April 17, 2014- Kentucky Gov. Steve Beshear has signed a bill that gives the Commonwealth’s whisky distillers a break from the so-called “barrel tax” imposed on every barrel of whiskey maturing in their warehouses. According to the Kentucky Distillers Association, distillers filled more than a million barrels with spirit for aging last year, and getting the tax changed has been the group’s top legislative priority for years.

“Kentucky is the only place in the world that actually taxes barrels of aging spirit,” KDA President Eric Gregory told WhiskyCast’s Mark Gillespie in an April 8 interview following the bill’s passage in the General Assembly. “This will give a corporate income tax credit against that tax. It keeps our local communities whole, which is very important to us, and it requires the distilleries to reinvest in their Kentucky operations.” The “ad valorem” tax taxes businesses on their inventories, with the proceeds going to local governments and school districts. Because of that and its special status in the state Constitution, eliminating the tax has never been a serious option. A special commission appointed by Gov. Beshear in 2012 recommended some form of relief for distilleries, since their barrel inventories must sit in storage for several years – and accrue taxes each year – while other businesses can turn over inventory on a regular basis.

The compromise worked out with legislative support allows distilleries to take a credit on their Kentucky corporate income taxes for each dollar paid in ad valorem taxes, but the money must be reinvested in a company’s Kentucky operations. “We’ll create more jobs and more investment, it’s really a win-win for the Commonwealth,” Gregory said.

By using the credits to increase production, distilleries may actually increase the amount of ad valorem tax revenue available to local governments. “In 1990, when Kentucky became a model for education reform, they tied the local property tax into barrel inventories and barrel taxes, so it’s a great funding resource and we don’t want to harm that,” Gregory said. “This way, the local communities will keep their money for education, health care, and other top priorities. We’ll get a corporate income tax credit, reinvest it, which will create more barrels to go for education and local input.”

The barrel tax generated around $14 million last year for the Commonwealth and local governments. The tax credits will be phased in at 20% annually over the next five years, with distillers required to use the credits on capital projects such as construction, renovation, and new equipment.

Links: Kentucky Distillers Association