good. Federal excise taxes apply to a wide variety of products and services, ranging from alcohol and tobacco to indoor tanning, ozone-depleting chemicals, airline tickets and gasoline, and are generally perceived as an indirect tax levied on the producer or merchant who is then expected to pass on the cost to the consumer.

The United States began taxing distilled spirits not long after the nation was founded; federal excise taxes on alcohol have their origin in the Distilled Spirits Tax Act of 1791. Since that time, these taxes have served as a significant source of revenue for the federal government. A 2015 report by the Joint Committee on Taxation estimated that alcoholic beverage excise taxes would result in approximately $10.2 billion of revenue in 2016. This is greater than the revenue projected from nearly all other excise taxes, with the exception of those on gasoline, airline tickets, tobacco and health insurance providers.

When it comes to the federal excise tax, not all drinks are created equal. Compared to wine and beer, the greatest tax by far is on distilled spirits, imposed at a rate of $13.50 per proof gallon. A proof gallon is a gallon of liquid that is 100 proof, or 50% alcohol by volume, at 60°F. By comparison, the highest tax on wine is $3.40 per wine gallon (defined as a gallon of liquid equivalent to the volume of 231 cubic inches), imposed on champagne and other sparkling wines. Artificially carbonated wines are taxed at a rate of $3.30 per wine gallon, while hard cider is taxed at the comparatively low rate of 22.6 cents per wine gallon.1 All other "still" wines, or wines containing not more than 0.392 grams of carbon dioxide per hundred milliliters of wine, are taxed according to alcohol content. Still wines containing not more than 14% alcohol by volume are taxed at a rate of $1.07 per wine gallon; while those containing more than 14% but not more than 21% alcohol by volume are taxed at $1.57 per wine gallon. For wines containing more than 21% and not exceeding 24% alcohol by volume, the rate jumps to $3.15 per wine gallon. Wines containing more than 24% alcohol by volume are classified and taxed as distilled spirits.

Beer is taxed at a rate of $18 per barrel (the equivalent of 31 gallons). To put this into perspective, the federal excise tax on a 750-ml. bottle of distilled spirits (at 80 proof) is $2.14. The tax on the equivalent amount of beer would be slightly over 10 cents. It's unclear why the tax on distilled spirits at both the federal and state level is so high compared to other alcohol, but a common hypothesis is that it is due to the higher alcohol content per drop, or unit, of distilled spirits. In response, some commentators have argued that taxes should be adjusted to reflect the respective contribution of each type of alcohol to overall societal costs. Under this analysis, they argue beer would bear the highest share of excise taxes because research suggests beer is most often linked with negative outcomes related to excessive drinking, likely because of its lower price relative to other types of alcohol.

Liability for the federal excise tax on distilled spirits arises when the alcohol is produced, but the tax is not determined and payable until bottled distilled spirits are removed from the bonded premises of the production plant. Likewise, liability for the federal excise tax on wine and beer accrues upon production, but it is not payable until the wine is removed from the bonded wine cellar or winery or the beer is removed from the brewery for consumption or sale. Generally, bulk distilled spirits and wine may be transported in bond between bonded premises and beer may be transported between commonly owned breweries without paying the tax. However, the tax liability follows these products and becomes due when the alcohol is consumed or sold.

In addition to federal excise taxes, states also impose significant excise taxes on alcohol, particularly distilled spirits. As of January 1, 2016, the highest excise taxes on distilled spirits were imposed by Washington, Oregon, Virginia, Alabama and Alaska. Wyoming and New Hampshire have some of the lowest excise taxes on liquor, followed by West Virginia, Missouri, Colorado and Texas.

Finally, the great majority of states impose sales tax on distilled spirits on top of state and federal excise taxes, and some states impose even more taxes! For example, Kentucky—the touted bourbon capital of the world—imposes an excise tax, wholesale sales tax, and retail sales tax on distilled spirits. Wholesalers in Kentucky are also required to pay a "case tax" on each case of distilled spirits sold in the state. In addition, unlike any other state in the nation, Kentucky imposes a property tax on distilled spirits located in a bonded warehouse. Thus, in addition to high federal excise taxes, distilled spirits may be subject to a variety of state and local excise, sales and even property taxes, all resulting in a bigger price tag for the ultimate consumer.

PATH Act

  One recent piece of legislation with ramifications for the alcohol industry is the Protecting Americans from Tax Hikes of 2015 (PATH Act). The PATH Act was signed into law at the end of last year, but its provisions related to alcoholic beverages do not go into effect until 2017. The PATH Act removes the bond requirements and extends the filing due dates for certain taxpayers with limited excise tax liability. Starting with the calendar quarter beginning on January 1, 2017, taxpayers who reasonably expect to be liable for not more than $1,000 in excise taxes on distilled spirits, wine, and beer for the calendar year, and who were liable for not more than $1,000 in such taxes for the preceding year can pay these taxes annually, rather than quarterly. In addition, taxpayers eligible to pay alcohol excise taxes annually under these new provisions, as well as taxpayers currently eligible for quarterly filing under current  law (i.e., taxpayers who anticipate being liable for no more than $50,000 in alcohol excise taxes and who were liable for no more than $50,000 in excise taxes the preceding year) are exempt from the requirement of furnishing a bond covering operations or withdrawals of distilled spirits or wine for nonindustrial use or of beer for any purpose.

Waiver of the Federal Excise Tax upon Exportation

  The good news for distillers is that the high federal excise tax is waived if the spirits are exported from the United States. Federal law permits a proprietor to withdraw spirits from the bonded premises of the distilled spirits plant for exportation without payment of the federal excise tax. Exportation includes both shipments to a foreign country and shipments to the Commonwealth of Puerto Rico, the territories of the Virgin Islands, American Samoa and Guam and the Panama Canal Zone.

Distillers seeking to withdraw distilled spirits without payment of tax must complete TTB Form 5100.11, Withdrawal of Spirits, Specially Denatured Spirits, or Wines for Exportation. If the exporter is not the proprietor of the bonded premises of the distilled spirits plant (DSP) from which the spirits are to be withdrawn, the exporter must prepare TTB Form 5100.11 as an application; if the exporter is the proprietor of the bonded premises of the DSP from which the spirits are withdrawn, the exporter must prepare the form as a notice. In accordance with the instructions, the exporter must list the country of importation and describe the spirits to be exported.

Each package of spirits withdrawn without payment of tax must be marked with the word "Export" prior to its removal from the bonded premises. In addition, the proprietor must mark the word "Export" on the government side of each case or government head of each container before removal from the bonded premises for exportation. To be relieved of liability for the tax, the proprietor exporting the distilled spirits must maintain and submit proof of exportation, which may include a copy of the export bill of lading, a copy of the railway express receipt, a copy of the air express receipt, a copy of the through bill of lading where exportation is to a contiguous foreign country (i.e., Canada or Mexico) or a certificate by the export carrier. Further, the operations or unit bond required to be given by the distilled spirits proprietor to the Alcohol and Tobacco Tax and Trade Bureau (TTB) in order to operate a DSP must cover the withdrawal of distilled spirits without payment of tax.

If TTB Form 5100.11 is filed as an application (as opposed to a notice), the appropriate TTB officer must approve the application if it has been properly executed and the required bond has been filed in a sufficient amount. The officer must send copies of the form to the proprietor of the bonded premises from which the spirits will be withdrawn.

Distillers can also submit a request to TTB to use an alternative export documentation procedure. The alternative procedure allows distillers to maintain copies of export documents, including Form 5100.11 and appropriate proof of exportation, at their premises as opposed to sending these documents to TTB. Distillers utilizing the alternative procedure must submit a monthly report of goods exported to TTB in an electronic spreadsheet and obtain acceptable proof of export within 90 days after the spirits are removed from the premises. Export documents must be retained for six years after the date of exportation. All proprietors of distilled spirits plants may request to use this alternative procedure by submitting a letterhead request to TTB. Distillers interested in this alternative procedure should review TTB Industry Circular 2004-3, available on TTB's website at TTB.gov.

  After spirits are removed from the bonded premises for exportation, they may be stopped for repacking purposes prior to being laden on board the export carrier if the following conditions are met:

  • The foreign destination is established prior to removal of the goods from the bonded premises, and this is clearly reflected in the distiller's commercial records;
  • The goods are consistently moving, in accordance with good commercial practice, to the ultimate consignee and the shipping documents show a foreign country as the final destination; and
  • The repacking is accomplished for reasons of economy or efficiency, with the goods consigned directly to the foreign customer/ultimate consignee.Export certificates (such as Certificates of Origin, Certificates of Health/Sanitation, and Certificates of Authenticity/Free Sale, among others) may be required for alcoholic beverages to be imported into a foreign market.2 These certificates can be requested from the TTB's International Affairs Division3 by mail or e-mail  using the TTB's export certificate template, available on its website .  

Another tool that should be available to distillers in the near future is the International Trade Data System (ITDS). ITDS is an interagency program that seeks to establish an electronic "single window," operated by Customs and Border Protection (CBP), through which importers and exporters can electronically submit the data required by federal agencies for clearing imports and exports. Executive Order 13659, issued on February 19, 2014, requires agencies to be able to utilize ITDS by the end of this year. On June 21, 2016, TTB published a notice of proposed rulemaking proposing amendments to its regulations governing the importation of distilled spirits, wine, beer and malt beverages that will allow importers to file TTB-required data electronically through ITDS as an alternative to the current rules that require importers to submit paper documents to CBP upon importation.4 The deadline for public comments was August 22, 2016. Currently, TTB is hosting a pilot program that allows participating importers to utilize ITDS to file their TTB-required data. Although a similar program is not yet available to exporters, TTB should be amending its export regulations in the near future to make them compatible with ITDS and allow exporters to take advantage of this streamlined procedure.

Distillers should also check the laws in their state of operation to determine whether alcohol produced for shipment out-of-state is exempt from state and local excise and sales taxes. Many states contain an exemption from tax for property that will be permanently shipped out-of-state (often referred to as the interstate or foreign commerce exemption).

A Note of Caution on Taxes Abroad

  Although distillers can avoid domestic taxes by shipping their products abroad, they should be aware that foreign countries may impose their own taxes when spirits are imported. Two popular destinations for American-made liquor are Canada (because of its proximity) and China (because of the popularity of U.S. spirits there). Countries in Europe, including the United Kingdom (UK), France and Germany, are also popular destinations for U.S. distillers. Each of these countries imposes its own set of taxes on alcoholic beverages.

In Canada, imported spirits are subject to a customs duty, an excise tax, a "goods and services" tax and a provincial sales tax collected on behalf of the Canadian provinces; however, because the North American Free Trade Agreement created duty-free access for most beverage alcohol products imported into Canada from the United States, the customs duty does not apply. The excise tax on spirits is imposed at a rate of $11.696 per liter of pure alcohol, although spirits containing not more than 7% absolute ethyl alcohol by volume are taxed at a rate of $0.295 per liter of spirits. The goods and services tax is levied at 5% of the retail price of the goods. The provincial sales tax varies depending upon the province. For example, the provincial sales tax on liquor in British Columbia is imposed at a rate of 10% of the purchase price. In China, distilled spirits are subject to three separate taxes: an import tax, a value added tax (VAT), and a consumption tax. The rates for each of these taxes vary depending upon the product and are compiled into a formula used to determine the effective tax rate.

France, Germany and—at least for now—the UK are member states of the European Union (EU). The UK voted to leave the EU earlier this year, but it will be at least a couple of years before "Brexit" takes effect and the UK officially exits the EU. When that happens, it may impact the taxes imposed by the UK on goods and services, including imported spirits, since the UK is currently subject to certain minimum rates set by the EU with respect to the VAT and excise duties.

All countries in the EU must impose the VAT on goods and services bought and sold for use or consumption, including imports. The VAT is charged as a percentage of the sales price. EU law sets a minimum standard VAT of at least 15%, but member states are free to impose higher rates. Spirits, wine and beer are subject to the standard VAT of 20% in France and the UK and the standard VAT of 19% in Germany.

EU law also requires member states to impose excise duties on certain goods, including alcohol. The rate varies depending upon the type of product—i.e., beer, wine, spirits or "intermediate products," such as port and sherry. With respect to spirits, EU legislation sets a minimum excise duty of 550 euros (the equivalent of $613.89) per hectoliter of pure alcohol. Most member states, however, impose much higher rates. Germany imposes an excise duty of 1,303.00 euros per hectoliter of pure alcohol, France imposes an excise duty of 1,737.56 euros per hectoliter of pure alcohol and the UK imposes a high excise duty of 3,754.58 euros per hectoliter of pure alcohol. In the UK, for example, this is the equivalent of approximately 37.55 euros, or $41.91, per liter of pure alcohol. In addition to the VAT and excise duties, customs duties, which are calculated based upon the value of the goods, will apply to spirits imported into the EU.

Like Canada, China and member states of the EU, many foreign countries do impose their own taxes on imports, including spirits. Therefore, it is important to do your homework before deciding whether exportation is the best course of action. However, exportation is certainly a viable option to explore, particularly given today's global marketplace and the popularity of U.S.-made liquor abroad. After all, Americans aren't the only ones who enjoy American-made spirits—and for good reason!

Footnotes

1. 26 U.S.C. § 5041(b)(6). The PATH Act modifies the definition of wine eligible for the comparatively low tax rate applicable to "hard cider." See TTB.gov, "TTB Announcement – IRC Amendments Affecting Excise Tax Due Dates and Bond Requirements for Eligible Taxpayers and Revision of Hard Cider Tax Class – Effective in 2017" (Jan. 14, 2016), available at https://www.ttb.gov/announcements/ttb-announcement-cider-statutory-changes.pdf [hereinafter "TTB Announcement"].; see also Protecting Americans from Tax Hikes Act of 2015, Division Q of Consolidated Appropriations Act of 2016, Pub. L. No. 114-113 § 335. The Act increases the allowable alcohol content for hard cider from less than 7% to less than 8.5% alcohol by volume, increases the allowable carbonation level from 0.392 to 0.64 gram of carbon dioxide per hundred milliliters of wine, and authorizes the use of pears, pear juice concentrate, and pear products and flavorings. Id. These changes apply to hard cider removed after December 31, 2016. Id. This is a favorable change for the alcohol industry, as it increases the allowable alcohol content of wines that qualify for the favorable tax rates applicable to hard cider.

2. See TTB.gov, International Affairs Division, "Exporting Alcohol Beverages from the U.S.", available at https://www.ttb.gov/itd/exporting_documents.shtml.

3. The TTB's website at https://www.ttb.gov/itd/interrel.shtml provides a guide compiled by the Internal Affairs Division summarizing information about many countries' import and export requirements, including licensing, labeling and taxation considerations. It is a good starting point for distillers but it is not necessarily comprehensive or updated and does not cover all countries.

4. See TTB Press Release, "Proposed Amendments to Streamline Importation of Distilled Spirits, Wine, Beer, Malt Beverages, Tobacco Products, Processed Tobacco, and Cigarette Papers and Tubes and Facilitate Use of the International Trade Data System" (Jun. 20, 2016), available at https://www.ttb.gov/press/fy16/press_release_fy-16-14_notice_no_159-itds_nprm.pdf.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.