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Small Distillers May Tap Into State Tax Break

Small Distillers May Tap Into State Tax Break

Small Michigan distillers who buy their ingredients in-state would get a 50% discount on the state's regular 65% markup on spirits, under legislation the Senate passed, 27-9.

Sen. Curt VanderWall's (R-Ludington) SB 0349 is designed to support the fledgling micro-distilling industry so it can invest more of what it makes into growing their operations, said Scott Ellis, executive director of the Michigan Licensed Beverage Association.

"This helps Michigan small businesses while also helping Michigan agriculture," Ellis said. "Many of the distillers buy 100% of their ingredients from growers within the state of Michigan."

The state buys liquor from manufacturers and sells it to stores at a 65% markup. In 2017, liquor sales in Michigan topped $1.35 billion, with the state receiving $448 million in taxes, Ellis said. Small Michigan distillers make up between 2 and 5 percent of the market, so the loss of the taxes on a 32.5% markup would be relatively small, but the impact to the state's economy in general could be large, he estimated.

The Senate Fiscal Agency (SFA) reported Tuesday that using Fiscal Year (FY) 2012 numbers and presuming all qualified small distillers max out on production, the General Fund hit would be $8.5 billion. The School Aid Fund (SAF) would lose $600,000 in the first year and the Convention Facility Fund would be out $300,000.

Ellis called the SFA's final $9.4 million price tag "flawed" because it looks at things as a "worst-case" scenario as opposed to providing a more likely estimate.

Nonetheless, any loss in SAF money is too much for school groups who have seen the Legislature poke holes in the $15 billion SAF over the years. That's why Sen. Dayna Polehanki (D-Canton) and other Democrats opposed the bill.

Polehanki offered an amendment that would have reimbursed the SAF through the General Fund for any revenue it lost through the change. It was defeated on a mostly party-line vote.

"We can't continue to chip away at our School Aid Fund, whether it be great or small, and expect our schools to survive," she said.

Former Sen. John Proos had a similar bill in the 2017-18 session. Like the VanderWall bill, it gave the 50% discount only to small Michigan distillers who buy at least 40% of their ingredients in-state. However, that bill slightly rolled back the state's 65% tax on all liquor distillers, which increased the price tag to roughly $11 million. The current VanderWall bill does not.

For Jon O'Connor, president of the Michigan Craft Distillers Association, this is an issue of tax parity. The 65% markup is a regressive tax that hits his 35 members harder than the state's flat excise tax on micro-brewers or wine makers.

As an example, if the shelf price for a bottle of spirits distilled by a small operation is $29.99, it means the producers sold it to the state for $16.23. Michigan marked up the alcohol $10.55. Then, three different $1.07 taxes are put onto that bottle.

Giving micro-brewers a break for the quality product they put on a shelf would be a big boost to for his members and consumers, he argued.

The Proos bill last year passed the Senate unanimously but ran into a wall in the House. This year, O'Connor is hoping for a different result.

"We appreciate the bipartisan support of the bill," he said. "We appreciate the opportunity to help small businesses create jobs and more infrastructure in both rural and urban centers across the state," he said. "Hopefully, we can get this across the finish line."

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