Manufacture and Sale of Alcoholic Beverages

There are a number of Vermont tax types that affect manufacturers of alcoholic beverages, including malt beverages, hard ciders, wine, and spirituous liquors. This guidance provides information on some of the common issues related to three of those tax types: malt and vinous beverage tax, meals and rooms tax, and sales and use tax.

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Summary of Tax Types Related to Alcoholic Beverages

Malt and Vinous Beverage Tax

Malt and Vinous Beverage Tax is imposed on (1) sales from bottlers and wholesalers to retailers and (2) retail sales by manufacturers and rectifiers. The tax rate is 26.5 cents per gallon of malt beverage containing 6% or less alcohol by volume (ABV) and hard ciders containing 7% or less ABV, 55 cents per gallon for all other malt beverages, hard ciders and vinous beverages, and $1.10 per gallon for ready-to-drink spirits beverages.

The malt and vinous beverage tax is imposed on the distributor, or on a manufacturer if it distributes its own product. When a manufacturer of alcoholic beverages sells to a distributor, the tax is imposed on the distributor. However, the malt and vinous beverage tax is due from the manufacturer for all other sales. Please remember to include all beverages not sold to a distributor on your malt beverage tax return, vinous beverage tax return, or ready-to-drink spirits return.

Keep in mind that malt and vinous beverage tax becomes due when you sell a beverage. If you transfer beverages from your manufacturing facility to a retail store or restaurant under common ownership, tax is not due for that transfer. Instead, tax becomes due when your retail business conducts the sale because that transaction is considered a retail sale by a manufacturer.

Note: The tax on spirits and fortified wines is not administered by the Department of Taxes. Please contact the Vermont Department of Liquor Control for more complete information related to that tax.

Meals and Rooms Tax

Meals and Rooms Tax is imposed on the sale of all alcoholic beverages (malt beverages, vinous beverages, spirits, and fortified wines) sold for immediate consumption. The tax rate is 10%. Alcoholic beverages subject to meals and rooms tax are exempt from sales and use tax.

Sales and Use Taxe

Sales and Use Tax is imposed on alcoholic beverages sold at retail that are not for immediate consumption. The sales and use tax is also imposed on many of the items purchased and used by businesses, although some items are exempt from tax. The tax rate is 6%. The use tax applies when a taxable item is used or consumed by the retailer.

Additional Reporting

Under Vermont law, businesses that sell malt and vinous beverages to retail dealers are required to submit a report of the description, quantity, and price of those beverages. The report is due at the same time as the malt and vinous beverage tax return. Bottlers and wholesalers are required to submit electronically, but manufacturers are allowed to submit electronically or nonelectronically. For more information, see Reporting Malt and Vinous Beverages Sold Direct to Retailers.

For additional information or assistance with reporting distributions to retailers, please contact the Compliance Division at tax.ComplianceSupport@vermont.gov or call 802-828-6602.

Free Samples of Alcoholic Beverages

Vermont Meals Tax

All alcoholic beverages provided for immediate consumption are subject to Vermont Meals and Rooms Tax. This means that no tax is due for free samples of alcoholic beverages provided for immediate consumption because the meals and rooms tax is applied to a charge of $0.00. If you provide samples, your business will need to set up a meals and rooms tax account using myVTax.

Vermont Sales and Use Tax

The Vermont Sales and Use Tax does not apply to alcoholic beverages sold for immediate consumption. Hypothetically, if the sales and use tax were applied, a free sample would be considered a taxable “use” of inventory.

Malt and Vinous Beverage Tax

Although no meals and rooms tax is due when a manufacturer provides free samples, keep in mind that the law is applied differently for the malt and vinous beverage tax. The malt and vinous beverage tax applies to retail sales by manufacturers and is calculated based on gallons. You should include the number of gallons given as free samples on your malt and vinous beverage tax returns because free samples are retail sales where the charge was $0.00. Note: It is not always legal to provide free samples of alcoholic beverages. Please consult with the Department of Liquor Control before taking action.

Bundled Transactions

Combining Alcoholic Beverages with Other Items

The Department of Taxes suggests that you itemize on a receipt all items sold together and apply the appropriate type of tax individually to each item. If you sell items bundled together, however, please follow the instructions below.

You should apply the highest applicable tax rate to the entire transaction when bundling non-itemized products together. For example, if you sell a pint of beer and an unopened growler of beer together and do not itemize, you should apply the 10% meals and rooms tax rate to the entire transaction. If you itemized that transaction, the unopened growler would be subject to sales and use tax because it is not for immediate consumption. However, because the transaction in this example is not itemized, the entire transaction is subject to meals and rooms tax because the growler was part of a non-itemized bundle transaction with a pint of beer that is subject to meals and rooms tax.

Caution: Structuring Non-Itemized Transactions

The Department of Taxes requests that you be cautious when structuring transactions in a nontraditional way. For instance, if a business sells tangible personal property subject to sales and use tax—such as a mug—at an increased price but offers “free samples” with the purchase of the mug, the business is actually charging for the free samples but shifting that charge into the price of the mug. The Department will consider transactions like this one as subject to the meals and rooms tax because an indirect charge is being made for alcoholic beverages for immediate consumption.

Tours Are Subject to Sales and Use Tax

Charges for admission to places of amusement are subject to sales and use tax. Tours of manufacturing facilities are expressly identified by the Sales and Use Tax Regulations as taxable. Sometimes taxpayers overlook the collection of sales tax for a tour because they believe its educational nature makes it tax-exempt. Please be aware that tours by for-profit entities are almost always taxable, even when they are at traditionally educational facilities, such as zoos, museums, and observatories. Also be aware that if alcoholic beverages are bundled with the admission price for a tour, and the charges are not itemized, you are required to apply the 10% meals and rooms tax rate to the entire charge.

Sales and Use Tax Exemptions for Manufacturing

Breweries, wineries, and distilleries are considered manufacturing businesses that can use Vermont’s sales tax exemptions for manufacturing supplies, machinery, and equipment. Accordingly, some tangible personal property purchased by manufacturers of alcoholic beverages is exempt from sales and use tax. Apply the following tests to determine whether a particular item may qualify. See the explanations after the test to learn how to apply the tests. Failing to meet one part of the test means that the item is subject to tax.

Manufacturing Supplies Test

To qualify, an item must be:

tangible personal property,
used in manufacturing,
have a useful life of less than one year, and
become an ingredient or component part of tangible personal property for sale, OR be consumed or destroyed or lose its identity in the manufacture of tangible personal property for sale.

Manufacturing Machinery and Equipment Test

To qualify, an item must be:

used in or consumed as an integral or essential part of an integrated production operation, and
by a manufacturing or processing plant or facility engaged in the manufacture of tangible personal property for sale, OR in the manufacture of other machinery or equipment, parts, or supplies for use in manufacturing.

Integrated production operations begin when raw material is first changed physically, chemically, or otherwise in form, composition, or character, including being removed from storage or introduced for this manipulation, and end when the product is placed in initial packaging. An integrated production operation includes production line operations, initial packaging operations, and waste, pollution, and environmental control operations.

When machinery or equipment is used as an integral or essential part of production operations part of the time and for nonproduction purposes at other times, the primary use of the machinery or equipment shall determine the qualification of the machinery or equipment for the exemption. In this case, primary use means more than fifty percent of the time.

Supplies

The Manufacturing Supplies Test

A supply must be either:

an ingredient or component part, or
consumed or destroyed in manufacturing.

To qualify as a supply, it must also have a useful life of less than one year. For maple products, supplies are usually limited to the ingredients that go into the product.

Generally, cleaning supplies and maintenance supplies are not ingredients, component parts, consumed, or destroyed in manufacturing. One exception is when bottles or cans are cleaned immediately prior to initial packaging. In that instance, cleaning is part of manufacturing because it preserves the quality of the product, and it is done during production operations. In that case, cleaning supplies are considered “consumed in manufacturing.” Most other instances of cleaning occur outside of the production process.

Bottles and cans are not manufacturing supplies, but they are exempt as packaging materials. Sales of packing, packaging, or shipping materials to manufacturers or distributors who use the materials for the packing, packaging, or shipping of tangible personal property for sale are exempt. Boxes and similar packaging are also exempt from tax under the packaging exemption.

Machinery and Equipment

The Manufacturing Machinery and Equipment Test

“Machinery and Equipment” is defined by the Sales and Use Tax regulations as “tangible personal property, capital in nature, with a useful life of one year or more, and does not include real property or supplies.” To be considered machinery or equipment, and therefore eligible for an exemption, an item must:

be tangible personal property (not real property and not intangible),
be capital in nature (it must be used or consumed to produce other goods), and
have a useful life of one year or more (although it may be a supply if it has a useful life of less than one year). An item is not required to be depreciated to be considered “machinery and equipment” for purposes of the exemption.

The exemption for manufacturing machinery and equipment is a “use based” exemption. This means that the way a particular item is used may determine whether it is taxable. It can be difficult to determine how the law applies to a particular use and the Department of Taxes understands that. We encourage any business to contact the Department if it is unsure about the taxability of a purchase. You may also request a formal ruling if you would like a definitive answer. A formal ruling is binding on the taxpayer and the Department.

Examples of machinery and equipment deemed to be used as an integral or essential part of an integrated production operation when used during the integrated production operation include, but are not limited to:

Those used to transport or convey products from the beginning of the production line until it is placed into initial packaging
Those used to guide, control, or direct the movement of property undergoing manufacturing or processing
Those used to test or measure materials, the property undergoing manufacturing or processing, or the finished product during the manufacturer’s integrated production operations
Those used to assist the functioning of other production machinery and equipment and the continuation of production operations, such as to provide lubricant, electricity, water, or similar substances
Those used to package the property being manufactured or processed in any container or wrapping in which such property it is normally sold or transported, even if the machinery operates after the point of initial packaging

Quality Control and Monitoring

Monitoring, testing, and quality control equipment are all eligible for the exemption if part of integrated production operations, even if it operates beyond the point of initial packaging.

Fuel Used in Manufacturing

A fuel dealer should know when to collect sales tax on fuel deliveries and what exemptions may apply. They will need a manufacturer’s help in determining specific uses and appropriate tax treatment. The Department of Taxes advises that taxpayers use separate meters or fuel storage tanks to easily distinguish taxable and exempt uses. If that is not practical, a taxpayer may also determine the percentage of floor space used primarily for qualified purposes and allocate usage according to the resulting percentage, provided floor space accurately reflects fuel usage.

Exemption Certificate

Use Form S-3M, Vermont Sales Tax Exemption Certificate for Manufacturing, Publishing, Research & Development, or Packaging when claiming a manufacturing packaging exemption during a purchase.

For additional information or assistance with Malt and Vinous Beverage Tax, please contact the Miscellaneous Tax section at tax.miscellaneous@vermont.gov, or call 802-828-2551.