NBWA Legislative Conference Highlights: Tax Reform a Risk

FILED APRIL 16, 2013

Dear Client:

The nation's beer distributors are enjoying the cherry blossoms in bloom at the NBWA Legislative Conference this week in Washington DC. There's no pending distributor legislation, so this year was more about making sure that comprehensive tax reform, such as it may be, won't include onerous new taxes on small businesspeople like distributors, particularly "pass-through businesses" like S-corps, where the company profits pass through to the individual owners. Also, with so many new faces on the Hill (48% are new since 2009), distributors are reminding lawmakers and staff that state-based alcohol regulation works, that the TTB should remain an independent and fully funded entity, and the Stop Underage Drinking Act needs to be funded.

COMPREHENSIVE TAX REFORM. NBWA guv affairs vp Mike Johnson told distributors that "for the first time in 20 years, taxes are the number one issue facing this group. We really have to address that in ways we've never done before." Not talking about excise taxes per se, but the "debate going on around comprehensive tax reform."

When Congress reforms the tax code, watch your wallet, because "one guy's idea of reform causes some other guy's pain," says Mike. The fight could center on the battle between big publicly traded c-corps (which have armies of lobbyists) and small privately held S-corps like ours. "You may say we're overstating this," said NBWA chief Craig Purser. "We have one opportunity here to be heard on this...... We've never seen an environment like this.....the political environment is poisoned in some ways. If we ignore this issue, we wouldn't be doing our duty."

"You're seeing the absence of regular order," added Mike. The sequester, for example, is in "some ways a man-made crisis" with "kick the can down the road" measures but "no conversation about what's important..... you can't cut spending or raise revenue enough" to solve the national debt problem.

So in this environment there's been some crazy ideas, many from lawmakers who've never made a payroll. For instance, one lawmaker proposed a 25% flat tax rate for all corporations. "Sounds pretty good, right?" asked Mike. That's the reform, here's the pain: "He would've paid for that by ending the use of 'less important tax policy.' That's us."

Another lawmaker said to Mike at a lunch that he'd like to get to a 25% flat tax rate and pay for it by ending the deductibility of interest on debt. (Wow). "He looks at me and says, 'You guys would support that, right.' I said, 'No!'". So the ask for Congress: Can we count on you to support comprehensive tax reform that similarly reduces taxes on pass-through businesses and c-corps and also avoids double taxation?

Another issue is LIFO (last in, first out inventory accounting). Some tax reform proposals include the repeal of this long standing method of inventory accounting, and it would be detrimental for many distributors. Also looking at changing self-employment tax rules for owners of closely held businesses, an increase in the estate tax, and the ability to amortize blue sky or intangible assets. There's a lot of shell-game maneuvering going on on Capitol Hill with the tax code, so distributors need to stay on top of it.

STATE BASED REGULATION. Another key issue for NBWA is the maintenance of our state-based system of alcohol regulation, the "gold standard" in regulation, said Mike. Part of that is the risk of losing the Tax and Trade Bureau (TTB). "Given the choice between the IRS and the FDA, I'll take the TTB any day," says Mike. It's a lean agency that takes in $464 for every $1 they spend, compared to the IRS that collects $250 for every buck spent. "Government efficiency stories in Congress are few and far between." Says Craig: "The TTB is the guardian of Congress' intent about states being the primary regulator of beverage alcohol."

And finally, a classic quote from Mike Johnson: "The President's budget is deader than Margaret Thatcher." Amid groans, Mike added, "I didn't know we had so many Europhiles in here."

BREAKDOWN IN U.S. 3-TIER CITED AS FIRST RISK IN GLOBAL BEER SECTOR

In a research report last week published by Bernstein's Trevor Stirling listed some interesting drivers and risk affecting global beer volumes and profits. Interestingly, the first risk listed which could adversely affect beer profits is the possibility of a deterioration of the three-tier system. Trevor's list of risks: "1. A breakdown in the three-tier distribution system in the United States would expose the producers of beverage alcohol to greater margin pressure from retailers. 2. Current upward trends in U.S. consumption of alcohol in general and spirits in particular could reverse. 3. The difficulties of the beverage alcohol markets in Western Europe could be more severe than we anticipate. 4. A drop in commodity prices could hit emerging market economies particularly badly, and reduce prospects for emerging market growth. 5. Significant foreign exchange movements such as a decline in the dollar could reduce the value of non-European profits."

READER MAIL: DON'T CALL IT A BUBBLE

One reader takes issue with the increasingly common industry nomenclature of calling the recent exuberance in craft a "bubble." Says our reader: "Why do we keep referring to a 'bubble?' What is over-valued in the industry? Who is over paying? Too many brands and SKUs doesn't mean we are over valuing anything. An excess supply means we have too much in the marketplace and prices must drop to clear the market. From a share of stomach perspective against all other beverages, is that all that bad?"

Good point.

Another reader, regarding c-stores' recent softness, points out that c-stores under-index compared to other channels on craft, and craft is where much of the growth is. Another good point. I would also suggest that c-stores, particularly in chain-heavy resort markets, are more affected by weather comparisons with last year, and we all know how bad the weather's been for beer sales this year.

FLYING J HEADQUARTERS RAIDED BY FBI

If you've ever driven a highway in the south, you've run across a Flying J. The FBI locked down big c-store operator Pilot Flying J's headquarters, according to a Knoxville Biz.com report. The entrance to the travel center operator's headquarters was blocked, media was barred from entering the campus and employees were being escorted off the campus, the website reported. Pilot Flying issued a media statement confirming that FBI officials today sequestered its headquarters. "At this time, we do not know the nature of the situation. Pilot Flying J is cooperating fully with the authorities," the travel center operator said in its statement. The stores remain open. Pilot Flying J operates more than 650 retail locations and is the largest operator of travel centers and travel plazas in North America.

COMMENTARY: BEST COUNTRY ON EARTH; HIRE A VETERAN

As many of you are, I am in our nation's capital as a guest of the National Beer Wholesaler's Association. I visited the Library of Congress this evening for a private party the NBWA hosted. It was the most magnificent structure I've ever seen ..... much better than those dilapidated ruins in Europe and Egypt and Rome. It reinforced in me a notion that I've suspected all along: That we are, most convincingly, the best nation on earth. May it continue to be so.

Much of that greatness is due to the soldiers who go forth and put themselves in grave danger to protect our way of life. And in that vein, I'd like to point your attention to a program of the NBWA's for distributors to hire veterans newly returned from war. Why the hell not? John Seputo, a distributor and veteran himself, told me this deal is a win-win for distributors and veterans.

Here's how it works: Use the Army's approved automated jobs pipeline, www.Hero2Hired.com, which assists transitioning and job-seeking service members with civilian career readiness resources. You can post your company's job openings to www.H2H.jobs/employers. Employers get unlimited free job postings and automatic notifications when candidates apply - a valuable no-cost recruiting option. And these people are proven studs. Jobs are hard to find these days as we know. I encourage distributors and brewers alike to check it out.

BEER BRIEFS:

THE BUDWEISER BOWTIE CAN in 8-packs will appear on store shelves nationwide beginning May 6. A-B says the proprietary can, in development since 2010, will be available only in the United States and in an 8-pack and will not replace the traditional Budweiser can.


Until tomorrow, Harry

"Politicians are the same all over. They promise to build a bridge even where there is no river."
-Nikita Khrushchev

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