In the wake of a court order that nullified an exemption from the alcoholic beverages tax on distributors and noncommercial importers of beer for small New York breweries, see TSB-M-12(1)M (N.Y.S. Dep’t of Taxation & Fin., Apr. 13, 2012), new replacement legislation has been enacted with the goal of strengthening New York’s craft beer industry. The legislation proposes three separate new provisions that provide refundable tax credits and exemptions from the annual liquor authority fee, and allow craft brewers greater ability to sell their products.
New York Tax Law § 424 imposes taxes on beer, wine, liquor, and other alcoholic beverages. In 2009, a provision was added to Tax Law Section 424(6) allowing an exemption from the tax on the first 200,000 barrels of beer brewed in New York, and sold or used in New York, in each calendar year, by a brewer whose principal executive office is located in New York. The law was challenged as violating the U.S. Constitution, and on March 28, 2012, the New York State Supreme Court entered a Stipulation of Settlement and Judgment, which provided that, with no admission on the merits by either party, Tax Law Section 424(6) is unconstitutional and of no force and effect. A settlement payment of $160,000 was also made to plaintiff and its attorneys. Shelton v. N.Y.S. Liquor Auth., Index. No 7893-06 (Sup. Ct. Albany Cty. Mar. 28, 2012).
According to the announcement made by Governor Cuomo regarding the new legislation, small brewers in New York will “fare at least as well as they did under the prior exemption.” The legislation includes the following new provisions:
Tax Credits. Any brewery that produces 60 million or fewer gallons of beer in New York would be eligible for a refundable tax credit against New York State personal income and business taxes, in the amount of 14¢ per gallon for the first 500,000 gallons produced in New York, and 4.5¢ per gallon for the next 15 million gallons.
Exemption from Liquor Authority Fee. Breweries that produce brands of 1,500 barrels or less annually (regardless of location) will be exempt from the $150 annual brand label fee.
Creation of a Farm Brewery License. This provision creates a new license that will allow craft brewers to sell New York State labeled beer, wine, and liquor at their retail outlets; obtain licenses to operate restaurants, conference centers, and hotels; conduct tastings; and sell related products such as beer-making equipment and supplies, foods at tastings, and souvenir items.
Additional Insights. The previous exemption that was available only to entities whose principal executive office is within the State seemed to be an obvious violation of the Constitution, under such cases as Bacchus Imports, Ltd., et al. v. Dias, Dir. of Taxation of Hawaii, 468 U.S. 263 (1984), in which the United States Supreme Court held unconstitutional a Hawaii statute that exempted locally produced alcoholic beverages from the liquor tax as violating the commerce clause, since the statute had both the purpose and effect of discriminating in favor of local products. It remains to be seen whether the new version of the statute, to the extent it provides benefits available only to New York State craft breweries, will withstand constitutional challenge should one be brought. Structuring the benefit as the provision of a tax credit against personal income and business taxes, rather than as an exemption, may not necessarily insulate the new law from challenge.