CCE helps breweries & cideries hone their craft

By: R.J. Anderson

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Home to more craft breweries and cideries than you can shake a pint glass at, the Finger Lakes region continues to entice new craft beverage consumers and producers. Recognizing the value and continued potential of these growing industries, Cornell Cooperative Extension (CCE) and its educators have joined forces with industry leaders to provide research-based resources for the area’s current and future brewers, malters and grain growers.

Those collaborations were most recently on display at the second annual Finger Lakes Craft Beverage Conference hosted by CCE of Seneca County April 1 and 2 in Seneca Falls, New York.

Featuring research from CCE regional agriculture program specialists as well as real-world advice from current producers, attendees learned about avoiding potential pitfalls. From hop-growing basics and cidery set up, legal advice and supply chain analysis, there was a depth and breadth of learning opportunities.

“This event is important because it is the only craft beverage event in the state that covers such a wide range of topics – especially the legal and business-related topics,” said event organizer Derek Simmonds, CCE Seneca’s agriculture economic development specialist. “It also serves as a great networking event.”

Noel McCarthy, a home brewer and cabinet maker opening a malt house north of Syracuse next year, said the conference was a great way to immerse himself in the craft beverage industry. “I heard from brewers, grain growers, educators and all kinds of other people in the industry about trends and best practices they see across the state,” he said. “It’s given me a better sense of how everything fits together.”

McCarthy pointed to research-driven sessions, such as Elizabeth Newbold’s presentation on brewery supply chain analysis, as being especially useful. Newbold, a food distribution and marketing specialist with CCE’s Harvest New York regional agriculture team, surveyed New York’s brewers to gauge demand for locally produced ingredients as well as their interest in promoting the use of those products through a statewide branding and labeling program. In both cases, Newbold said the data indicated brewers believed consumers are willing to pay the premium prices that accompany products containing local ingredients, which cost more to grow than crops that are mass produced in states such as Oregon and Washington.

The brewers’ willingness to invest in local ingredients is partly tethered to the 2012 farm brewery law, which provides tax and fee cuts while easing some regulations for brewers who use New York state-grown or produced ingredients. With the laws escalating requirements for inclusion of New York ingredients – at least 90 percent of a product’s hops and other grains will have to be New York-grown by 2019 – the demand for locally produced hops and barley will only increase. That’s good news for current and future growers like McCarthy.

“Hearing the brewers’ responses in Elizabeth Newbold’s survey really justified my reasons for pursuing the malt house,” McCarthy said. “It’s an exciting time to be sure.”

Along with research and shared expertise, the conference promoted a collaborative culture between presenters and attendees, novice and expert alike. Brewers, malters and growers as well as scientists and educators could be found sitting side-by-side trading stories, sharing advice and networking.

“That was probably my favorite part,” said McCarthy. “Some of those people might be my customers one day. Events like this help reveal that the pieces are indeed coming together for my business and for other like-minded folks attracted to these great industries.”

R.J. Anderson is a communications specialist/staff writer for Cornell Cooperative Extension

Extension Helps N.Y. Brewers, Growers Raise a Pint

By: R.J. Anderson, Courtesy of the Cornell Chronicle

The essential ingredients of a pint of locally produced New York state craft beer are quite simple: hops, barley, yeast and water. Much more complex, however, is how the supply chain of those elements comes together to create beverages that adhere to New York’s escalating farm brewery regulations.

It’s a recipe further challenged by the relative infancy of the farm brewery industry and its explosive growth. Since the introduction of the state’s farm brewery license in 2013, which offered tax benefits and relaxed regulations for breweries using New York-grown ingredients, there are now more than 160 farm breweries online. And while the path to startup has been made easier, there exists significant challenges for farm brewers looking to procure New York-produced ingredients. In addition to lending distinctly local flavors to their beverages, Empire State hops and barley satisfy the state’s mandate that farm-brewed beers contain at least 20 percent New York-grown ingredients – a requirement that jumps to 60 percent in 2019 and 90 percent in 2024.

Helping the industry link and grow a more inclusive supply chain are Cornell Cooperative Extension (CCE) specialists. Examples of CCE efforts were recently on display at a pair of Farm-to-Pint tours that brought together more than 70 New York hop and barley producers, maltsters, brewers and state officials with Cornell and industry researchers.

By design and per New York state legislation, our craft beer supply chain is a relatively short one,” said event organizer Cheryl Thayer, an agricultural economic development specialist with CCE’s Harvest New York regional agriculture team. “Because of those limitations, it’s imperative that the supply chain stakeholders not only know one another, but understand the intricacies involved in each node of the supply chain.

“We thought a perfect mechanism for this was to bring those stakeholders together and follow the life cycle of a pint of New York state beer,” she added.

Funded by the New York Farm Viability Institute, the bus tours – one held north of Albany in Washington County June 29, the other near Rochester Aug. 4 – each began with a stop at a local hop yard and malting barley field. In addition to hands-on, real-world conversations with the growers, those stops included updates from Cornell College of Agriculture and Life Sciences scientists Gary Bergstrom and David Benscher, who joined CCE crops specialist Mike Stanyard and CCE hops specialist Steve Miller for research-based discussions about ongoing trials and trends.

Each tour also included a visit to a craft malt house. “Malt house owners are a vital middle link in the craft beer production chain,” said Thayer. “But with the recent reintroduction of malting-grade barley to New York agriculture, they are also the newest additions to the supply chain. Because of that, attendees were very interested in seeing a working malt house in action and spent quite a bit of time picking the maltsters’ brains about their trade and preferences when working with growers and brewers.

Wrapping up each event was a tasting at a farm brewery where the groups networked while sampling beers featuring hops and barley from earlier tour stops.

“The attendees were very appreciative of having a forum where they could absorb new information while making those important new connections,” Thayer said. “The exchange of information and candid discussion about challenges and opportunities currently present in the supply chain was probably the most valuable takeaway for them.

“Along with a lot of people across the state, we at CCE think the craft beer industry has the potential to cultivate emerging market opportunities for growers while simultaneously supporting good agricultural economic development initiatives,” Thayer continued.

“That’s why we’re doing all we can to support its continued growth and success. But for those things to happen, the industry needs to develop a strong sense of community and understand the role of each link in the supply chain – and we’ll do everything we can to help make that happen.”

R.J. Anderson is a writer/communications specialist

with Cornell Cooperative Extension.

Petition for a Writ Far-fetched? Nope!

By: Dan Minutillo, APC

If a state regulatory agency with jurisdiction over the craft brew industry makes a decision that appears to be arbitrary and capricious, having a direct effect on your business, then, you have the right to petition a court for relief using a Writ of Administrative Mandamus. An unnecessarily fancy phrase meaning that a court of law reviews the administrative decision and decides if, under applicable law, the decision is not rational. Most times a writ is requested by an association or group of companies that are affected by the agency decision so that a positive result will affect many companies in the association or group.

STATE ADMINISTRATIVE AGENCIES

State administrative agencies with jurisdiction over the craft brew industry create policies that can affect your business. I recently wrote in this magazine about a Tennessee agency which passed a regulation indicating that only people domiciled in Tennessee for a certain time could get a permit to sell alcoholic beverages in the State.

For the purpose of this article, let’s say that an administrative agency in California, like the California Department of Alcohol Beverage Control (ABC), passed a regulation indicating domicile restrictions to get a permit to sell craft beer om the State; that a company had to be in business in the State for ten (10) years and then that company could sell alcoholic beverages. This regulation is then challenged by you as arbitrary and capricious at the agency level, and the agency denies your challenge.  You argue that this domicile restriction is illogical, with no purpose other than to discriminate against out of state craft brew companies. You lose at the agency level, that is, the ABC reviews your challenge and denies it.

THE APPEAL; THE WRIT

That administrative decision (the denial of your challenge) by the ABC can be appealed to a court by “writ”, and you, the appellant, will win and ensure that this decision and underlying regulation is stricken if you can prove that the decision and underlying regulation is arbitrary, that is, without a rational basis.

So, there are a few criteria to get you into court to have the ABC decision (the denial of your challenge) reviewed and to win on your writ:

  1. That the decision/regulation was made by an “administrative agency” of a state (or of the Federal government), like the California ABC;
  2. Normally, that you have exhausted your administrative remedies. This means that if there is a method of appeal at the ABC, then you must first make that appeal and follow all other procedural rules regarding an appeal at the ABC before you bring a writ.
  3. That all of your ABC remedies have been exhausted and denied, and this denial must usually be in writing by the ABC (evidentiary issue).
  4. That you have standing to be heard by a court. Standing means that you are a “party in interest” which usually means that you, that is, your business has been affected by this ABC regulation/decision. You have standing if you will be or have been damaged by the regulation or decision. For example, if I teach math to high school students in a local school, I would not have standing to bring a writ in this circumstance because the ABC regulation/decision does not affect me. But, if you make or sell craft beverages, this regulation/decision does affect you, so, you have standing to bring the writ.
  5. That any applicable statute of limitation has not run. Most actions brought in a court of law must be brought to the court before a certain time period, that is the statute of limitations. Various statutes limit the time in which you can bring certain actions. Some statutes are as short as ninety (90) days from the time of the ABC denial of your challenge.
  6. That you can prove that the decision/regulation was made by the California ABC in an arbitrary and capricious manner, that is, there is no basis in fact or law to support the decision (the denial). It was whimsical and therefore an abuse of discretion by the ABC. The case law language is that a court on a writ will not disturb the ABC’s decision absent an arbitrary, capricious, or patently abusive exercise of discretion by the ABC.

THE STANDARD

Some courts call this a “rationality review”. Is the regulation/decision rational, that is, justified in fact and in law. No matter how you look at this, the key here is that the ABC did something that has damaged you and, after exhausting your administrative remedies, you are able to prove that the ABC’s decision is arbitrary and capricious—and you win.

THE REMEDY

I will discuss remedies, that is, what decision a court could make on a writ and how it could affect you, in a later article for this magazine.

Dan Minutillo has lectured to the World Trade Association, has taught law for UCLA, Santa Clara University Law School and their MBA program, and has lectured to the NPMA at Stanford University. Dan has lectured to various National and regional attorney associations about Government contract and international law matters. Dan has provided input to the US Government regarding the structure of regulations. He has been interviewed by reporters for the Washington Post and other newspapers.

Brew More Pay Less: A six pack of tax tips for breweries

By: Brandon Scripps, Senior Audit Manager, Sensiba San Filippo.

Lavender, bacon, maple syrup, chipotle. A decade ago the only thing these flavors would have in common is a row in a jelly bean box. Today, the combination of innovative flavors and unique business character has led to the success of the ever-growing craft beer industry.

With creative, and often obscure, flavor profiles flooding the market, beer consumers are rejoiced by the plethora of options at the taps and down liquor store aisles. In fact, nearly 65% of beer lovers say that they prefer craft breweries due to the volume of variety. Where there used to be only several major beer companies monopolizing the market, there are now 5005 breweries in the US, 99% of which are small, independent craft breweries.

With an ever-growing demand for more and more unique varieties, it’s no mystery why breweries are popping up all over the nation. Whether established or just getting off the ground, it’s important for brewers to know what options there are in terms of tax benefits. Like any business, producing and retaining enough of your profit is critical to sustainability, and beer is no different. Here is a list of tax tips that will help you maximize your wealth and keep those taps flowing.

Domestic Production Activities

Deduction (DPAD)

Since brewing is the process of transforming raw ingredients into a final product, breweries are inherently considered manufacturers. The Domestic Production Activities Deduction (DPAD) is a deduction available to U.S. manufacturers and can amount to as much as 9% of net Qualified Production Activities Income (QPAI). To be eligible, the brewery must pay W-2 wages and must be producing a profit. The deduction applies only to manufactured products at the brewery, and therefore resale and merchandise sales do not qualify. To avoid later complication and questions from the IRS, a well-organized accounting system is recommended to distinctly separate qualified DPAD related expenses and revenue from non-manufactured activities.

R&D

Think that research and development only happens at tech companies? Think again. Breweries are constantly innovating the brewing process, developing new or improved product formulas and testing out new procedures — all of which are qualifying R&D activities. The tax credit can be applied to expenses associated with any R&D activities, including wages, supplies and services used during the process. The qualification process is tricky and requires a four part eligibility test. For this reason, it’s recommended that you have extremely organized and accurate documentation on the costs associated with the R&D activities. Qualifying activities include anything developed or improved, such as bottling processes, preservative chemicals, filtration methods, flavor or aroma profiles, or other advances in methodology or procedure.

To make things better, congress recently passed new legislation that enables small businesses to apply their R&D credit to offset payroll taxes. Like many start-ups, breweries often struggle to make and sustain a profit their first few years in business. While not profitable, the odds are they still have payroll to maintain. This legislation allows small businesses and breweries to put those R&D credits toward those payroll taxes rather than income taxes to realize an immediate cash benefit.

Charitable Donations

While charitable giving is a great way to boost employee morale and help others along the way, it’s also an exceptional way to save some cash throughout the year. Contrary to popular belief, charitable giving can mean donating physical items rather than just straight cash. Like other businesses that have an inventory supply, breweries often have an excess of inventory or out of season beer throughout the year. Let’s say your brewery makes a delightful winter ale, but come springtime, consumers no longer crave those comforting notes of nutmeg and cinnamon. By donating this excess beer to a qualified charitable non-profit for a fundraising event, you could receive a tax deduction directly correlating to its market value. The beer must of course be in consumable condition, and must be donated to a registered 501(c)(3) to qualify. Be sure to keep documentation of the donation as well as a signed form from the charity to receive the tax benefit.

FICA Tip Credit

For brewpubs, customer tips are a critical part of employee compensation. The FICA tip credit gives brewpubs the chance to claim a credit on their federal taxes, including social security and Medicare. Note that this credit is only applicable to tips that put the employee in excess of the national minimum wage ($5.15 per hour). Employers are responsible for 7.65% of FICA payroll taxes, making this credit a huge asset when properly utilized. A simple year-end payroll report will showcase all of the necessary information to qualify for this credit.

Section 179 Deduction and

Bonus Depreciation

Having good equipment is an essential part of a successful brewery. Section 179 of the IRS tax code gives businesses the opportunity to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. In an effort to encourage business growth and investing, this deduction is one of the few that really helps small businesses grow their operation. While businesses used to write off a portion of the purchase each year as a part of depreciation, this deduction allows businesses to write off the entire purchase price for the year they buy it (up to $500,000 in 2016). This covers everything from software, corporate vehicles and machinery.

Bonus depreciation is also a great way to quickly recover the cost of capital assets. Essentially, bonus depreciation allows breweries to purchase equipment (thus pumping up the economy) and expense a portion of the asset immediately in return. Bonus depreciation allows for an immediate deduction of up to 50% of the cost of the assets, above and beyond the Section 179 deduction claimed. As part of the extension, the amount available for immediate deduction will be 50% in 2016 and 2017, 40% in 2018 and 30 percent in 2019. It’s important to note that bonus depreciation is not applicable for used equipment or other assets — in which case it’s best to take the Section 179 deduction on those assets when qualified.

California Sales Tax Exemption on

Manufacturing Equipment

Since brewing naturally requires a large amount of production equipment, most brewing equipment will qualify for California’s manufacturing sales tax exemption. The exemption allows a 4.1875% sales tax rate reduction on qualified production purchases. Claiming the reduced rate is simple and well worth the benefit. When making a qualified purchase or lease, simply provide a Partial Exemption Certificate for Manufacturing Equipment to the seller. Although the exemption began in July of 2014, it’s not too late to get a refund for the sales tax exemption that could have applied to prior qualifying purchases. Consult with your tax advisor to see about getting a refund for any past overpaid sales tax.

Whether it’s a bold new flavor, a more economic bottling procedure, or a new facility to expand your operation capacity, be sure to take advantage of the many tax incentives offered to breweries.

If you want to learn more about how your brewery can start saving cash, contact our craft beer and wine specialist, Brandon Scripps, at 408.286.7780 or at bscripps@ssfllp.com

Hop Growers Face Challenges to Meet Rising Brewery Demands

By: Krishna Ramanujan, Courtesy of the Cornell Chronicle

The New York craft beer industry is really hopping. From 2012 to 2016, the number of breweries more than tripled, from 95 to 302, according to the New York State Brewers Association, and the industry contributes $3.5 billion to the state’s economy annually.

Lawmakers seeking to tap into the industry’s economic potential have passed new policies that provide incentives for New York hop growers to jump on the bandwagon and supply the growing demand for local ingredients. As these growers have learned, cultivating hops has its challenges, mainly from pests and two pervasive diseases, and Cornell researchers are lending a hand.

Plant disease experts David Gadoury and doctoral student Bill Weldon, both at the New York State Agricultural Experiment Station in Geneva, are providing expertise to help everyone from hops hobbyists to professional farmers through outreach materials, public presentations and field visits.

Real-World Challenges

Three years ago, J.D. Fowler and a team from Fowler Farms, added 30 acres of hop plants to their 2,000-acre family farm in Wolcott, New York, giving them one of the largest hop yards in the state. Fowler Farms mostly grows apples, but added hops to take advantage of increasing demand from a skyrocketing craft beer industry and recent legislation that stipulates farm breweries must use a percentage of New York-grown hops.

“We thought we’d get in on the front end of it,” Fowler said. As is the case with new opportunities, he wasn’t the only one trying to take advantage of a surge in the local beer industry.

While Fowler grows his hops on a large scale with the same agricultural standards that have kept Fowler Farms in business for six generations, most New York hop growers plant just 1 to 5 acres and started within the last five years. For many growers, inexperience combined with challenges from persistent hop diseases, and such pests as aphids, leaf hoppers, Japanese beetles and two-spotted spider mites have led to inconsistent quality and failed crops.

“Many New York growers lack practical experience with hops,” said Gadoury, a senior research associate in the Plant Pathology and Plant-Microbe Biology Section of the School of Integrative Plant Science in the College of Agriculture and Life Sciences. “It’s kind of like having a depth of knowledge on NASCAR and you’ve gone to a lot of races, but nothing in your experience equips you for getting behind the wheel and driving at 200 miles per hour. It’s a very different thing to read about it compared to doing it.”

In order to get new hop growers up to speed, Gadoury and Weldon have focused on outreach and education. Funded by a one-year, $15,000 Engaged Graduate Student Grant through the Office of Engagement Initiatives, as well as two grants from the United States Department of Agriculture (USDA) Specialty Crops Research Initiative, Weldon traveled to the Pacific Northwest to gain insights from experienced growers; Washington, Oregon and Idaho produce roughly 98 percent of U.S. hops. He also met with New York State growers to better understand their needs.

With this knowledge, he helped produce a new Cornell website https://sips.cals.cornell.edu/extension-outreach/hops that serves as a hub for hops-related information. Growers can find a set of fact sheets on such topics as the five things to consider before planting your first hop plants, and managing downy mildew vs. powdery mildew. A set of videos in development will help with identifications and management strategies.

This past summer, he and Gadoury fielded calls from New York growers, collected pathogen samples, diagnosed diseases and advised growers on management strategies.

Hops History

One hundred years ago, New York was the center for hops production in North America, with an optimal climate for the plant. But the combination of powdery mildew and downy mildew, aphids and alcohol prohibition killed the industry. Hop agriculture moved to the inland Pacific Northwest after that, where a dry climate limits downy mildew, though powdery mildew is a problem.

In 2013, New York lawmakers signed the Farm Brewing Law, designed to bolster New York’s economy by increasing demand for locally grown products and creating new businesses surrounding the brewing industry. The initiative revitalized hop growing in the state.

According to the law, receiving a farm brewery license in New York state requires beer to be made from locally grown farm products. The law is being implemented on a schedule: until the end of 2018, at least 20 percent of all hops, malting barley and all other ingredients must be grown in New York state; from 2019 through 2023, no less than 60 percent of these ingredients must be grown in-state; and from 2024 on, no less than 90 percent must be state-grown.

Overcoming Challenges

In spite of high hopes, a resurgence of the hop industry in New York hasn’t been easy. After a hot, dry 2016 summer, Fowler noticed a disease, which turned out to be powdery mildew, on some of the leaves of a hop variety called Zeus. And this year, after a wet summer, some of his crops fell victim to downy mildew.

Gadoury and Weldon visited Fowler’s farm in 2016, took samples and soon after made a diagnosis. They offered Fowler treatment advice, which included spraying safe chemicals and removing infected leaves and diseased plants. For early in the following season, they advised spraying, pruning, training shoots and stripping lower leaves after the first year to reduce humidity.

Tactics for managing downy mildew and powdery mildew differ, particularly when it comes to spraying. Fungicides that are perfect for suppressing downy mildew may not be effective against powdery mildew and vice versa.

“The focus is really on educating growers to choose the right materials for the right disease and then applying them on an as-needed basis,” Gadoury said. “It’s also important to have a knowledge of the basic biology of the organisms that threaten hop plants.”

Fowler has learned that good quality hops come from having a protocol for growing. “Timing is very critical between harvest and processing the hops; there are a lot of steps where the process can go wrong,” he said.

The marketable part of the plant, called the hop cone, grows when the plants start to bloom. This period and the month thereafter present a critical phase for managing disease. “The hop flower, which ends up being the cone, consists of rapidly growing tissues that are more susceptible to infection; it’s a time when pathogens can take advantage of that young new tissue,” Weldon said.

Fowler said he has found that certain varieties are more susceptible to mildews. He has five varieties that make up the bulk of his hop yard, but this year added five more test varieties of interest to brewers.

According to brewers, the quality of New York-grown hops has been inconsistent so far. Many brewers source their local hops from hobbyists, who are still learning. Also, brewers want certain varieties, such as Cascade for IPAs, but some of those varieties may be more susceptible to disease and pests. As a consequence, many New York brewers have no choice but to source some of their hops from Washington and Oregon, and that’s a lost opportunity for New York hop growers.

“That’s one of the things we are trying to change, having high-quality varieties and enough of them,” Fowler said.

Getting the word out to growers on how to grow healthy, high quality hops is a top priority of the Cornell and USDA projects. Weldon is scheduled to make presentations at the Annual Cornell Hops Conference at Morrisville State College in Morrisville, New York, in early December, and at the USA Hops annual meeting in Palm Desert, California, later this winter.