Federal tax reform under Pub. L. No. 115-97 has been the major tax story of the year, even for those of us working in the SALT world. However, the implications for state and local transaction-based taxes, such as sales tax, have not been as closely examined. Although the effects are not immediately obvious, the reduced federal excise tax on certain types of beer, wine, and distilled spirits may end up having a large impact on sales tax revenue down the road.
All states imposing a sales tax impose that tax on at least some sales of alcoholic beverages. Certain states only impose sales tax on retail sales of beer, wine, and liquor at liquor stores, grocery stores, and similar establishments. These states, like Vermont, generally exempt alcoholic beverages sold for immediate consumption at a restaurant or bar from the sales tax and impose an excise tax on these purchases instead. Texas imposes both sales tax and an excise tax on all sales of “mixed beverages” within the state. Rhode Island imposes its sales tax on sales of beer only; wine and distilled spirits are exempt from sales tax there.
For purposes of analyzing federal tax reform’s effect on revenues from these sales, it is important to note that federal excise taxes on beer, wine, and distilled spirits are imposed on the producer or importer and are thus included in the sales tax base. In general, federal tax reform decreased these taxes on many types of alcohol, while increasing the tax credits available for some producers and importers. This may seem like great news to you when you’re stocking up on booze for Margarita Monday or to make mint juleps while watching the Kentucky Derby, but this could spell trouble for already struggling state coffers.
It is unclear at this point if federal tax savings will be passed on to consumers, but any decrease in the overall sales price of alcoholic beverages would lead to a decrease in state and local sales tax revenues, in addition to decreasing revenues from any excise taxes also imposed on such sales. At a time when many states are already strapped for cash, any reduction in revenue may require a response, which could include cutting state budgets or increasing taxes on other products or transactions.
It will likely take some time for states to determine the level of impact the change in federal excise taxes will have on sales tax collection. Meanwhile, this is good news for alcoholic beverages producers and importers, and I’m happy to drink to that.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think the decrease in federal excise taxes on alcohol will impact state and local revenue?
Tune in for Bloomberg’s tax reform webinar on Wednesday, May 30, 2018, from 2 pm to 3 pm. “Federal Tax Reform: State Impact and Responses” will give you a snapshot of state responses to federal tax reform and let you know what to expect during the remainder of the year. Register for this webinar here.
For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.
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