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Kombucha Industry and Others Seek Tax Breaks of Their Own

Advocates push for changes they say are in sync with GOP tax overhaul goals

Producers of kombucha want lawmakers to ensure they’re free from alcohol excise taxes. (Jonathan Leibson/Getty Images for [is.] file photo)
Producers of kombucha want lawmakers to ensure they’re free from alcohol excise taxes. (Jonathan Leibson/Getty Images for [is.] file photo)

Now that President Donald Trump and Republicans in Congress have redesigned the tax code, niche markets from bitcoin buyers to kombucha makers and cannabis businesses are seeking their turn at the tax cut trough.

Producers of kombucha, a fermented tea drink growing in popularity with millennials, yogis and more, want lawmakers to ensure they’re free from alcohol excise taxes. Marijuana dispensaries are aiming to ease restrictions blocking them from claiming the same tax breaks as other small businesses. And amid a growing cryptocurrency craze, advocates are seeking to exempt transactions of bitcoin and other virtual currencies from strict IRS reporting requirements.

Some lawmakers and industry advocates are framing their favored legal changes as consistent with the goals Republicans espoused during their tax overhaul effort last year, namely, lowering the tax burden on small businesses and fostering innovation. There’s bipartisan backing for measures that would benefit each of those industries and other narrow groups of taxpayers, as well as a lobbying efforts from major players in the pot, crypto and kombucha markets.

But the legislative outlook for further tax changes is foggy. There’s little chance any of the proposed legislation would be taken up on its own. And broader tax packages that could carry those provisions will be few and far between in an election year and after the exhaustive process that produced the new tax law, the most sweeping tax code rewrite in three decades.

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One area of interest on Capitol Hill is how to fairly tax marijuana companies that are springing up across the country as more and more states legalize medical or recreational cannabis.

Polls show public sentiment largely favors legalizing marijuana — a highest-ever 63 percent of voters surveyed last month in a Quinnipiac University poll expressed approval — and many lawmakers support changing federal tax and spending laws to ease restrictions on the substance. That list now includes heavyweights such as Senate Minority Leader Charles E. Schumer and former Speaker John A. Boehner.

Advocates are seizing the moment to push for more specific policy changes, including tax rules. For example, a bipartisan group of lawmakers wants to exempt cannabis companies from a section of the tax code that forbids businesses from taking deductions for income related to controlled substances. The law stems from a 1982 court case involving a cocaine trafficker who sought to deduct ordinary business expenses from his drug racket.

Companion bills in the House and Senate sponsored by Rep. Carlos Curbelo of Florida and Sen. Ron Wyden of Oregon would exempt state-legal marijuana companies from the rule. Curbelo is a Republican member of the House Ways and Means Committee and Wyden is the top Democrat on the Senate Finance panel.

Colorado Democrat Jared Polis, a co-sponsor of the House bill who is running for governor this year, sought to include a form of the measure alongside a group of tax administration bills the House passed in April. At a Rules Committee hearing last month, he asked for an amendment vote on his bill, saying that marijuana businesses are subject to an effective federal tax rate “as high as 70 percent” because of their inability to claim the deductions.

The measure was not allowed to move forward for a floor vote, leaving Polis and other advocates searching for their next opening.

It’s unclear when that will be.

Republicans like Ways and Means Chairman Kevin Brady of Texas are talking up a “phase two” of tax cuts, which would extend temporary portions of the new tax law and other potential fixes. Such a measure could come up for a vote this summer in the House, but it’s not expected to become law and is largely seen as a messaging ploy by Republicans.

That bill could carry some of the new tax provisions lawmakers are pushing, potentially as a bipartisan sweetener to attract votes.

A more realistic vehicle for cutting taxes on cannabis, kombucha and crypto is a package of so-called tax extenders that could arise late this year or early 2019. Congress regularly renews a slate of temporary tax breaks, typically for one or two years at a time, for certain narrow activities and industries like racehorse owners, film and theater producers, Caribbean rum makers, railroad track maintenance, energy production and more.

Lawmakers retroactively renewed many expired tax breaks through the end of 2017 as part of a broad budget agreement in February. But those provisions will need to be extended once again before next year’s filing deadline or a hodgepodge of industries and individuals will see higher tax bills instead of the lower taxes Republicans promised.

An extenders package would be a natural fit for the targeted tax provisions some lawmakers are now pushing. On the other hand, key tax writers aren’t likely to favor adding new tax breaks for individual industries at a time when they say they’re looking to simplify the tax code. Brady has said he wants Congress this year to finally kick its habit of temporary tax extensions by making permanent the tax extenders that are worth keeping and axing the rest.

Kombucha carve-out

The trendy beverage kombucha, perceived by many as a health drink, is made from tea and sugar with a culture of yeast strains and bacteria.

Because of fermentation, kombucha can reach an alcohol content higher than 0.5 percent by volume during the brewing process or after it’s been sitting on store shelves. That means the drink is sometimes regulated and taxed like it’s beer, even though it generally has no intoxicating effect on consumers.

“It makes no sense to regulate this tea product like we regulate or tax alcohol,” Polis said at the Rules hearing in April.

He’s signed on to a bill with Colorado GOP Rep. Scott Tipton and other House members that would exempt kombucha makers from excise taxes unless the beverage exceeds a higher threshold of 1.25 percent alcohol by volume.

Wyden has also introduced the same legislation in the Senate with Colorado Republican Cory Gardner. The so-called Kombucha Act was actually included in an initial version of the Senate GOP’s tax overhaul, but the provision didn’t make the cut in the final House-Senate compromise.

The trade group Kombucha Brewers International has backed the effort, dispatching lobbyists from the firm McDermott Will & Emery to make their case on Capitol Hill for friendlier tax treatment.

The demand for kombucha is rising in part because it’s considered a health drink, even though perceived benefits on digestion, immunity, energy, cholesterol and more have not been proved. It’s a $600 million industry projected to triple by 2020, according to the bill’s sponsors.

Crypto taxes

The boom of another new market, cryptocurrencies, has brought on headaches for some taxpayers who deal in bitcoin, Ethereum, Ripple and other virtual currencies.

Under current law, the IRS deems digital currencies to be a form of property. Transactions of any size could be considered capital gains, subject to taxes, and must be reported to the government.

Polis and Arizona Republican Rep. David Schweikert,  a Ways and Means member, have filed a bill to effectively exempt any transactions under $600 from those reporting requirements and taxes.

“When someone buys a cup of coffee with bitcoin, they shouldn’t have to do a filing with the IRS. It probably costs more than the cup of coffee to do that paperwork,” Polis said at the Rules meeting last month.

He and Schweikert chair the Congressional Blockchain Caucus, a bipartisan group focused on new technologies like digital currencies. And they have a powerful White House ally in their push for new cryptocurrency tax rules. Mick Mulvaney, director of the Office of Management and Budget, was a founder and co-chairman of the Blockchain Caucus until he left Congress to join the Trump administration.

Mulvaney also has newfound leverage over tax rules, thanks to a White House memo last month that gave the OMB significant authority over certain regulations that had previously been under the Treasury Department’s purview alone.

Digital currency groups have also launched lobbying efforts on the Hill. They include Coinbase, Coin Center, the Bitcoin Foundation and the Chamber of Digital Commerce.

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