10News Investigates: Effects of Tennessee's beer tax

12:34 AM, Feb 27, 2013   |    comments
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Breweries are opening across the country at a rate faster than any time since prohibition.  According to the Brewer's Association, craft beer is driving that growth, boosting local economies and creating jobs. But, Tennessee isn't seeing the same boost as surrounding Southern states. Many craft brewers blame a decades-old "sin tax," that's the highest in the country.  

A proposed state law could change that.  If the legislature passes it, beer would be taxed based on quantity instead of price.  Economic development experts believe that would put Tennessee in a position to compete with other states for new business, instead of seeing brewers go elsewhere.  Those opposed to the change argue it could bring down tax revenues that benefit local cities and counties.
For example, in the past year, one major craft brewing company based out west, passed over the Volunteer state for its East Coast expansion, in part, because of those high taxes.  Now, an East Tennessee-based brewer is considering leaving so he can turn a profit.

"I love to do the Belgian beers. I also love to do the Porters and the Stouts," said Allen.

Studio Brew is brewing up business in Kingsport, Tennessee.  Owner and Brew-master, Erich Allen, started the brewery about 18 months ago after a friend introduced him to craft brewing.  Allen approaches brewing as more than a business though, he considers it art and sees similarities with his background in photography. The brewery calls Allen's former photography studio home.

"People can stand next to you and take similar shots, but this is an image that you created. And, it's just like in beer," said Allen.

Studio Brew is ready to expand from the 50 barrels it produced in 2012,  but Allen said Tennessee's taxes, especially the 17% wholesale tax, are keeping him from getting ahead, "You start looking at the Tennessee state beer laws and stuff, and you go, holy smokes, I'm being penalized to start a business."

Allen is considering growing his beer business 23 miles north of Kingsport, in Bristol, Virginia where there is no wholesale tax on beer.
Start-ups like Studio Brew aren't alone in their financial frustrations.

"The Tennessee tax is a real stumbling block for our state," said Blount Partnership President and CEO Bryan Daniels.

He worked to get Sierra Nevada brewing to Alcoa in 2012.  After months of narrowing down a list of top candidates to Blount County and another site near Asheville, North Carolina, the Northern California-based brewer took its 160 jobs and $100 million investment to North Carolina instead of Tennessee.

Initially, local officials and Sierra Nevada executives cited environmental concerns for not coming to Tennessee.

Daniels now tells 10News that Tennessee's beer tax played a major role in losing the brewery, "That was the Achilles heel we could not get around."

A Sierra Nevada spokesperson also tells 10News that high taxes was not the primary reason the brewery pulled out of Tennessee, but acknowledged it was a factor.
Brewers and distributors in Tennessee, and in most other states, pay both state and federal taxes to produce and sell beer. Tennessee is the only state that adds that 17% wholesale tax based on the price of the beer sold, not the quantity, which makes Tennessee's beer tax the highest in the country.

For example, in 2011, Tennessee's beer industry paid about $37 per 31-gallon barrel.  That's more than four times the rate in Virginia, and is also higher than tax rates in Alabama, Georgia, Kentucky, and North Carolina.

Many Tennessee brewers, distributors, bar and restaurant owners want the wholesale rate capped, or done away with all together, so their businesses can flourish in the future.  That will also mean jobs and tourism, which will increase the industry's economic impact across the state.

"We're hoping that this will be the opportunity to create a brewery that we can hand over to our child, our daughter, and she can take it to her children, and so forth," said Allen.

He is waiting to see if Tennessee lawmakers pass the beer tax bill before making a final decision about moving to and expanding in Virginia.  The bill's co-sponsor Rep. Cameron Sexton (R-Crossville) said lawmakers will get it in committee in a few weeks.

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