Distillers Hoping to be Part of Coronavirus Solution While Fighting to Stay in Business

By Mark Gillespie

March 19, 2020 – Chris Montana wrote an email Tuesday night to his team at Du Nord Craft Spirits that he’ll never forget.

“It was the hardest email I’ve ever written…informing them that the best thing we could do for them was to lay them off and get them unemployment benefits because that’ll pay them more than I could pay them,” he said. Like many small-scale distillers, the Minneapolis-based distillery generates most of its revenues from drink sales in its cocktail room and bottle sales at its on-site shop. Those sales dried up after Minnesota Governor Tim Walz ordered the temporary shutdown of bars and restaurants statewide Tuesday, joining numerous other U.S. states and other nations in closing down pubs to help limit the spread of the COVID-19 coronavirus pandemic.

“I laid off a bartender who’s been with me since the day I opened my cocktail room,” Montana said in a telephone interview from home while his kids played in the background. “We hope to bring him back, but I don’t know what’s going to be left of Du Nord when this whole thing gets done, so I don’t know if I’ve let him go for good. I don’t know if that’s the last time that he’s going to welcome people into our place…I really don’t have words to describe it.”

Montana and his wife Shanelle opened Du Nord in 2013, and has been producing vodka, gin, and other spirits while the whiskey inventory matures. He’s become a leader in the U.S. craft distilling movement, and is in his second term as president of the American Craft Spirits Association, one of the key groups representing small-scale distillers. As a result, he knows that he’s not alone, and says more than 90 percent of the 1,800 or more U.S. distilleries survive on the revenue from their on-site bottle and cocktail sales.

“Most microdistilleries in this country are losing money, but they’re growing toward the place where we all hope that we will make a dollar one of these days, so to get this kind of interruption in that process is particularly tough because a lot of the programs designed to replace lost revenue are built off of models that don’t necessarily apply to people who make alcohol for a living – particularly for people who make whiskey for a living who might be laying down a lot of barrels but not selling a lot right now, and so they don’t have much income to replace,” he said.

Montana could have taken advantage of Minnesota’s temporary move to allow drive-up liquor sales and keep his bottle shop open, but chose the safety of his employees over a small amount of revenue. “We have staff with compromised immune systems, and it just wasn’t a position I was willing to put anybody in to ask them to come to work and continue to engage with the public,” he said. Montana hopes the situation will spur an interest in changing state laws to allow distilleries to ship directly to consumers.

As Congress and the Trump Administraton hammer out a third coronavirus relief package that could add up to a trillion dollars or more, distillers are just one of the many industries lining up in Washington to make their case for help. While many distilleries have switched at least part of their operations over to producing much-needed hand sanitizers and alcohol for disinfectant use, they’re viewing it more as a community service than a profit center.

In fact, the move could actually cost them money unless Congress steps in to help. The Treasury Department’s Tax & Trade Bureau has removed much of the red tape required for distillers to be able to make hand sanitizer and disinfectants, with one key exception. TTB officials announced Wednesday that they cannot waive federal laws that set different tax levels for “beverage alcohol” and “denatured alcohol” that contains additives designed to make it non-drinkable. As a result, spirits distillers cannot use any of their existing stocks to help ease the shortage of hand sanitizer without being hit with a tax bill.

“We had a call yesterday with the Senate Majority Leader’s office,” says Chris Swonger of the Distilled Spirits Council, which represents almost all of the nation’s large spirits companies and works closely with the ACSA and other industry groups. “Congress is moving quickly on an economic stimulus package, and we’re hoping we can get that issue resolved quickly…I would have to credit the Trump Administration, they’ve been very helpful in this effort as well,” he said in a telephone interview.

The industry is also hoping that the stimulus package might be the legislative vehicle that delivers their long-sought goal of making the short-term federal excise tax cut for small-scale distillers permanent, along with delivering immediate relief from excise tax payments. The tax cut was originally part of the 2017 tax reform package, and reduced the tax rate from $13.50 per proof gallon to $2.70 on the first 100,000 proof gallons of spirits a distiller produces each year.

That cut was set to expire at the end of 2019, but Congress voted in late December to extend it until the end of this year to allow for consideration of a longer-term solution. While it applies to distilleries of all sizes, along with spirits importers, major spirits companies only get a small benefit since they reach the threshold within weeks while the vast majority of craft distillers never even comes close to the threshold over an entire year.

While extending the federal excise tax cut is important, distillers are also asking state officials for relief.  Tennessee Distillers Guild president Kris Tatum released a letter to Tennessee Governor Bill Lee Wednesday asking for help for his state’s distillers, who attract millions of tourists each year. Tatum’s Old Forge Distillery in the tourist haven of Pigeon Forge attracts around one million guests each year, and is already seeing cancellations for tours and hotel stays in the area around singer Dolly Parton’s popular Dollywood theme park.

While Congress has the power to grant relief from federal payroll taxes, Tatum says his members face a dizzying array of state and local alcohol taxes as well as all of the taxes other businesses pay. “We have gallonage taxes based on our alcohol, LBD taxes, sales use tax, and then our fed excise tax…people don’t realize that a lot of those taxes are due every two weeks for us. I love that both local and state and federal are looking at helping…very clearly, I think they’re caught up on ‘we’re gonna help the airlines, it’s not their fault.’ Well, it’s none of our faults,” he said. “We’re the bond for these communities just like in Kentucky…you’ve got M.B. Roland up there, they’re part of the community, they’re part of the revitalization of either urban areas or rural areas, and we shouldn’t be forgotten either.”

Chris Montana sees the response to the pandemic as a debate on the future not only of small-scale distilling, but on the future of society itself.

“We have to wrap our heads around the fact that the economic impact of this is going to be unprecedented, and we have never seen anything like this before…not in my lifetime, not in yours…we have to understand that there’s going to a price tag at some point, and that price tag is as high as we value our small businesses. The largest businesses are going to make it through this, but if we value our small businesses, then we’re going to have to do something to bring that side of the economy back.”

“I really don’t think it’s an option to let the small businesses of America fail.”

Links: Du Nord Craft Spirits | American Craft Spirits Association | Distilled Spirits Council of the United States | Tennessee Distillers Guild | Old Forge Distillery