The Pennsylvania Department of Revenue, somewhat quietly, has issued a sales tax bulletin recently setting forth some guidance which lays the groundwork for the Department of Revenue to begin imposing a 6% sales tax on products served by Pennsylvania breweries in their taproom to customers. This would include draft beers that are sold onsite and six packs and growlers which are sold for off premises consumption.
There didn’t appear to be a lot of buzz when this guidance was passed by the Department of Revenue. Central Penn Business Journal published an article highlighting the double hit that many breweries are currently taking given the tariffs that have been imposed by the Trump Administration on steel. What is of particular concern is the seemingly unfair and inconsistent manner in which the sales tax would be imposed on the sales made by breweries when compared to a restaurant.
Some perspective on how sales tax is currently imposed will help to explain the problem. Currently, restaurants pay sales tax on bottles of liquor when they buy them from the PLCB. They also pay sales tax on the beer they purchase from a distributor. In each case, the sales tax is calculated based upon the wholesale price they pay for the bottle of liquor or keg/case of beer. A restaurant does not then have to impose or collect sales tax from its customers when it sells a glass of beer or a liquor beverage to its customer, since the sales tax has already been paid at the wholesale level.
To further illustrate the problem, for a keg of beer that a restaurant is going to sell, they pay sales tax based on the price of that keg when they purchase it from a beer distributor, say for $40. The same will be true for a bottle of liquor, which might cost $15. When a restaurant purchases that bottle of liquor from the state, they pay sales tax based on that $15 purchase price.
Contrast that with the new Department of Revenue requirements for breweries. For a brewery, they are going to be required to impose sales tax on each drink they sell across the bar. That method of imposing the tax has the effect of imposing a significantly higher tax burden on breweries because they have to collect and remit based on the retail price, as opposed to bars and restaurants that can pay the tax based on the wholesale price. For instance, if we assume that same $40 keg of beer was made by a local brewery, the brewery might sell 120 pints of beer out of that keg at a price of $5 per pint. That means a brewery would have to collect and remit sales tax based on the total sales of $600 worth of beer, which equates to $36 in tax. The restaurant buying that same keg for $40 would only remit $2.40 in sales tax. That hardly seems fair and imposes a significantly higher burden on manufacturers of alcohol within Pennsylvania.
The Pennsylvania legislature, in the last days of its session in 2018, was scrambling to adopt language in an omnibus liquor bill that would address this issue and provide some consistency for the manner in which sales taxes would be imposed on a brewery and have it more closely resemble the way restaurants are taxed. Unfortunately, the corrective language was stripped out of the bill and presumably has been tabled until the 2019 legislative session.
Regardless of whether or not the legislature finds a way to level the playing field when it comes to the imposition of this tax, it will be a cost that all breweries should begin planning for now. Whether they pass that cost along to the customer or whether they absorb it as an expense, it will impact the bottom line for all of these manufacturers who thus far have been able to operate without having to remit sales tax to the State.