A brewery has enough to worry about – whether it be an early frost diminishing the local fruit supply, reports of its latest barrel-aged stout being infected, or its customers complaining about the way it released said barrel-aged stout – you’ll never please everyone! Failure to pay sales or use tax is one issue a brewery doesn’t want to encounter, but that’s exactly the issue many breweries face at some point and the consequences can be significant.
This tax issue typically surfaces in retail transactions rather than wholesale transactions. Retail transactions involve property bought for the purpose of consumption or use by an end user (in this case, the brewery). Wholesale transactions involve property bought for the purpose of reselling to an end user or reselling in another wholesale transaction. When a brewery purchases a canning machine to can its beer, it typically pays the legally imposed sales tax to the vendor at the time of purchase. Let’s say the sales tax amount is 5% of the purchase price. What happens if the vendor charges only 3% sales tax or, even worse, doesn’t charge sales tax at all? In many cases, the brewery will be responsible for paying use tax to make up for the sales tax that was not collected.
What is a Use Tax?
Use tax acts as a companion, or substitute, for sales tax. It is computed based on the purchase price of the item being taxed. Generally speaking, it is not designed to increase the burden on the taxpayer, but, instead, as a substitute for sales tax that wasn’t collected or to make up the difference between the actual amount of sales tax collected and the amount of tax that is owed. In the example, the sales tax required by law was 5% of the purchase price. If the vendor selling the canning machine charges the brewery 3% sales tax on the purchase, then the brewery will owe 2% of the purchase price in use tax to make up for the tax deficit. It would be the brewery’s responsibility to complete any necessary forms and send the use tax payment to the appropriate authority.
What Kind of Property is Taxed?
Tangible personal property sold in a retail transaction is typically subject to sales and use tax. This includes things like glassware used to serve beer at the brewery, tables and chairs, certain equipment, and other personal property items found in a brewery. However, there are certain exceptions depending on the state and local jurisdiction involved. In Colorado, machinery is exempt from state sales and use tax so long as it is used in manufacturing. While that sounds simple, determining what constitutes “machinery” and whether it is used in “manufacturing” requires some detailed analysis. Further complicating the analysis is that the machine may be subject to local sales and use tax despite the state exemption.
Our firm recently encountered this issue for one of our Colorado brewery clients. The brewery purchased a canning machine for a substantial amount of money but didn’t pay sales tax to the vendor at the time of purchase. The invoice included a statement that the brewery was responsible for all taxes as a result of the sale. This prompted the brewery to ask us to determine the tax owed, if any, as a result of the purchase. We determined that the canning machine did meet the Colorado Department of Revenue’s definition of “machinery” used for “manufacturing” purposes, and, therefore, the canning machine was exempt from state sales and use tax. However, the brewery’s local jurisdiction is a “home-rule” municipality, which is a fancy way of saying it can make its own rules. This particular jurisdiction’s rules did not exempt this canning machine from local sales and use tax. Consequently, the brewery had to file documents detailing the purchase and pay the local jurisdiction use tax in the amount of 4.11% of the purchase price.
The Consequences of Failing to Pay Sales or Use Tax can be Significant
Each state and local jurisdiction is different, but the consequences of failing to pay legally required sales or use tax are generally significant. In our brewery client’s example, had it failed to pay the use tax owed, the local jurisdiction would have assessed a 10% penalty plus 1% interest for each month that the brewery failed to pay the use tax. Local jurisdictions depend heavily on the revenue generated by such taxes and conduct regular audits of local businesses to ensure they are getting their share.
So what can a brewery do to avoid these tax issues? Here are some general tips:
- Know your state and local jurisdiction’s sales and use tax rates;
- Keep good records of every purchase your brewery makes;
- Conduct self-audits at least annually to determine if adequate taxes were paid at the time of purchase; and
- Consult professionals to assist in analyzing whether your personal property is subject to state or local sales and use tax.
A brewery, whether well-established or just getting started, has enough to worry about without adding sales and use tax issues to the mix.