AG contradicts Jack Daniels’ bill — says whiskey barrels can be taxed

A legal opinion from the state attorney general’s office says the barrels used to age whiskey in Tennessee distilleries are subject to property taxes paid by businesses, despite a contention to the contrary in a bill pending before the General Assembly.

Producers of Jack Daniels whiskey have been pushing the bill (SB2076) since officials in Moore County laid plans to begin applying the tax to aging barrels, something not done in the past. The fiscal note prepared by legislative staff estimates that would mean about $2.8 million in new revenue for Tennessee’s smallest county.

State Comptroller Justin Wilson asked for the AG opinion on the legal issue of whether whiskey barrels are covered by a provision in the Tennessee constitution that exempts from taxation articles “manufactured of the produce of this state,” typically understood to cover farm products.

The bill by Sen. Ken Yager (R-Kingston) and Rep. David Alexander (R-Winchester) says, basically, that since barrels are made from timber that is produce of the state, it cannot be taxes. The legal opinion says that’s wrong, citing state Supreme Court opinions dating back into the 1920. Under those precedents, the exemption only applies to the “manufactured article” when it’s in the hands of the manufacturer – the sawmill operator, for example. Once sold by the producer and turned into something else, such as furniture or whiskey barrels, the product is taxable in the hands of the buyer.

The full opinion is HERE. An excerpt:

In sum, the proposed legislation would exempt from taxation wooden barrels while the barrels are used to produce whiskey. But those barrels are not within the scope of the exemption allowed for manufactured articles” under article II, section 30. The legislative finding to the contrary notwithstanding, barrels used by a whiskey maker to age whiskey are not “manufactured articles” as that term has long been construed by the Tennessee Supreme Court. A statute exempting such barrels from taxation would not comport with article II, section 30, of the Tennessee Constitution.

4 Responses to AG contradicts Jack Daniels’ bill — says whiskey barrels can be taxed

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    Kay White says:

    Lets not run Jack Daniels out of our State. We have had enough unnecessary taxes! There are other ways for getting income for our state. I call it a “Choice” Bill, more to come later when I am elected Governor of the State of Tennessee.

    Kay White for Governor of Tennessee

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    Rob Mitchell says:

    As elected representatives of the citizens of our respective counties; property assessors must identify and classify all real and tangible property. Tangible business property is self-reported every year and appropriate depreciation amounts are applied to values as items age.

    In a manufacturing business the equipment used in the manufacturing process is assessable. It does not matter if it is a food product you are producing or television sets; if it is an item used to produce a product it must be classified and valued. Jack Daniels does produce their own barrels. While those barrels are being made and held by their subsidiary for retail use or transfer to the distillery for use in the manufacturing process they are exempt. Once they become a part of the process of whiskey manufacturing they must be picked up.

    A Little history on the subject:

    On May 13th 2013, Bill Haslam, governor of Tennessee (TN) signed House Bill 1084, which created the first state law to define what can be called “Tennessee Whiskey”. The law defines TN whiskey as: a spirit manufactured in TN; filtered through maple charcoal prior to aging, also known as the Lincoln County Process; made from grain that consists of at least 51% corn; distilled to no more than 160 proof (80% abv); aged in new charred oak barrels; placed in the barrel at no more than 125 proof (62.5% abv); and, bottled at not less than 80 proof (40% abv).

    This was a bill Jack Daniel’s fought for because of the value of “the process” in branding their product. They codified the process and noted in state law that the bio-mechanical process of aging their product in wooden barrels of a unique nature “finished” their product. It is undeniable that the aging in new charred oak barrels is a part of the manufacturing process.

    The fact that they may have not reported it before is not an issue. The assessor did not select Jack Daniels for an audit. That was a random process in which the accounts for yearly audit are selected by the State of Tennessee. The county assessor hires a professional outside auditor to conduct the audits.( A disinterested third party professional. )

    In Kentucky the barrels and the distilled spirits contained within the barrels are subject to taxation. Jack Daniel’s currently values their product for retail at a minimum of $10,000 per barrel. The ad valorem property tax on the distilled spirits would produce a greater revenue if taxed than a used $200 barrel. I am not proposing the contents be taxed but I do believe one should never look a gift horse in the mouth. Tennessee’s current valuation system is one such gift horse.

    Should such an exemption pass the legislature the tax burden would be shifted from the back of the largest distiller in the state onto the backs of the citizens in one of the state’s least prosperous communities forever. Furthermore it would create an entirely new class of items and undermine the equity of our taxation system.


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    Kirk H Low says:

    Since the beginning of the arguments on the taxation of whiskey barrels for property tax purposes there has been confusion in three areas: 1) the tax being discussed, 2) the role of the barrel in whiskey making, and 3) who first opined that the barrels should be taxed.

    The tax is personal property tax and is part of Tennessee’s property tax scheme. The equipment used by businesses is taxed using a “percent good” table set by the Legislature. In this table a whiskey barrel, if taxable, would be assessed at 88% of the cost, including freight, of the barrel times 30%. Then the tax rate would be applied. As the distiller is classed as a manufacturer, there would be no credit on the business tax.

    The barrel is required by Tennessee law to be a new barrel to produce Tennessee whiskey. The whiskey ages in the barrel and the oak imparts favor to the whiskey. Therefore, the oak is an ingredient required to produce the taste desired by the distiller. You can buy wines that are “unoaked” and only touched by stainless steel and they will taste different than the same wine from an oak barrel.

    The auditor that first introduced the idea that the barrels were manufacturing equipment was an employee of Tax Management Associates that had a contract with the Moore County Assessor to audit a percentage of the county’s businesses. Definitely an auditor with an interest in increasing the tax base of the county. As the biggest industry in Moore County Jack Daniels was audited. I do not know how Jack Daniels classifies the barrels on their financial records, but as there are approximately a million barrels holding aging Jack Daniels this is a significant accounting entry.

    The deciding factor should be that the barrels are an ingredient in making the whiskey. In Tennessee personal property law ingredients are taxable when being stored for use and become exempt when the ingredients enter the manufacturing process. The barrels would also be exempt when emptied as they are a by-product of the whiskey making process with value to other distillers making spirits such as Scotch, to winemakers, and to the makers of Tabasco sauce.

    So we have a hired auditor with an interest in increasing Moore County’s tax base making an incorrect judgement on the role of whiskey barrels in the process backed up the the Comptroller’s Office and the Attorney General. The Legislature would not be incorrect in making the barrels exempt, but should look at the process a little closer to assure Tennessee’s system is fair to businesses and not ruled by those with an interest in increasing the tax base.

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    Rob Mitchell says:

    Kirk, The auditor was not an employee of Tax Management Associates. If it ages in stainless steel tanks or oak barrels it is all the same. It is used to age the whiskey and that is equipment.

    The auditor has no interest in inflating tax rolls. They regularly adjust some personal property schedules down. Their job is to insure the accuracy of the self reporting.

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