Tax compliance flap shakes up craft beer debate

The issue is central to efforts being made by alcohol wholesalers and distributors to halt House Bill 500, a proposal to raise the amount of beer breweries can produce before they have to contract with a distributor under North Carolina's three-tiered Alcoholic Beverage Control system. The North Carolina Beer and Wine Wholesalers, the group's lobbying arm, has argued in part that they should remain in control of distribution because they collect and remit state excise taxes.

Most ABC license holders have their tax records, both income and excise, reviewed at the time of their required permit renewal. However, Boles explained, breweries and distilleries hold permits that don't expire, so there's no annual check on their tax reporting.

Under House Bill 480, the ABC Commission would be required to do annual checks on whether breweries and distilleries are in compliance with tax reporting requirements.

The measure would also add new reporting requirements for breweries and distilleries that distribute their own products, requiring annual reporting of quantity and dollar amounts of sales on and off premises and at special events.

If they're found to be out of compliance on business or excise taxes, their permits would be suspended.

"With the number of these breweries," asked Rep. Mitch Setzer, R-Catawba, "is it safe to assume that the state is not collecting the revenue that it is due, and is this problem associated with self-distribution?"

"We’re unaware with any noncompliance due to underreporting at this time," answered Revenue audit director Alan Woodard.

Rep. Julia Howard, R-Davie, said she had been told that there was "a large percentage that was not compliant. Are you indicating to the committee this morning that everyone is in compliance?"

Woodard said compliance, as defined by the department, means checking to see whether a taxpayer has timely filed all required reports and paid all taxes associated with those returns.

"It makes no mention of us auditing the tax return to see if they have underreported," Woodard said.

"Is there a loophole somewhere with Revenue that there are areas where people can be non-compliant and we are losing a large source of revenue?" Howard followed up.

Woodard answered that, if the department believes a taxpayer is underreporting, it initiates an audit.

"Has there been an audit that found that more than 20 percent non-compliant?" Howard asked.

"Not from the Department of Revenue, ma’am," Woodard replied.

Asked why the bill was needed, Boles replied, "I got a report that there was approximately 23 percent that were not in DOR compliance. That’s what led us to where we’re at today."

When he was asked if he could produce the report, Boles responded, "Not at this time," and he pulled the bill off the agenda for the day.

In the chain, Freeman had requested a list of breweries that are out of compliance. Edwards replied on Feb. 14 that he couldn't by law give out that information. But he wrote, "We can provide non-taxpayer specific aggregate information which indicates 23 percent of resident breweries are not in total compliance."

"A list of resident breweries (breweries based in North Carolina) was provided to the Department of Revenue by General Assembly staff with the request that we provide a status of tax compliance. The 23% was calculated by a determination that 38 out of the 164 resident breweries provided were not in total compliance. The DOR employee answering questions at today’s meeting was answering under-reporting of taxes under audit and was not aware of the list. The Department regrets the confusion," wrote Revenue legislative liaison Ken Wright.

The measure is likely to resurface in House Finance next week.