Washington state distilleries are days away from potentially drowning from a 400% tax increase as the current federal excise tax cut is slated to expire on December 31, 2019.
“Two years ago, we were thrown a lifeline as part of the 2017 Craft Beverage Modernization and Tax Reform Act,” said Mhairi Voelsgen, founder of BROVO Spirits and Washington Distillers’ Guild President. That “lifeline” was a federal excise tax cut that lowered the tax rate distillers pay per proof gallon from $13.50 to $2.70 on the first 100,000 proof gallons. The majority of Washington state distillers produce less than 10,000 gallons a year, explained Voelsgen. “This tax cut was designed for us smaller distilleries,” said Kim Karrick, who owns Scratch Distillery in Edmonds with her husband, Bryan . “It allowed us to buy more American-made equipment, bring in more raw materials from farmers, develop more unique products, and we hired more people.”
“We brought on three outside salespeople to support BROVO. It made a big difference,” added Voelsgen. “Most of all, it freed us up to keep prices of our spirits down amid growth.”
Voelsgen and Karrick can’t stress enough how much small distilleries need the current tax rate frozen before it expires on New Year’s Eve. “We need federal legislators to act NOW, and pass legislation that will renew the tax change, before the 400% increase takes effect,” said Karrick.
The American Craft Spirits Association projects that 30% of craft distilleries will need to close their doors next year if the tax cut is not renewed. In Washington state, we expect that figure will be even higher because of the serving restrictions that have been placed on us at the state level as well,” explained Voelsgen.
Public Support Needed Now
Local distillers are calling on the public to buy local spirits and to reach out to lawmakers at the state and federal level. We need our fellow Washingtonians to rally around us and support small-batch distilleries,” said Nathan Kaiser, owner of 2bar Spirits in Seattle. “That means purchasing local products this holiday season, ordering our spirits at your favorite watering holes, and making calls to state and federal legislators on our behalf asking them to support bills that assist our industry and to keep the current federal excise tax rate.”
Dozens of Washington State Distilleries Closed Up Shop in 2019
Established distilleries such as Sound Spirits in Seattle and Wishka River in Aberdeen shuttered their businesses after more than eight years in business. “Even with the current lower tax rate, we’ve seen the number of active distilleries in our state go from 132 at the start of 2019 down to 98 as of this October,” said Voelsgen.
“A 400% increase in taxes on spirits will mean that the cost of a vodka soda bought at a restaurant or bar will go up by a dollar, and a bottle of vodka will go up by three to five dollars,” said Karrick. “Prices will go up for everyone because the highest cost in a bottle of spirits is the taxes, by far.”
“We’ve had to swim upstream and paddle like mad because of how lawmakers treat our industry,” said Voelsgen. “We’ve attracted fans of our products, garnered national and even international acclaim and awards, and yet many in our industry simply can’t stay afloat.”
“We need a level playing field,” added Kaiser. “Small breweries and wineries have an existing tax break that allows them to build and grow their businesses. Small-batch craft distilleries need the same treatment once and for all.”
About Washington Distillers Guild
Established in 2008, the Washington Distillers Guild is a 501(c)6 non-profit organization that represents and works to promote the success of distilleries located in the state. We do this through industry education, legislative efforts, events like PROOF, and an active board of directors comprised of distillery owners and industry members in Washington.
Facts about Washington Craft Distillery Industry/courtesy of Washington Distillers Guild:
• WA Distillery average 2018 revenue $87.5k-6 months, $175k/yr
• Median 2018 revenue $28.5k-6 months, $57k/yr (not enough to hire even one full-time person. Lack of access to the market = lack of sales
• 33% of revenue is through the tasting room
• If you have no distributor, then 70% of revenue is through the tasting room
• Getting tasting rooms in higher foot traffic areas is one key to success for the industry
Background on Washington Craft Distillery Industry/courtesy of Washington Distillers Guild:
The craft distillery industry was started in the state in 2008 when Dry Fly in Spokane got legislation passed that created a craft distillery license for $100 a year that focused on grown in Washington products.
Washington state distilleries are less than 1% of the total liquor licenses in the state (more than 18,000) and less than 2% of the total spirits licenses (more than 7000).
The industry has also grown at a national level, with close to 2000 craft distilleries across the US. The 2008 legislation served as a trigger to start a distillery here, but in the ten years that followed, many other states have followed suit. Washington distilleries were industry leaders.
But other states saw the benefit of creating a strong, growing industry that would create jobs in state, and enacted laws to support their states products.
Privatization of Liquor Sales
Washington state also went through privatization in the meantime. Many new retail outlets opened, but they stocked their shelves with national brands- big liquor. Decisions for these slots were made in Ohio or California, not in Washington. The state stores (220-ish) were auctioned off, but they have struggled, and many of them have shut their doors. Independent retailers are the backbone of selling new products like ours- complicated, expensive, with a deep story to tell.
Consolidation of distributors
At the same time in the last couple of years, distributors have consolidated in the state. There has been a national trend to form ever large distributors who focus on bigger brands. These distributors are not interested in supporting smaller distilleries in the state, especially rural ones. As a result, 64% of the distilleries in the state have no in-state distributor. They get a majority of their revenue – more than 70% from their tasting room sales.
Remote Locations/small communities
Distilleries are also located out of the way, in small communities around the state, where there isn’t much foot traffic. Most of their tasting rooms have fewer than five seats and hold fewer than ten people. They get less than 50 people a week visiting them, and the median revenue in 2018 for these distilleries is $57k. When they get people in the tasting room, they are limited to serving them 2oz per person per day. That is typically served as a flight of four samples of different products. People can try the products, but these are different products, so they don’t get to try them in a cocktail where they could understand how to use them. We are the only license type in the state that has a limit on servings. At the same time, we have the same obligation through MAST to not over serve or serve minors. And we are the license type with the fewest infractions.
More info about WA state liquor sales courtesy of Washington Distillers Guild:
Craft spirits made in state make up approximately 1% of the total spirits revenue in the state. The national average for craft spirits is 3%- we are one-third of it. In Oregon, one easily accessible stat online shows that in 2011, made in Oregon spirits made up 11% of their total spirits sales. Oregon is much friendlier to craft distilleries, allowing up to 5 tasting rooms per distillery. Other states are also recognizing the potential- in the last 18 months, Pennsylvania, New York, and Delaware have allowed any beer, wine or spirits producer in state to serve and sell the products made by any other beer, wine or spirits producer in state. It helps everyone in the state grow the local industry. We are not keeping up with the national increased use of craft spirits here in Washington.