Alexandra “Sasha” Sacavage, McNees Wallace & Nurick

Pennsylvania has a rich history in brewed beer. According to the Beer Museum in Pittsburgh, the first brewery in the colony was built on the location of a land grant from William Penn in 1684. Penn himself had a brewery around the same time and gifted barrels of his beer as part of his diplomatic efforts. Over the next several hundred years, the commonwealth became home to tens of thousands of eastern European immigrants who continued the practice. Prohibition halted production for a time, but manufacturing returned and today there are more than 360 breweries operating in the commonwealth.

The Pennsylvania Department of Revenue recently announced that Pennsylvania breweries are to begin collecting 6 percent sales tax on direct to consumer beer sales. This is a significant departure from the department's prior determination that breweries were exempt from collecting and remitting sales tax from direct-to-consumer sales. The change in policy has caused concern among an industry that includes small family-owned operations to sprawling mega breweries, and every size in between. The industry has undergone major changes in the last several years, and brewers of every size have had to navigate the liquor code and accompanying tax regulations.

Historically, breweries were not permitted to sell their own beer for on-premise consumption without additional licensing from the Pennsylvania Liquor Control Board (the board.) Under the old rules, breweries were confined to sales to distributors, and for tax purposes the distributors would collect 6 percent sales tax when selling the beer to retailers and the public. In 2015, the board issued regulations permitting breweries to sell their own beer direct to consumers for onsite consumption, triggering changes in sales and tax remuneration. After the new regulations were issued, distributors continued collecting the required sales tax but there was no collection on a brewery to consumer transaction.

For the uninitiated to Pennsylvania's complex Liquor Code, breweries hold a “G” category license with the board which entitles the holder to produce malt or brewed beverages and to transport, sell and deliver those malt or brewed beverages. Some breweries hold a companion “GP” or “brewery pub” category license which allows a brewery to operate a restaurant or brew pub within or immediately adjacent to the brewery's premises, see  47 P.S. Section 4-431(a), 47 P.S. Section 4-446. The brewery pub is no longer necessary for a brewery to sell its beer for on premise consumption but there are some additional physical requirements required by the board. Specifically, the brewery must have adequate seating for at least 10 patrons and must make food available for each patron and may only serve beer for on-premises consumption between 10 a.m. and midnight, 40 Pa. Code § 3.93(c)(4). The regulatory changes have allowed breweries increased freedom of service and sales.

For tax purposes, G licensees were treated like Restaurant “R,” Hotel “H,” and Eating Place “E” licensees, who pay taxes on wholesale cost rather than point of sale. Distributors “D” licensees collect on the retail price at the point of sale. The Pennsylvania brewery industry continued to adhere to the applicable tax rules as determined by the Department of Revenue until 2018, when the department issued a rule clarification related to tax on direct to consumer beer sales. The department made it clear that breweries are required to collect 6 percent sales tax on direct-to-consumer transactions. The department indicated the law has not changed but that clarification was necessary because of changes to the liquor laws. They say that the new rules are consistent with Pennsylvania's Tax Reform Code of 1971 and point to language in the statute that states that “a brewery shall collect and remit sales tax on sales of malt or brewed beverages to any person for any purpose except to distributors or importing distributors.” The department asserts that although this new directive is merely a clarification of tax law, they are sensitive to the affect that the change may have on the industry. They have agreed to push the start of tax collection from Jan. 1, 2019 until June 1, 2019. At that time, the department will begin collecting 6 percent sales tax for every dollar of beer sold by breweries directly to consumers in addition to the $2.48 per barrel state excise tax that Pennsylvania breweries already pay.

Breweries remain concerned about the potential for increases in prices to cause a decrease in sales in a crowded industry where the business environment can be cutthroat. Every operating brewery must maintain compliance with the strict requirements of the Liquor Code as well as obligations imposed by the Department of Revenue in addition to running a profitable business. The industry seems to accept taxation on their product, but prefers that it be collected at the wholesale level. The impact of the rule change will be felt most in Philadelphia and Pittsburgh, home to a large number of breweries. Philadelphia levies a liquor tax of 10 percent applicable to sales of liquor, wine, or malt and brewed beverages. The city also levies a general sales tax of 2 percent on drink sales. Pittsburgh assesses a 7 percent drink tax along with a 1 percent sales tax. Breweries are concerned that consumers will pay more for drinks purchased at their establishments than at other bars and restaurants, leaving them at a competitive disadvantage.

Whether this tax on breweries becomes permanent remains to be seen, as various trade associations and advocacy groups, as well as some state legislators continue to voice their opposition. Unless the General Assembly passes legislation exempting direct-to-consumer sales at breweries from sales tax collection, or the Department of Revenue reconsiders its determination, breweries must begin complying with the new directive in the near future.

Pennsylvania has been in the brewery business for a long time, and its probably safe to say that however this latest tax issue turns out, the commonwealth will always have a showcase brewery industry. This isn't the first governor or General Assembly who has faced opposition to liquor tax and it won't be the last. In 1683, Gov. William Penn insisted on low taxes on cider and liquor. When it came time to review those taxes, he faced such strong resistance to even the low rate that he agreed to suspend all taxes for a year. In Pennsylvania, government and beer makers have co-existed for centuries, sometimes in harmony and sometimes at odds. It will certainly be interesting to watch this issue unfold.

Alexandra “Sasha” Sacavage focuses her practice at McNees Wallace & Nurick on litigation matters pertaining to food and beverage, government services, white collar defense and eSports. She previously served as legal counsel to the Pennsylvania House of Representatives Democratic Caucus, legal counsel to the Pennsylvania Liquor Control Board and enforcement counsel to the Pennsylvania Gaming Control Board in Harrisburg.