The Brewery R&D (Research and Development) Tax Credit is a government incentive program designed to encourage innovation and technological advancements in the brewing industry. While it offers significant benefits to breweries engaged in qualifying research activities, some challenges can be associated with claiming and maximizing the R&D Tax Credit.
Common Tax Challenges Breweries May Face Under the Research and Development Tax Credit
Sales Tax on Non-Beer Items
Breweries often sell more than just beer, such as branded glassware, apparel, accessories, and even food in taprooms. These non-beer items are typically subject to standard sales tax, which can vary by state and sometimes by item type. For example, in certain states the sales tax treatment of apparel depends on the item’s price, with lower-priced clothing often exempt or taxed at a reduced rate while higher-priced items are fully taxable. Overlooking these rules can lead to compliance issues and costly audits, so it’s essential to apply the correct tax rates and keep accurate records.
Use Tax Liability on Giveaways or Promotional Merchandise
Breweries often provide giveaways or promotional merchandise as part of their marketing activities to increase brand awareness and customer loyalty. However, breweries need to be aware of the potential use tax liabilities associated with these items. The use tax is typically imposed on the use, consumption, or storage of tangible personal property where sales tax was not charged at the time of purchase. When breweries purchase promotional merchandise from vendors that do not have a sales tax nexus in the state they are shipping to, the brewery may be responsible for remitting use tax on the value of those items. Calculating the use tax liability can be challenging, as breweries may need to determine the fair market value of the items at the time of distribution, which may require reasonable estimation based on their cost, retail value, or other relevant factors. Compliance with use tax obligations can be complex, especially for breweries selling in multiple states, as each state has its own rules and rates for use tax.
Use Tax on Out-of-State Purchases
When breweries buy equipment, packaging, or supplies from out-of-state vendors that don’t charge sales tax, they’re still responsible for paying use tax to their home state. Because this tax is not collected at the point of sale, it is easily overlooked and creates compliance gaps and audit risks. The best way to stay compliant is to track all out-of-state purchases and implement clear procedures for self-assessing and remitting use tax accurately.
Physical Nexus Triggered by Inventory or Returnable Containers in Another State
Breweries often distribute their products to various locations, and some may store inventory or use returnable containers in another state. This activity can inadvertently trigger a physical nexus, which establishes a tax presence in that state, potentially subjecting the brewery to various tax obligations such as sales tax, income tax, and other related tax liabilities in the state where the inventory or returnable containers are located. Proper tracking and management of inventory and returnable containers are crucial to mitigate the risk of triggering a physical nexus. Breweries should consider implementing robust inventory management systems and consulting with tax professionals to understand the implications of their distribution and storage activities in other states.
Economic Nexus Triggered by Sales and Transactions into Other States (Remote Sales)
With the growth of e-commerce and remote sales, breweries engaging in sales or transactions across state borders can trigger economic nexus. Economic nexus refers to a sufficient level of economic activity within a state that creates a tax obligation, even without a physical presence. The threshold for economic nexus varies by state and may be based on the gross value of sales or the number of transactions. Breweries need to monitor their sales and transactions in other states to determine if economic nexus thresholds are met. Meeting economic thresholds could potentially require a brewery to register and collect sales tax in those states. Compliance with economic nexus rules can be complex and burdensome, as breweries need to understand each state’s requirements and stay updated on any changes in nexus laws. Technology solutions, such as sales tax automation software, can help breweries manage their tax compliance and navigate economic nexus challenges.
Excise Tax vs. Sales Tax and Other Special Taxes
Understanding the difference between excise tax and sales tax is critical for breweries. Excise taxes apply to beer production and are paid to federal and state authorities, but they do not replace the obligation to collect and remit sales tax on retail transactions. Misunderstanding this distinction can lead to missed filings and penalties. Adding to the complexity, some states impose unique requirements, such as Pennsylvania’s rule requiring breweries to pay use tax on a percentage of retail beer sales. These overlapping regulations make clear compliance strategies and accurate reporting essential.
Eligible Research & Development Tax Credit to Maximize the Amount of Savings
The R&D Tax Credit offers significant benefits to breweries engaged in qualifying research activities. However, breweries may face challenges in identifying and documenting eligible research and development activities. Defining and substantiating qualifying research activities and associated expenses can be complex, requiring breweries to meet specific criteria set by the IRS. Proper recordkeeping and documentation are crucial to support R&D claims and withstand potential audits or reviews. To maximize the amount of savings through the R&D Tax Credit, breweries should consider engaging tax consultants or experts with expertise in R&D Tax Credits. These professionals can help breweries navigate the complexities of the program, identify eligible activities, optimize their tax savings, and ensure compliance with documentation requirements. They can also assist in conducting a comprehensive analysis of research and development efforts to capture all eligible expenses and activities, ultimately maximizing the potential tax benefits. To overcome these challenges, breweries can consider seeking professional assistance from tax consultants or experts with experience in R&D Tax Credits.
Withum’s Food and Beverage Services Team is here to help navigate the complexities of the program, ensure compliance with documentation requirements, and maximize eligible credits while minimizing audit risks. From setting up an efficient tax structure, determining tax compliance obligations, and obtaining tax credits, benefits, and exemptions, we are here to be your trusted resource.
Authors: Courtney Easterday, MSA | [email protected] and Tyler Collins, CPA, Partner and Market Leader, R&D Services | [email protected]
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