On March 31, Kentucky passed House Bill 445, which allowed distillers a corporate income tax credit for the ad valorem barrel taxes paid on aging whiskey. According to the Kentucky Distillers Association, distilleries pay $13 million a year in barrel taxes.
Although ad valorem taxes—“according to value,” usually a tax on real estate or property—on Kentucky distilled spirits have existed off and on since 1906, the current system has been in place since 1990, when the General Assembly raised the rate from $0.001 to the current rate of $0.005. This 24-year-old legislation also allowed county and cities to tax the aging spirits, creating significant taxation liability without the ability to write off these contributions on their corporate income taxes.
Thus, HB 445 is an historic piece of legislation for the bourbon industry. But the distillers will not receive the tax credit if they do not reinvest the money, says Eric Gregory, president of the Kentucky Distillers Association.
“There’s a list of capital improvements that can be utilized for the credit. All our members agreed to that,” Gregory says. “We wanted to show the legislature that we’re serious about using this money to strengthen our industry, create jobs, and compete on an international scale. I think that’s important. The state Revenue Cabinet also is required to report to the legislature’s Interim Joint Appropriations & Revenue Committee each year on who has taken the credit, how much and what capital improvements for which it was used.”
Since Kentucky distillers are the only alcohol manufacturer in the world required to pay aging barrel taxes, Gregory says, this new law will at least allow distillers to better compete in the global marketplace with non-tax-burdened brands. It will allow them to reinvest that money in their Kentucky operations, create jobs and spur production, Gregory says, and allow the Bluegrass State to better compete with other states for new craft distilleries.
“Distilleries will still pay these taxes, so both the local communities and state will receive their money,” he says. “It will simply allow a tax credit on the distillers’ corporate income tax. We strongly believe that the reinvestment credit will actually create more than it will cost. Bourbon is a great investment for the Commonwealth. We have one of the state’s highest job spinoff factors; surprisingly, higher than other signature industries like tobacco, coal, and horses. For every distilling job, three more are created down the line.”
But no matter how much the KDA, its distillery members, or non-KDA member Buffalo Trace Distillery’s lobbyists—who all actively pursued this legislation for seven years—campaigned for change, a Kentucky legislator needed to take action. That man was Kentucky Senate president Robert Stivers (R-Manchester, a dry district), and I spoke with the president the day after the bill passed.
Tell us about the ad valorem tax credit. Why was it important?
Years go, a particular legislator wanted to add more funding to his local school system, so he got the legislature to pass an ad valorem tax on barrels in the warehouses aging. It’s how they funded their school systems and has gotten to the point that the school systems have developed their budgets on this. You couldn’t repeal [the local tax] because the schools would lose their money. What we’ve done is create a credit at the state level. [Distillers] get a dollar for dollar credit on their state corporate tax liability and are supposed to reinvest part of that into their operations. It’s what they’ve been wanting for years.
For all these years, distillers have not been able to write these taxes off. Was that fair?
Their bourbon was sitting there unusable for six to eight years and they’re paying taxes on it. That’s the only product like that you have. It wasn’t fair.
I’ve been told you’ve been working on this bill behind the scenes for a while.
When I got into leadership five years ago, I started looking at it. I thought it was an unfair tax and saw an opportunity in this session, so I took advantage of it. People in the House have been saying for they’re for it; I just gave them an opportunity to prove they were for the tax credit.
In private meetings, Senators and House members indicated they wanted to give distillers a barrel tax credit?
They would say they were supporting this, but you never saw anybody doing anything about it. Actions speak louder than words.
Were there any organizations or distilleries that helped make this happen?
The KDA and the distilleries, but I saw this opportunity and I took it.
How did you put this in motion?
As an amendment to a House Bill that the House Leadership really wanted. They basically saw the amendment and said we’re willing to talk. It passed with large numbers in senate.
Would this have passed if bourbon were not so popular?
I think you’re onto something. The Kentucky Bourbon Trail has become so popular and accepted. Bourbon is a true signature industry in Kentucky. It creates employment, peripheral jobs, and there’s also the image of Kentucky bourbon.
What is next? Are there other bills for bourbon?
We’ve are working on an option for state parks to go wet. But right now, the bourbon industry is on solid footing from a legislative standpoint.
I can’t let you off the hook without asking: What’s your favorite bourbon?
I have a lot of Woodford Reserve, but I also like to drink a little Maker’s Mark every now and then.