VOL. 42 | NO. 12 | Friday, March 23, 2018
Jack Daniel’s squeezed between barrel tax, threat of trade war
By Sam Stockard
NASHVILLE – Jack Daniel’s is over a barrel – literally – regarding a tax assessment, an attorney general’s opinion and the potential impact of President Donald Trump’s trade tariff.
The whiskey distiller’s ownership, Brown-Forman, is concerned the tariffs could lead to retaliation by the European Union, forcing the company to pay higher taxes abroad as it expands American manufacturing and sells whiskey brands in 165 countries.
President Trump said today he is going to "pause" steel and aluminum tariffs against the European Union, Canada, Mexico, Australia, Argentina and Brazil in order to negotiate better deals.
But foremost, Tennessee’s most famous whiskey distiller finds itself facing a $2.78 million tax assessment on 2 million white oak barrels and, as a result, is pushing for a state law exempting it from taxation on those barrels it uses in the aging process for sipping whiskey.
Technically, the legislation sponsored by Rep. David Alexander, a Tullahoma Republican, would affect about 40 whiskey distillers in Tennessee. But the bill stems directly from a first-time assessment on the aging barrels at Jack Daniel’s in Lynchburg, a tiny town in rural Moore County about 80 miles southeast of Nashville.
“It’s based on a misunderstanding of the whiskey-making process. The whiskey in the barrels transformed the barrels. It gets soaked into the barrel, the charcoal barrel, and then it comes back out,” Alexander says. “Half of the flavor and all of the color of a whiskey is as a result of that barrel. It is as much a part of the whiskey-making process as the corn mash is.”
Alexander amended his legislation at least three times to start moving it through the House, saying this week he worked with the Comptroller’s Office because of concerns raised in an attorney general’s opinion to take the aged barrels “out of the equation.” It is to be heard in the House Finance, Ways & Means Subcommittee Tuesday.
The House Local Government Committee approved an amended version of the bill that simply states all barrels comprised of timber from any state in the country used to age whiskey shall be exempt from ad valorem taxation when the barrels are used and owned by a person producing or manufacturing whiskey in them.
Jack Daniel’s Assistant Master Distiller Chris Fletcher points out the distillery has been making whiskey for more than 150 years and never had to pay the tax. He isn’t even certain where it originated.
“But we do certainly view it as unconstitutional and as a new tax on our industry,” Fletcher says.
Fletcher contends the tax targets Tennessee whiskey making and would put a new “burden” on one of the state’s top exports. He also notes Jack Daniel’s “respectfully disagrees” with the attorney general’s opinion and furthers the argument, saying the company sells the used barrels to companies in Europe that use them for different types of whiskeys, Scotch, tequila and even the aging of hot sauce.
Issued March 5 by Attorney General Herbert Slatery, the opinion says under state law and “relevant” case law, “an article being used to manufacture another product – such as a barrel being used by a whiskey maker to age whiskey – is not entitled to an exemption from taxation.”
The exemption would have applied “during the time in which the barrels are so used and owned by a person that produces or manufactures whiskey in such barrels,” according to the opinion’s analysis. The legislation’s initial premise was that the barrels were a “manufactured article” and shouldn’t fall under taxation for personal property, in part, because they transform as an integral part of the whiskey-making process and are sold to other companies for aging alcoholic beverages.
Exemptions designed to encourage domestic manufacturing, for instance, barrels made by a cooper would apply in this case but only a whiskey maker starts to hold and age whiskey in the barrel.
“The whiskey maker is not converting the barrel into an article different from the barrel that the whiskey maker bought; thus the barrel in the hands of the whiskey maker is not a ‘manufactured article’ within the scope of section 30 (of state law) as construed by the Tennessee Supreme Court,” the opinion states. “The whiskey maker may sell used whiskey barrels to a third party after the whiskey has been emptied from it, but that does not change the fact that a whiskey maker is a manufacturer of whiskey, not a manufacturer of barrels.”
The barrels are by-products of the whiskey-aging process, just as sawdust and tree bark are by-products of a miller’s process involving finished wood products in another legal case, it states.
The assessment on Jack Daniel’s comes is the result of a random audit conducted by a third-party company that determined the distiller should pay the taxes on the barrels because they are considered equipment used in the manufacturing process.
Information provided to the Comptroller’s Office shows Gibson, Madison, Montgomery, Moore and Williamson counties are assessing taxation on liquor barrels. Exempting distillers in those counties would cause a loss of $200,000, in addition to $2.9 million for Moore County, all of which is consider forgone local revenue.
Will Denami, executive director of the Tennessee Association of Assessing Officers, told House Local Government Committee members the legislation would set a dangerous precedent by creating a category of “aged manufacturing equipment” exempt from taxes.
Companies across the state, such as Nissan, purchase equipment that gets old and could wind up seeking an exemption for it.
“The assessors of property have asked that everybody be treated the same, regardless of whether you’re a modest homeowner or a very large corporation,” says Denami, noting counties have appeals processes for people to contest assessments.
“That appeals process is very taxpayer friendly in so far as you do not have to pay tax on the amount that’s in dispute” until an administrative law judge or Chancery Court determines it should be paid.
Personal property taxes also are based on self-reporting, and property assessors rely on property owners “to be forthcoming in listing what property they have,” Denami says.
House Local Government Committee Chairman Tim Wirgau, however, says he is “baffled” by the estimated fiscal impact of the bill.
“How can we mandate they use a new product” each time whiskey is aged and then tax that product, asks Wirgau, a Republican from rural Buchanan.
Rep. Jerry Sexton, a Bean Station Republican, agrees, saying, “If we start taxing things like this, we open up the door for a whole lot of other things.”
On the other hand, Rep. Antonio Parkinson, a Memphis Democrat, points out the typical Tennessee property owner wouldn’t have the resources to seek a state law exempting them from taxation.
“I think I support Jack Daniel’s more than anybody in here,” Parkinson says with a laugh. But he points out, “The door we have opened says a large corporation can come here and push to get a law changed” rather than going through the appeals process.
Alexander disagrees with such a contention, arguing the other distillers in the state are small businesses, “and to say that they can’t come up here and do battle … is ridiculous. That’s what we’re here for, is for them to give us a concern and for us to get together and do something about it.”
In light of President Trump’s steep new tariffs on imported steel and aluminum, Brown-Forman CEO Paul Varga recently said during a company conference call he would be monitoring the potential for retaliatory tariffs.
The company “could be an unfortunate and unintended victim of a policy which, in part, is aimed at promoting something which Brown-Forman is a stellar example of – a committed long-term American manufacturing company,” Varga said on the call.
He hoped to make an argument “compelling enough to influence” alternatives action and pointed out the global economy is improving. But the president moved ahead with his tariffs anyway.
Brown-Forman reported net sales decreased 3 percent to $2.99 billion in fiscal 2017. In the third quarter of fiscal 2018, though, the company reported net sales increased 9 percent to $878 million, and for the first nine months of the fiscal year, its net sales increased 9 percent to $2.5 billion compared to the previous year
Varga pointed out in the conference call Brown-Forman is accustomed to dealing with these types of situations.
“A few years ago when the U.S. and Russia were having some spats back and forth, our Jack Daniel’s Tennessee Honey got caught up in, for a short period of time, in Russia over that topic. So we are fairly well schooled at knowing how to deal with this stuff,” he said.
Nevertheless, he is concerned the tariff would be a “negative thing for our particular company.”
But while Brown-Forman and Jack Daniel’s could face a difficult international landscape, it is likely to get support from a friendly Republican-controlled Legislature.
State Sen. Ken Yager, a Kingston Republican sponsoring the Senate version of the barrels tax exemption, says he was “disappointed” with the attorney general’s opinion and plans to introduce the same amendment as Alexander.
“We’re going to proceed and we’re filing the amendment, probably the same one David Alexander has, on the Senate side, which we think will correct the problem and the concern of the attorney general.”
Asked if the Legislature is rewriting the law to deal with the Jack Daniel’s situation, Yager says, “That’s what bills do.”
Sam Stockard is a Nashville-based reporter covering the Legislature for the Nashville Ledger and Memphis Daily News. He can be reached at firstname.lastname@example.org.