In a Technical Memorandum issued on April 13, 2012, the Department of Taxation and Finance explained the effect of an order that nullified an exemption from the alcoholic beverages tax on distributors and noncommercial importers of beer. TSB-M-12(1)M (N.Y.S. Dep’t of Taxation & Fin., Apr. 13, 2012).
New York Tax Law § 424 imposes taxes on beer, wine, liquor, and other alcoholic beverages. Tax Law Section 424(6) also provides a broad 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 Authority, Index. No 7893-06 (Sup. Ct. Albany Cty. Mar. 28, 2012).
The Department has now issued guidance explaining that the court’s order “nullified” the exemption, and that, on or after March 28, 2012, all distributors are subject to the 14 cents per gallon tax on all beer sold or used in New York State, plus an additional tax of 12 cents per gallon on all beer sold or used in New York City.
The TSB-M also contains directions for completion of the Beer Tax Return, directing taxpayers not to include any beer sold on or after March 28 in computing the brewer’s exemption, but allowing brewers to claim the exemption for sales completed or uses made prior to that date.
Additional Insights. An exemption that, on its face, is available only to entities whose principal executive office is within the state seems to be an obvious violation of the Constitution. See, e.g., 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. Given that the Department entered into a Stipulation of Settlement and Judgment, and promptly issued guidance instructing taxpayers that the exemption is no longer available, it appears the Department chose not to seek to defend the statutory exemption as written.