Growing & Winemaking

 

Suppliers, Industry Seek Clarity on Yeast Sales Tax

April 2016
 
by Andrew Adams
 
 
wine yeast
 
The total global yeast market is estimated to grow to $4.3 billion by 2020. Winemaking is the third-largest use of yeast behind baked goods and brewing.

Given oxygen, stable temperatures and a supply of sugar, yeast will happily get to work powering a fermentation.

And perhaps at the microbial level, the yeast do not even perceive a difference between fermenting beer and wine. In California’s capital city of Sacramento, however, the state department that applies sales tax did see a difference between yeast used for brewing and yeast used for winemaking: Wine yeast was subject to sales tax, while brewing yeast was not.

According to the California State Board of Equalization (BOE) sales tax annotation 440.0780, selling yeast to wineries was taxable because “yeast is used in the manufacture of wine in order to bring about the fermentation process and is not used for the purpose of physically incorporating it into the wine.”

Annotation 245.1101 stipulates, “Tax does not apply to the sale of viable yeast, which is sold as a food for human consumption in the production of bread and malted alcoholic beverages such as beer, mead and ale.”

The difference, according to the state BOE, is that “yeast for wine is not incorporated, and thus, not consumed by humans.”

Earlier this year, however, an attorney with the BOE made the unexpected decision that the viable yeast sold for winemaking is in fact a food product and should not be subject to a sales tax. Suppliers and industry representatives had been pushing for a change for years but made little progress with the state.

Winemaking to get a little cheaper
The state’s change in policy means that a crucial ingredient to making wine should be a little cheaper in time for the 2016 harvest.

Wineries that paid a sales tax on yeast will also be able to seek refunds from suppliers. That refund process, however, has caused suppliers a certain amount of consternation as they wait on the state to confirm the changes and refund them the sales tax monies so they can in turn refund their customers. “We receive numerous calls a day from wineries wanting their refunds back,” said Scott Laboratories CEO Zack Scott. “It’s hard to tell them we don’t know the extent of the changes, and we don’t know when we can get the refunds to them.”

Scott added he was hopeful that further meetings with state officials would clear up any remaining confusion. The changes by the BOE could mean other winemaking products—such as yeast nutrients or fining agents—may also no longer be subject to a sales tax.

The California companies that supply the wine industry with its yeast now need to comb through thousands of accounts to tally up all the potential refunds. Since in most cases it was the supplier that paid taxes to the state, the onus on securing the refund falls on the suppliers. Those suppliers then need to provide detailed accounts to the state, showing they distributed all refunded tax dollars to customers that had been charged a sales tax. Some wineries eligible for substantial refunds may need to file additional paperwork with the supplier that sold them the yeast.

Gladys Horiuchi, director of media relations for California’s Wine Institute, said the institute has been lobbying to change the tax code. She said wineries that purchased yeast and yeast derivatives directly from a supplier were eligible to file for a refund with the BOE. Wineries that purchased yeast through a vendor would have to have those companies file for a refund on their behalf. “The refund process—whether direct or through a vendor—could take several months,” she said.

Pushing for change
Anthony Heinrich, the commercial manager of the Australian company AB Mauri, said a winery client approached the company about three years ago seeking technical information to bolster a petition to the state to change the tax code. The winery’s accounting department had realized the tax discrepancy between winemaking and brewing and wanted the potential savings of tax-free yeast. “It seemed very unusual how one industry would be different from another,” Heinrich said.

AB Mauri is one of several yeast suppliers and manufacturers that have been petitioning the state government to change the discrepancy between taxing yeast for making wine but not beer for years.

Jason Mabbett, technical sales manager of the Americas for AB Mauri, put together a detailed memo for the state that not only defined what yeast is but how crucial it is for wineries in developing wine flavor and aroma and to produce a clean wine without any off-flavors. Mabbett also detailed how, through autolysis, the impact of yeast goes far beyond just the reaction of converting sugar to alcohol and carbon dioxide.

“Hence, winemakers now see yeast as an essential ingredient to optimize the quality of their wine, as it has one of the greatest impacts on the wine throughout the winemaking process. If it were just a processing aid, there would not be the large variety of available yeast strains that impart such diversity to the finished wine,” Mabbett wrote. “As a consequence, a lot of time, energy and money have been invested by yeast manufacturers in developing new strains for use in the winery.”

Heinrich said Mabbett’s report was sent off in March 2013 as part of a formal request to the state to change the tax, and that was the last he heard of it until late January, when Mauri’s distributor Pacific Coast Chemicals passed along a letter from an attorney in the tax and fees division of the BOE concerning yeast used in winemaking.

Heinrich provided a copy of that letter to Wines & Vines, and in it attorney Erin Dendorfer wrote, “We find that the use of yeast in both winemaking and beer brewing is substantially similar.” The attorney concluded that the annotations making a distinction between brewing and winemaking yeast should “be deleted as inconsistent and misleading.”

The change will generate some significant cost savings for California’s wine industry. The state’s largest wineries could save tens of thousands of dollars per year as a result of the tax change, as well as secure refunds for the money al ready spent on sales tax.

It’s unclear just how much money is at stake, but the research group MarketsandMarkets recently predicted the global yeast market would reach more than $4.3 billion by 2020. North America is the fastest growing market for yeast and accounts for nearly a quarter of the total market, the group said. This broad category includes wine yeast as well as yeast used in food production, brewing, bio fuels and yeast specialty products.

“We also recently learned that BOE is considering whether other food-grade ingredients used in winemaking might qualify for the tax exemption. We will provide additional information as soon as it is available,” the Wine Institute’s Horiuchi said.

 
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