The cap is aimed primarily at benefiting small distilleries, aiming to spark small-business expansion and hiring. But the lower tax rate is also available to importers buying from foreign producers, and some fear that has opened up a loophole that foreign firms could use to pay the lower rate on more liquor than the plan's drafters intended.
The scramble to enforce these new alcohol taxes is one example of the federal bureaucracy's daunting new task of implementing a Republican tax law that critics say was passed quickly through Congress and contains a host of provisions that took effect within days of the law's passage. Much of the enforcement will fall to the Internal Revenue Service, which experts fear has been left unable to handle the burden due to steep budget cuts. But other agencies have been tasked with enforcement too, and their ability to shoulder that burden is up for debate.
Enforcing the new liquor tax regime falls predominantly to the U.S. Alcohol and Tobacco and Trade Bureau, a Treasury Department agency that even before the tax law was racing to keep up with a boom in new domestic distilleries and breweries. The agency, which employs about 500 people across the country, had an annual budget of $113 million in 2016.
Some fear the fast adjustment to the new tax regime will stretch the agency's ability to effectively monitor the industry, although others insist that the agency is well-prepared to meet the challenge.
“This whole thing is being accordioned into a short period. They don't have time to consider everything that might happen, because they had to have rules as of January 1,” said David Dunbar, who spent decades at Bureau of Alcohol, Tobacco and Firearms and now works as a consultant to craft distillers nationally. “There's a way in which rules are normally made that goes through a very formal process, in which agencies consider comments and make the changes necessary. I suspect that is not happening here.”
In its changes to liquor taxes, the GOP tax law drew heavily from an earlier, bipartisan proposal to revamp the federal tax system for booze. But while that previous version would have delayed the tax changes for about one year after passage to allow the agency time to craft an enforcement strategy, the law that passed gave the bureau about two weeks to do so.
TTB says that it is currently working on deciding how to implement the law, which could include issuing regulations. Typically, the bureau holds a months-long process to take public feedback and craft new regulations or guidelines for translating federal law into reality.
“We’re assessing [the new law] right now and will move on it as quickly as we can,” said Tom Hogue, a spokesman for the Alcohol and Tobacco and Trade Bureau. “It’s a pretty short run-up time, but we’re doing the best we can with the new statute. We’re hoping to issue guidance as soon as we can.”
But in the law as written, some see a loophole foreign firms could exploit.
If one foreign company were to act as if it were multiple companies selling different products to U.S. importers, its products might be eligible for the $2.70 tax rate on all sales, including those beyond the first 100,000 proof gallons, said Adam Looney, a former Treasury Department official now at the Brookings Institution.
Theoretically, U.S. companies could try the same scheme. But it would be easier to get away with abroad, where the TTB has less access and limited resources.
Foreign producers “will represent themselves as ‘craft’ producers even if they’re not,” Looney writes in a recent blog post. “Almost a third of distilled spirits is imported and the importers would have a strong incentive to claim the lowest rate. [The United States] will have little ability to stop them.”
Experts disagreed about the scale of the problem, with several in the industry dismissing the concern as baseless. Some noted that the agency would likely be able to enforce the law by overseeing importers, based in America, who they could hold accountable for the actions of their foreign producers.
“TTB has no extraterritorial reach, and they can’t go to France or German or South African to enforce this law. But they have an existing base of accountable importers, and the fallback is to say that they’re going to be held accountable,” said Bill Earle, president of the National Association of Beverage Importers. “It’s an issue that could be prickly, but it’s not something that’s irresolvable.”
“I don’t see where there will be an enforcement issue,” said Chuck Schumacher, a consultant for private companies who served as an investigator at TTB. “Fraud is rare and, for the most part, industry complies.”
Others former government officials said that it was hard to imagine how many foreign producers, if any, would be both big enough to have to evade U.S. law to claim the lower credit and willing to take the risk to do so. “Anyone who is doing 100,000-proof gallon has too much at stake to cheat,” said Dunbar, who predicted the TTB could craft the necessary regulations to ensure producers follow the new law.
Added Earle: “The United States has the benefit of being a market that has overwhelmingly reputable distilled spirits producers coming here, and that’s because it’s an expensive market to get into.”