Anyone in the business of producing alcohol will need to be familiar with excise duty, an indirect tax applied to the product and ultimately passed on to the consumer. The implications of this tax are significant, and this article covers what it is, who pays, and how it is collected across different jurisdictions.
We also look at:
- Using brewery inventory software to track and manage alcohol excise duty costs, and
- The role bonded warehouses play in the industry, and how they can be used to help manage the finances of a business.
What is excise duty?
Excise duty is a tax that is imposed on products including tobacco, alcohol and fuel. The taxes are applied to goods that are regarded as having a form of social harm, and as such are designed to decrease the consumption of that good, and / or fund the cost of that social harm.
The tax burden is generally high, and as such provides significant revenue for the relevant country’s government.
Excise duty is commonly charged to the manufacturers of these products, with laws also requiring the areas where the products are made to have special licences. Excise duty can be applied to domestic production or when such products are imported. It is regarded as an ‘indirect tax’ because while it is not paid by the consumer to the government, the consumer does ultimately cover the cost at the point of sale.
- Learn more: What is a Freeport?
Who pays excise duty?
Excise duty is payable by the manufacturers of the product. The definition of manufacturer can cover different situations, so it is important to clarify if and when production falls into this category.
Manufacturing the product can mean making it oneself, or hiring staff to make it on behalf of the business. Under both scenarios, the manufacturer would be liable to pay the duty.
Alcohol excise duty in the United Kingdom
Tobacco, alcohol and fuel all attract an excise duty in the United Kingdom, and the cost is included in the price the consumer pays for the product. As such, it is an ‘indirect’ tax. The products covered include wine, spirits, beer, cider and perry (a drink made from fermented pears), and ‘made-wine’, which covers any drink that is created through the process of fermentation but does not fall under the above categories.
The cost of the tax depends on the strength of the alcohol, and also whether it is still or sparkling. As an example, a still wine of between 5.5% and 15% alcohol content attracts a tax of nearly GBP300 per hundred litres. The rates are calculated and made available by the Government on this website.
If the product is being imported, duty is calculated and applied when it arrives in the United Kingdom. The amount due is calculated on the alcohol content, type of product, the amount being imported and the particular timeframe which is being assessed for the purposes of the tax.
The duty will be payable if you are importing to your own premises, or if you are transferring stock into a warehouse.
Exemptions on excise duty in the UK
There are exceptions, however. The duty is not payable at entry if the product is delivered to an excise warehouse, a storage site approved by the UK’s HMRC where the product can be kept pending payment. Similarly, the duty is not payable if the product is delivered to a customs warehouse, with similar rules and regulations.
There are also exceptions if you are a registered brewer and are responsible for bringing alcohol onto registered premises.
At the point of purchase, the consumer also pays Value Added Tax, known as VAT, of 20% on all alcohol products.
Alcohol excise duty in Australia
In Australia, alcohol taxes are some of the highest in the world, and there is a complex system of taxation. The taxes are drawn from several sources including excise duty.
Manufacturers who create or store products that include alcohol are liable to pay excise taxes, and also need to hold an excise license. The duty is payable on spirits, beers and other alcohol products, with the exception of wine which is taxed separately.
The duty payable depends on the type and amount of alcohol, and also the type of packaging and commercial arrangements for its sale. The tax is calculated per litre of alcohol and adjusted twice a year to track in line with the Consumer Price Index.
As an example, the tax per litre on packaged beer is $2.26, while the tax on draught beer is $1.50 per litre.
WET and GST in Australia
As mentioned above, wine is subject to a different tax, known as the Wine Equalisation Tax, or WET. That system adds a nearly 30% tax on the price of wine, meaning that if you drink expensive wine, you’ll be paying a tonne of tax.
A Goods and Services Tax (GST) of 10% is also payable on all retail sales of alcohol.
Alcohol excise duty in NZ
Like in the UK and Australia, in New Zealand an excise duty is payable on locally made or imported alcohol, tobacco and fuel. Manufacturers are liable for the tax if they sell or even give it away, and they must also hold licenses for the sites on which the products are made and stored. There is no duty payable on exported goods.
Excise duty must be paid on any part of the product which is consumed or which leaves the licensed premises, including giveaways, samples and promotional goods.
Like in other jurisdictions, the consumer also pays a Goods and Services Tax at the point of purchase.
Exemptions on excise duty in New Zealand
There are a number of exceptions to the payment of excise duty. One area in which exceptions are made is around the area in which the alcohol is manufactured. If the product is exported immediately after it leaves the licensed area, there is no liability for the tax. Furthermore, if the product is moved to a warehouse that has been licensed for this purpose by the government, no duty is payable.
Other times at which the duty is not payable is if the product is moved but returned to the licensed area, or if it is used in a laboratory or another type of testing facility.
Those who make alcoholic products for personal use are also exempt from the excise duty and do not need to license the area in which they manufacture alcohol. However, if the alcohol is distributed in any way, it attracts a duty.
Like in other jurisdictions, New Zealand also has duty-free shops at places such as its international airports, on the basis that the product is getting taken out of the country and being used for personal consumption or as a gift.
However, there are limits on the product able to be purchased in this way. Buyers are limited to three bottles of spirits or 4.5 litres of wine or beer.
Alcohol excise duty in the US
In the United States, alcohol excise duty is complex, due to different rules in different states. Both Federal and state governments collect the taxes and use them for general funds or special programmes.
The United States’ Bureau of Alcohol, Tobacco, Firearms and Explosives is responsible for the policing of tax payments, with its website stating its purpose is to “target, identify, and dismantle criminal enterprises…that traffic illicit liquor.”
Generally, excise taxes in the United States are linked to the amount of alcohol present in a barrel or gallon of product. The tax payable varies across jurisdictions, for example in Wyoming it is just US$0.587 per barrel, compared to $33.17 in Alaska.
Further, extra taxes can be levied in some states with, for example, a ‘gross receipts tax’ payable in Kentucky, which effectively raises the total tax rate to more than 25% per barrel.
The taxes are generally payable by the manufacturer of the product, with the costs then covered by the consumer at the point of sale. Manufacturers wanting to import alcoholic products into the United States need to apply for a permit, called the Federal Importer’s Basic Permit. This requires that you have an office in the United States or a relationship with a licensed importer.
Do you need to pay excise duty on alcohol in hand sanitisers?
The onset of the Covid-19 pandemic has thrown a sharp spotlight on to the use of products that contain alcohol and/ or potentially poisonous ingredients.
The use of hand sanitisers has soared since the onset of the pandemic, but there are some questions being raised over its long-term use.
The main ingredient in hand sanitisers is alcohol, either in the form of ethanol or in isopropanol. The ingredient is generally at a very high concentration – up to 95% ABV – and can be dangerous if it is misused or ingested, particularly by children.
As such, there has been a renewed focus on the use of hand sanitisers through the pandemic and any liability for an excise tax.
Generally, however, the alcohol contained within hand sanitiser has been treated to be denatured – or unfit for human consumption. As such, it does not attract excise duty and is able to be manufactured and imported without attracting taxes.
The need for vastly increased manufacturing of hand sanitiser has, however, attracted government intervention in some countries. In the United States, for example, the Food and Drug Administration put out guidance making clear tax-free ethanol was allowable for use in hand sanitiser, provided it was denatured.
The United States’ Tax and Trade Bureau also relaxed some requirements related to the usage of alcohol for the purpose of use in hand sanitisers.
In the UK, similar guidance was released by Her Majesty’s Revenue and Customers (HMRC), noting alcohol that had been denatured and was designed for use in hand sanitiser did not attract excise duty.
There remain exceptions, however, for when the product is used in care homes or hospitals, when untreated duty-free spirits may still be used. However, any manufacturer who wants to do this needs to have HMRC approval, unless they are already licensed as a distiller or gin manufacturer.
In New Zealand, hand sanitiser production comes under the Cosmetics Products standards, which outline restrictions to usage given the alcohol content. The Government also has restrictions around decanting the product as it contains ingredients that can cause harm if absorbed, particularly in children.
What happens with excise duty if you store products in bonded warehouses?
Bonded warehouses are commonly used throughout the developed world for the importing of goods that attract an excise duty, like alcohol.
The bonded warehouse offers a site in which the products can be stored, or undergo further manufacturing, without becoming liable for excise duty. The duty is applied when the products are moved from the bonded warehouse. This can create efficiencies for the goods, as they are able to be moved closer to their final destination, while payment of the applicable duty is postponed until they are finally shipped to the customer.
In New Zealand these are referred to as Customers-Controlled Areas, or CCAs. Manufacturers who operate CCAs need a license to do so, and are then able to store excisable items. It is also possible to move products between CCAs without attracting duty, although permission is required first.
- Read more: What is a Bonded Warehouse?
Excise duty and inventory management
Use of bonded warehouses or CCAs can create some complications for inventory management and the payment of excise duty.
If manufacturers decide to take advantage of bonded warehouses, it will be important to have inventory management systems in place that are able to accurately calculate the excise duty payable when inventory is shifted.
Manufacturers will likely want software or systems that can accurately capture the duties due on the excisable product as it is shifted to its final destination. This will require the analysis of physical inventory, customer orders, the movement of product, and any impact of third parties or subcontractors.
Any system will also need to track consignment, to ensure the manufacturer can assess demand and understand when to increase or decrease inventory supplies in the bonded warehouse. Given the financial benefits of using such warehouses, these systems can have a significant impact on the bottom line.