Three-Tier System Essentials: Tax Determination and Reporting

This blog was last updated on February 28, 2024

Tax compliance can easily become an overlooked area as alcohol producers work on numerous aspects of their three-tier distribution compliance, including state license forms and brand registration requirements. For alcohol producers distributing in the three-tier system, excise tax determination and reporting is especially critical. Businesses must ensure they stay compliant as they scale into new states, which can get confusing, complex and time-consuming. Yet it’s necessary to accurately track and manage all excise tax requirements, reporting and deadlines.

We’ve broken down some of the key things to keep in mind when it comes to excise tax determination and reporting in the three-tier system.

The three-tier system and excise taxes

Excise taxes are calculated against the volume of alcohol being sold or distributed, and they are levied at both the federal and state level. Federal excise taxes are generally paid by suppliers, be they domestic producers or importers. While it can be tricky for a supplier to determine exactly when it is due, federal taxes are relatively straightforward.

Under the three-tier system, wineries, breweries, cideries and distilleries need to recognize their tax liability in each state they ship into to understand their state-level excise tax burdens.

Generally, excise taxes are paid to the state by the first party to own the product in that state. As such, domestic producers are required to remit tax on what they produce to their home state regulators. But for interstate distributions, that often means the distributor. Still, there are a few exceptions (e.g., Wisconsin, West Virginia and Pennsylvania for beer) where an out-of-state supplier must remit to the state themselves based on what they sell there.

More so, it is critical for suppliers to understand the applicable excise tax so they can properly set their prices with their distributors. The biggest distinction among states on excise taxes is the different rates that apply. While spirits are always taxed more (sometimes by a lot), beer is taxed at the low end, and wine is taxed somewhere in the middle, the specific rates vary widely from state to state. For instance, spirits are taxed at $2.68 per gallon in Indiana, but right across the border in Kentucky, they are taxed at $8.41 per gallon.

This all changes when a product is sold through a control board, as instead the state will apply its own “mark-up.” That is the difference between the price at which a supplier sells their product to the state and the price it is sold at to consumers in retail stores. These markups include a variety of additional costs, from transportation to storage, but always include some kind of excise tax equivalent, which the state then collects directly.

Suppliers should always remember that excise taxes do not need to be paid to their home state on alcohol that was distributed out of state. Exports and interstate sales should be deducted from the total local production. That way, alcohol producers only pay home state excise taxes on products that are actually consumed in their home state.

The three-tier system and reporting

Distributing reports are key when it comes to managing tax compliance. Most states require suppliers to file follow-up reports, listing what was sold into a state, when and to whom. But these reporting requirements vary from one state to the next. For example, Alabama wine three-tier distribution requires monthly reports to be filed, with a list of the items shipped, invoice copies, prices and sizes. With Alaska wine sold in the three-tier system, such reporting is not required.

Essentially, states must be able to verify their tax collections from distributors. These reports can be as simple as one statement on total volume, or they can include a summary of all invoices from a producer in a specific time frame. What matters is understanding the specific requirements of the states you are shipping into and preparing to fulfill whatever reporting is needed.

Remember that as you expand into a new state for three-tier distribution, consulting with your compliance team, attorneys and even a producer located in that state will help you better understand how the state rules apply to your specific circumstance. Working with the right partner can also help the process be as seamless as possible.