Brewers can breathe a little easier. And so can beer drinkers.
Congress enacted legislation that will avoid a massive tax hike on beer in 2020.
As 2019 ended, the Brewers of Pennsylvania and other beer industry groups lobbied Congress to pass the Craft Beverage Modernization and Tax Reform Act, or extend the current excise tax rate before Dec. 31.
They extended the tax.
Not doing so would have meant higher taxes for brewers across the state and potentially, higher prices for consumers. However, for brewers, the $3.50 per barrel tax will remain. Had Congress not acted, the tax would have returned to its $7 rate.
In a statement, Jim McGreevy, president and CEO of the Beer Institute, said the recently signed legislation extending excise tax relief for all brewers and beer importers provides brewers and beer importers the certainty they need to continue growing and reinvesting in their businesses.
“More than two-thirds of Americans across the political spectrum want excise tax relief for the beer industry, which supports more than 2.1 million American jobs,” McGreevy said. “As we look forward to 2020, Congress must continue working to pass the extremely popular bipartisan, bicameral Craft Beverage Modernization and Tax Reform Act, and make the current beer excise tax rates permanent.”
Making the current excise tax rates permanent for all brewers would avoid a repeat of the uncertainty leading up to the end of the year, uncertainty that affects decision-making, job growth and planning for all brewers.
“Obviously, people are very happy,” said Ted Zeller, general counsel for the Brewers of Pennsylvania and an attorney for Norris McLaughlin in Allentown. “There’s a whole segment of brewers who don’t know of any other tax. Their whole business model is formulated on the lower tax. This is what they perceive it will always be.”
Planning for a potential tax hike is something that brewers should do this year, said Zeller, who specializes in liquor law. There’s always the chance Congress may not act in time to extend the current rate again.
“Plan on it not being extended and then be happy when it is,” he said. “The industry is rapidly changing so we’ll see what this year brings. It’s a highly regulated industry and it’s very difficult to predict.”
Chris Lampe, president of the Brewers of Pennsylvania and an owner of Weyerbacher Brewing Co. in Easton, said the National Brewers Association has been working hard to get the excise tax extended again.
“I don’t know how it’s going to affect Weyerbacher this year,” Lampe said. “For brewers in general, it’s a win-win because you can use the credit to purchase equipment. If you purchase equipment you can roll money back into the business.”
For one growing brewery, the news of the extension proved particularly welcoming.
“It is so beneficial to craft brewing, to what we do,” said Fred Maier, co-founder and vice president of Susquehanna Brewing Co. in Pittston, Luzerne County.
With 35 full- and part-time employees, and seven years in business, Maier has been hiring more employees and constantly buying equipment to advance the business.
“We haven’t stopped buying new equipment,” he said. “We probably would have had to spend it regardless. We are always investing back into the brewery.”
Susquehanna Brewing recently installed a can production line, which he said was a necessary investment.
He wasn’t certain that the federal government would extend the excise tax and said he was thankful for what the brewers could get.
“We were making plans on kissing it goodbye,” Maier said. “Until it’s made permanent, we don’t act like it’s permanent.”
In fewer than 30 days, the revised federal excise tax rate for more than 350 small and independent brewers in Pennsylvania will expire. If that occurs, it would mean higher taxes for brewers across the state and potentially, higher prices for consumers.
If Congress does not act on the legislation, the $3.50 per barrel tax will return to its original $7 rate, placing a financial burden on American and Pennsylvania brewers, according to Brewers of Pennsylvania, an industry group. Hardest hit, will be the more than 2,000 brewers who opened after Jan. 1, 2018, who will see a 100-percent tax increase.
If Congress allows the current rate to expire, the tax increase may have a negative effect on job creation, Harris added.
“Most of the brewers we looked to are taking those dollars and investing them back into their business,” Harris said. “The craft beer industry has experienced sustained growth in Pennsylvania, and the current FET rate has gone a long way to empower our brewers to make significant investments into their businesses, supplying more than 10,000 jobs and generating $2.2 billion in wages and benefits annually.”
America’s beer industry supports more than 2.1 million jobs, more than a quarter from the craft industry, he said.
The 2017 Craft Beverage Act had strong bipartisan support, but Harris feels the issue could be caught in a logjam in Congress.
“We had a standalone bill that would have made the tax deduction permanent that has all the co-sponsors,” he said.
Harris said there are two potential solutions: extend the tax deductions through a tax extender package, or fund the U.S. government beyond Dec. 20 to avoid a federal shutdown. If that were to happen, a tax deduction for brewers could be included in that, he said.
Having a reduced level of taxes could encourage growth in the industry, and assure brewers that the excise tax will not change, Harris said. “A lot of our brewers are sitting back kind of waiting to see how it plays out,” Harris said.
Ted Zeller, general counsel for the Brewers of Pennsylvania, said there is no excise tax for companies that make wine and spirits in Pennsylvania, but there is one for brewers.
“In Pennsylvania, the lower alcohol volume that you produce, the more regulation and tax you face for beer than you do for wine and spirits,” he said.
Zeller, an attorney for Norris McLaughlin in Allentown, said the increased federal excise tax would affect 99 percent of the breweries in the state.
“Really, doubling this tax has a significant effect on small business, the larger breweries are certainly more capable of absorbing the tax,” Zeller said.
Zeller hopes the excise tax remains at $3.50 per barrel in the short term.
Craft brewers have seen success in Pennsylvania and continue to grow.
“Manufacturing jobs are gold to any industry,” he said. “A lot of the companies I represent are contemplating starting to export to other countries.”
For two years, brewers have benefited from knowing what their tax rate was going to be and what they were going to do with the savings, said Beer Institute President and CEO Jim McGreevy.
“We think it’s good for both big and small brewers,” McGreevy said.
Tax extender discussions in Washington often go down to the wire before they are approved, he said.
“We think it will be extended,” McGreevy said. “We know that in our case, almost the entire delegation of house members are co-signers of the bill. We have almost everybody from the Pennsylvania delegation.”
Supporters include U.S. Senators Pat Toomey, a Republican; and Bob Casey, a Democrat.
McGreevy estimated that brewing contributes about $11.5 billion to the state’s economy. An increase in the excise tax could be especially onerous for brewers who are just starting out.
“It’s very important to keep this relief,” McGreevy said. “Any of those brewers would see an immediate doubling of their excise tax.”
David Kozloski, co-founder and head brewer of GearHouse Brewing Co. of Chambersburg, said he hopes that the reduced excise tax rate becomes a permanent thing.
“It’s kind of absurd to go back to $7 a barrel,” Kozloski said. “Even at $3.50 a barrel, that’s a big difference as opposed to $7 and that can chip away at not just our overhead but profits down the road.”
In part, the reduced excise tax rate allowed GearHouse Brewing to purchase a new brewing system in 2018, which it received in May and installed this year, Kozloski said.
His company started in 2016 and in 2017, it produced about 375 barrels and in 2018, produced a little more than 400 barrels.
Kozloski said he has been reaching out to his national representatives in government in addition to local and state reps and said it sounds as though everybody seems to be on par, based on the responses he has gotten.
The Brewers of Pennsylvania lobbied Congress to pass the Craft Beverage Modernization and Tax Reform Act, or extend the current excise tax rates before Dec. 31.
The Tax Cuts and Jobs Act, passed by Congress in December 2017, provided a temporary reduction in federal excise taxes on beer, according to The Beer Institute, a national trade association based in Washington, D.C.
For craft beer in Pennsylvania, the federal excise tax before the 2017 reduction was $7 per barrel, Harris said. The federal government reduced that tax to $3.50 per barrel as of Jan. 1 2018. If Congress doesn’t act, that tax will go back up to $7 per barrel on Jan. 1, 2020.
The reduced federal excise tax rate has allowed small and independent brewers across the state to reinvest in their businesses, hire employees and grow their breweries, Harris said.
Busy laborers hammer, saw and measure as Josh Divers and Jordan Serulneck walk through the site of the future Seven Sirens Brewing Company in Bethlehem. The two men, just 32 and 30 respectively, are co-owners of the microbrewery, set to open in late September or early October.
A lot is on the line for the pair. Josh is married with two sons, ages 3 and 6, while Jordan is recently engaged. Both put their houses on the line for collateral in order to obtain a small-business loan.
“Failure is not an option,” said Jordan. “We can’t not succeed; that’s how I know we will succeed.”
Seven Sirens will be the latest in a burst of micro-breweries in the Lehigh Valley. From Funk to Fegley’s, Bonn Place to Bangor Trust, there is a microbrewery (or two or three) in many local communities.
But will the growing supply outpace the demand? And with so many specialty beers, can any beer be special?
“I think it depends on how the business is conceived,” said Troy Reynard, president of the Lehigh Valley Brewers Guild, and one of the owners of Two Rivers Brewing, a brewpub located in an historic former tavern in Easton’s West Ward neighborhood.
“We’ve tried to be relevant to the community and stay on top of trends,” he said. “Our smaller size, too, is the most successful in the industry. The biggest mistake many make is trying to grow too fast.”
Reynard also believes that having enough capital to float the business in the early days is key. Most startups will take at least two years before a profit can be taken out of the business, he said.
“I’ve seen people quit their jobs, wrongly assuming they will be able to take money out of the business right away,” said Reynard. “To succeed, you need a great product, a good location and enough capital.”
Reynard sees a “correction” in the industry in the near future, with some microbreweries closing.
In fact, Salmon Pants Brewery, which was located on East Susquehanna St. in Allentown, closed in July after being open for less than a year.
While Reynard said having so many breweries in one area dilutes the audience to some extent, he believes that if a brewery has a good product and is the right size for the community, that there is still an opportunity to be successful.
Reynard also thinks it is a smart move for local craft breweries to open additional tap rooms in different neighborhoods.
“You make more money selling retail than wholesale,” continued Reynard. “We opened a tap room in Quakertown. We keep looking at trends, at what’s hot. Brewed IPAs were a thing on the West Coast, and we were the first to do that here.”
Two Rivers also has a restaurant, which Reynard feels is an advantage. “We get so much business from people who went into Weyerbacher for a couple of beers, but then they need somewhere to eat.”
“Pre-prohibition there were four breweries in Easton,” he said. “People forget that. It was a part of the way of life and it can be again.”
Hey, let’s make beer, that will be fun
Just up the hill from Two Rivers is the granddaddy of craft breweries in the Valley, Weyerbacher Brewing, founded in 1995 by Dan and Sue Weirback, and now located on Line Street on the South Side in Easton.
Weyerbacher filed for Chapter 11 bankruptcy in April and underwent corporate restructuring, with a private investment group now holding the majority of stock in the business.
Josh Lampe took over as president of Weyerbacher in 2015, which he described as a pivotal year.
“You started to see breweries our size and age get hit, as one-to-five-year-old breweries started skyrocketing,” he said. “We had been doing double-digit growth for six, seven years at that point and that stopped. Part of my job is dealing with the over-saturation of craft breweries in the market.”
Lampe said there are a lot of people who think, “Hey, let’s make beer, that will be fun,” without realizing that a craft brewery is a business first and foremost and must be focused on as such.
“If we see the number of breweries continue to open at the rate they have been,” he said, “you are going to start to see people eating each other. If they are all trying to be what we are now, that’s not sustainable for everyone. If you don’t have a quality business plan and great beer out of the gate, there is no room to screw up anymore.”
Lampe was also quick to point out, however, that there can be benefits to having a number of breweries in one small area.
“We’ve actually got a really tightknit community of brewers here,” he said. “If we need hops, we will ask Funk (a craft brewery in Emmaus). We all share. We are contract brewing for some of the local breweries.”
One of Weyerbacher’s contracts is with Funk. The deal allows Funk to avoid investing in the expensive infrastructure needed to brew larger quantities and gives Weyerbacher additional cash flow.
Lampe also mentioned that communities that have several breweries can attract beer tourists.
“From a wine perspective, go up into the Finger Lakes,” he said. “They were just voted best wine country in the U.S. by USA Today. There are so many wineries there that they have created a whole tourist industry around it.”
“In Easton,” he continued, “We’ve got Two Rivers, Boser Geist, there’s so much you can do in a small area. Beer tourism is a real thing.”
Lampe said Weyerbacher frequently attracts beer tourists from as far as four hours away and that Weyerbacher recommends the travelers visit other breweries in the area.
Ted Zeller, general counsel for the Brewers of Pennsylvania, the state’s official brewers’ guild, believes that beer tourism can be a tremendous economic opportunity for community redevelopment.
“There are an overwhelming amount of microbreweries in Phoenixville, and it’s literally just turned that community around,” he said. “High tide raises all boats. Competition makes everyone better.”
Zeller maintains that there is no “beer bubble,” but, like Reynard and Lampe, he said, the breweries that will fail are the ones that do not have a good product or business plan.
“The new beer drinker is more ‘What have you done for me lately?’” he said. “There isn’t a tremendous amount of loyalty in the consumer.”
And with every craft brewery marketing its own special editions, those rare craft brews that collectors once hunted for have started to lose a bit of their cache.
“There are still the rare beer unicorns,” said Weyerbacher’s Lampe. “There is still collectorism. Our Sunday Morning Stout flew, it was gone. People will always want something new, but yeah, when you have a can release every weekend, and you can go to Lost Tavern Brewing in Hellertown, Funk … when everyone has a can release, it loses something. And that’s ok, you might lose a bit of the lines, but people will still buy beer.”
For Weyerbacher, continuing to stay relevant in a crowded market has included expanding into craft spirits, opening additional tap rooms, and signing a recent contract to partner with White Castle Hamburgers, a fast-food restaurant chain headquartered in Columbus, Ohio.
Weyerbacher beer will be served in certain White Castle restaurants, and marketed alongside the hamburgers in stores.
“We are really excited about it,” said Lampe, adding: “We’ve survived because we’ve stayed agile. If there’s a bubble, I don’t think it’s gonna pop, but expand and contract. Those who are doing it smartly will remain.”
Patience and a positive attitude
Back at the soon-to-be home of Seven Sirens Brewing, co-owners Jordan Serulneck and Josh Divers are counting on a crowded craft brewery market to help their business.
“The Lehigh Valley is exploding in craft beers because of the ease of accessibility,” said Serulneck. “All the major highways connect here. We are so close to New York and Philly.”
Serulneck echoes the notion that before prohibition, it was common to see multiple breweries in one area.
“Prohibition really set our area back as far as beer culture,” he said. “The rest of the planet is used to these small breweries and pubs on every corner. It can be like that here. The population in the Valley is skyrocketing and we are here to serve it.”
For Serulneck and Divers, the biggest challenge has not been the competition, but the amount of time it takes to open the business. Still, they aren’t letting the red tape and construction delays get them down. They plan to stick around for the long haul.
“We’ve been working on this for two and a half years and still can’t legally sell beer yet,” said Divers. “It’s difficult but by no means impossible. We are doing it. It takes patience and a positive attitude.”
To keep their future customers engaged and excited, the pair will release limited edition barrel-aged tequila and rum, in-house wines, seasonal beers and even experimental beers.
“We are really excited to try out our shiny new toys and show off what they can do,” said Divers.
Seven Sirens will also be open later than most craft breweries, and will stop serving at midnight, rather than 8 p.m. or 10 p.m.
What they are most looking forward to sharing with the Lehigh Valley beer enthusiasts, however, is the Seven Sirens rooftop beer garden, modeled after the European beer gardens that Serulneck enjoyed while traveling in the Navy from 2009 through 2015.
“For us, we are in the perfect location for something like this,” he said. “People want an experience and they also want the closer-to-home feel. And if another brewery moved in across the street? We would welcome that. The more the better. There is room for everyone if you do it right.”
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