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F I S C A L I M P A C T R E P O R T

SPONSOR Beffort

ORIGINAL DATE

LAST UPDATED

1/30/08

HB

SHORT TITLE Winery Definitions & Taxation

SB 43

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY08

FY09

FY10

(124.0)

(129.0)

Recurring General Fund

(86.0)

(89.0)

Recurring Local DWI

Grant Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

Senate Bill 43 makes the following changes to the Liquor Excise Tax Act:

•

redefines “wine" as an alcoholic beverage other than cider made by fermenting fruit or

other agricultural products that does not contain more than 20 percent alcohol by volume;

•

redefines “person" to include institutions;

•

defines “winegrower" as a person who has received a winegrowers business license from

the state;

•

changes the threshold to be taxed as a small winegrower to 950 thousand liters;

•

allows winegrowers to transfer wine to each other for the purpose of processing, bottling

or storage without the transfer volume being taxed provided the wine is returned to the

original owner;

Under current law, the first 80,000 liters produced at a small winery are taxed at $0.10 per liter

and then the rate is $0.20 per liter for wineries who produce less than 560,000 liters per year.

SB43 would not change the 80,000 threshold but would increase the 560,000 to 950,000 that

would be taxed at the 0.20 rate. The rate for wineries that produce more than 560,000 are subject

to a $0.45 per liter excise tax on all liters.

The effective date for the changes is July 1, 2008.

Senate Bill 43 – Page

2

FISCAL IMPLICATIONS

TRD reports that in FY2007 about $77 thousand was collected from small wine growers that

produced fewer than 80,000 liters a year, so qualified for the reduced rate of $.10 per liter on

their entire sales in New Mexico, and $67 thousand was collected from small wine growers that

produced between 80,000 liters and 560,000 liters per year, so qualified for the reduced rate of

$.10 per liter on their first 80,000 liters of sales in New Mexico and the reduced rate of $0.20 per

liter on their remaining sales in New Mexico. Larger wine growers are subject to the regular

excise of $0.45 per liter. Receipts from the liquor excise tax are distributed to the Local DWI

Grant Fund (41.5%), with the remainder distributed to the General Fund.

Few New Mexico wine growers produce more than 80,000 liters per year, and even fewer more

than 560,000 liters per year (the current limit to qualify as a “small wine grower").

SIGNIFICANT ISSUES

The federal government provides a credit for small producers. The threshold for receiving the

federal credit is 250,000 gallons or 950,000 liters. This would match the definition proposed here

but the federal credit is only on the first 375,000 liters for these producers. [Section 5041(c)(1) of

the Internal Revenue Code of 1986 (26 U.S.C. 5041(c)(1))]

TECHNICAL ISSUES

TRD:

Under current as well as proposed law, the liquor excise tax is imposed on sales by a

wholesaler of liquor on which liquor excise tax has not been paid. A “wholesaler" is

defined as a person holding a wholesalers license under section 60-6A-1 or a person

selling alcoholic beverages that were not purchased from a licensed wholesaler. Thus, a

winegrower is ordinarily a “wholesaler" when they sell their own production, and must

pay liquor excise tax on their sales. New Subsection B of Section 7-17-6, which begins

on page 7, line 7 of the bill, creates a new deduction for wine “transferred" to a

winegrower by another winegrower for “processing, bottling or storage and subsequent

return to the transferor". If a “transfer" is a sale, this deduction is necessary to delay the

imposition of the liquor excise tax until the transferor winegrower sells the wine after it is

returned. If a transfer isn’t a sale, the language isn’t necessary. New Subsection B of

Section 7-17-5, which begins on page 6, line 7, appears unnecessary, either because a

transfer can be deducted under the new deduction, or the transfer is not a sale. The

apparent objective of new Subsection C of Section 7-17-5, which begins on page 6, line

17, is to delay the imposition of the liquor excise tax on sales from a winegrower to a

wholesaler until the wholesaler sells the wine. However, the method of achieving the

delay is by transferring the liquor excise tax liability from the winegrower to the

wholesaler. A more direct method of achieving this result would be to create a new

deduction for sales by winegrowers to wholesalers.

Current law has a “cliff" at the maximum for the reduced rate. A small winery that

produces only one liter above the threshold is penalized with a more than 100% increase

in excise tax liability. This “cliff" is retained in the bill.

Senate Bill 43 – Page

3

ALTERNATIVES

TRD reports that over half of the tax benefit from the reduced excise tax rate for “small

winegrowers" goes to out-of-state wine growers. All of the benefit could be directed to New

Mexico winegrowers by restructuring the benefit as a credit for in-state production.

NF/jp