GOP tax law could aid booze business

Some fear foreign distillers could exploit loophole.

WASHINGTON — The new tax law counts on a small, little-known federal agency to ensure a tax provision aimed at helping small liquor producers does not become a loophole large foreign distillers can exploit.

At issue is the law’s tax cut for hard liquor producers, dropping a tax from $13.50 per proof gallon (a measure of the liquor’s quantity and alcohol content) to $2.70 per proof gallon. That bargain $2.70 rate is limited to the first 100,000 proof gallons, while companies pay a higher rate on booze produced beyond that.

The cap is aimed primarily at benefiting small distilleries, aiming to spark small-business expansion and hiring. But the lower tax rate is also available to importers buying from foreign producers, and some fear that has opened up a loophole that foreign firms could use to pay the lower rate on more liquor than the plan’s drafters intended.

The scramble to enforce these new alcohol taxes is one example of the federal bureaucracy’s daunting new task of implementing a Republican tax law that critics say was passed quickly through Congress and contains a host of provisions that took effect within days of the law’s passage. Much of the enforcement will fall to the Internal Revenue Service, which experts fear has been left unable to handle the burden due to steep budget cuts. But other agencies have been tasked with enforcement too, and their ability to shoulder that burden is up for debate.

Enforcing the new liquor tax regime falls predominantly to the U.S. Alcohol and Tobacco and Trade Bureau, a Treasury Department agency that even before the tax law was racing to keep up with a boom in new domestic distilleries and breweries. The agency, which employs about 500 people across the country, had an annual budget of $113 million in 2016.

Some fear the fast adjustment to the new tax regime will stretch the agency’s ability to effectively monitor the industry, although others insist that the agency is well-prepared to meet the challenge.

In its changes to liquor taxes, the GOP tax law drew heavily from an earlier, bipartisan proposal to revamp the federal tax system for booze. But while that previous version would have delayed the tax changes for about one year after passage to allow the agency time to craft an enforcement strategy, the law that passed gave the bureau about two weeks to do so.

TTB says that it is currently working on deciding how to implement the law, which could include issuing regulations. Typically, the bureau holds a months-long process to take public feedback and craft new regulations or guidelines for translating federal law into reality.

“We’re assessing [the new law] right now and will move on it as quickly as we can,” said Tom Hogue, a spokesman for the Alcohol and Tobacco and Trade Bureau. “It’s a pretty short run-up time, but we’re doing the best we can with the new statute. We’re hoping to issue guidance as soon as we can.”

But in the law as written, some see a loophole foreign firms could exploit.

If one foreign company were to act as if it were multiple companies selling different products to U.S. importers, its products might be eligible for the $2.70 tax rate on all sales, including those beyond the first 100,000 proof gallons, said Adam Looney, a former Treasury Department official now at the Brookings Institution.

Theoretically, U.S. companies could try the same scheme. But it would be easier to get away with abroad, where the TTB has less access and limited resources.

Foreign producers “will represent themselves as ‘craft’ producers even if they’re not,” Looney writes in a recent blog post. “Almost a third of distilled spirits is imported and the importers would have a strong incentive to claim the lowest rate. [The United States] will have little ability to stop them.”