27 CFR 24.278, the small wine producers’ tax credit—beer and spirits producers, who do not enjoy a similar credit, might call it a loophole—strongly incentivizes domestic, still wine production by small and not-so-small wineries by reducing their excise tax liability on the first 100,000 gallons sold each year to almost nil.

The tax credit originated with efforts to rejuvenate the U.S. economy after its last major recession in the early 1990s. Specifically, in the Revenue Reconciliation Act of 1990, Congress increased the excise tax rate on still wine and artificially carbonated wine removed from bonded premises or Customs custody after January 1, 1991, by $0.90 per gallon. In the same bill, Congress introduced an up-to-$0.90 per gallon excise tax credit for small, domestic still wine and artificially carbonated wine producers. The taxation regime for most sparkling wines, which are naturally carbonated, remained the same.

This mildly protectionist measure—small, foreign wine producers receive no tax credit—sought to promote small business within the U.S. wine industry. Anecdotal evidence would suggest that it has succeeded: small independent wineries have multiplied since 1990. Yet, the credit defines “small” with surprising breadth, embracing any “person” who produces 250,000 gallons of wine—which equates to more than 100,000 cases—or less per calendar year. Conglomerates and wineries producing wine under multiple labels cannot necessarily double-dip, however: “person” includes a controlled group of entities with cross-ownership or control of 50% more, and a group of entities in which 5 or fewer people own or control 50% or more of each entity’s stock.

Originally, the credit could only be taken by a winery on wine produced and removed from bond for consumption or sale by the winery, itself. If the winery transferred the wine in-bond to a warehouse, it lost the ability to claim a credit on that wine, and the warehouse could not do so. In 1996, Congress amended the law to permit direct transferees in bond from qualifying small producers to claim the credit when they remove the wine from bond for sale or consumption.

The credit provides a strong financial incentive—and marketplace advantage—for small and mid-sized U.S. still wine producers. Wineries producing 150,000 gallons (63,090 cases) or less per year may take a full, $0.90 per gallon credit on the first 100,000 gallons (42,060 cases) produced. For wineries producing 150,000-250,000 gallons, the credit declines by 1% for every 1,000 gallons produced in excess of 150,000. Presently, the per-gallon excise tax rate on still wines with 14% or less ABV is $1.07. For still wines with 14%-21% ABV, the current rate is $1.57 per gallon. For many U.S. wines, then, application of the full credit reduces the per-gallon tax to only $0.17—about $0.03/bottle. Competing still wines produced outside the U.S. pay the standard excise tax rates of $1.07 or $1.57 per gallon, and all naturally sparkling wines are taxed at $3.40 per gallon.

Conclusion: Congress wants us to buy American—but without bubbles.


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