On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act, which included the Craft Beverage Modernization and Tax Reform Act ("Tax Law"). The new Tax Law contains an important federal excise tax ("FET") credit for wine importers that may have alluded many industry members. Although the regulatory framework is still being developed, it is imperative for wine importers to begin developing a corporate strategy to anticipate the best way to capitalize on the tax credit. With millions of dollars at stake for imported wine, understanding the implications for the tax credit could enable wine importers to reinvest their FET savings for new capital expenditures, brand ambassador and sales force training, or marketing and promotional campaigns to support new brands.
The Tax Law makes extensive changes to the Internal Revenue Code ("IRC"), including provisions related to alcohol that are administered by the U.S. Alcohol and Tobacco Tax and Trade Bureau ("TTB"). For the purposes of imported wine, the laws governing the imposition and rate of taxes were amended, resulting in significant changes for the tax treatment of foreign wines that are imported into the United States. Under the Tax Law, the current FET rates on wine products will be reduced based on a tiered production threshold that will enable the authorized importer to obtain favorable tax treatment on the importation of the qualifying products. While the actual FET for wine depends on the product's alcohol by volume and carbonation levels, the following chart illustrates the general reduction in FET liability:
It is important to note that this is a temporary tax cut, so the new FET treatment for imported wines only applies to products imported and removed from the bonded premises after December 31, 2017 (i.e., starting January 1, 2018), but does not apply to wine removed after December 31, 2019 (i.e., on January 1, 2020). Therefore, the reduced tax rates are effective for calendar years 2018 and 2019, so all wine imported and removed on January 1, 2020 and beyond would be taxed at the standard rates.
Essentially, the Tax Law amends the IRC to allow a "credit against any tax imposed [under the IRC for up to 750,000 wine gallons . . . ] which are imported by the importer into the United States during the calendar year but only if the importer is an electing importer . . . and the wine gallons of wine have been assigned to the importer . . . ." ("Tax Credit").1 The Tax Credit allowance belongs to the foreign producer, so the foreign producer must designate the importer and then assign the specified wine gallonage that will be imported to enable the importer to claim the Tax Credit.2 Thus, in order to claim the Tax Credit, the importing company must be: (i) designated by the foreign producer as the electing importer to receive the Tax Credit, and (ii) the wine gallons that are subject to the Tax Credit must be assigned and allocated to the electing importer.
These statutory changes went into effect on January 1, 2018, although implementing rules and regulations to determine the process for claiming the Tax Credit have not been finalized. TTB is responsible for creating rules for foreign producers to: (i) elect the designated importer to receive the Tax Credit, and (ii) assign the wine gallonage subject to the Tax Credit to the electing importer, in order to ensure that there is no fraud or abuse in the tax accounting and that only a maximum of 750,000 wine gallons are eligible for the Tax Credit. Interestingly, the law requires the TTB to write the regulations, but U.S. Customs and Border Protection ("CBP") is responsible for collecting the FET on imported alcohol beverage products. Accordingly, the TTB and CBP will be working together to establish the regulatory structure and develop procedures for handling the Tax Credit through CBP's current system.
The Tax Law has the potential for immense savings as it significantly reduces FET liability. Therefore, it is critical to understand how the law currently works, track the rulemaking process, and monitor the creation of TTB and CBP guidance documents and enforcement procedures. Consulting with competent alcohol beverage and tax attorneys can help industry members navigate through these uncertainties in order to maximize FET savings for imported wine.