Around the world, crisis-related tax relief has helped distilleries of all sizes join in the fight against the COVID-19 pandemic, even as the future of some of those businesses becomes increasingly uncertain.
Despite household purchase limits and anti-hoarding campaigns, hand sanitizer doesn’t stay long on store shelves these days, if it arrives at all. The shortage emerged more quickly than governments could implement tax and regulatory relief for a wave of new producers, but that didn’t stop distilleries from jumping in to aid frontline efforts by switching operations to DIY hand sanitizer.
Over 700 distilleries in the United States are producing hand sanitizer to combat the public health crisis, and that number increases daily, according to a list kept by the Distilled Spirits Council of the United States (DSCUS). Anheuser-Busch is producing hand sanitizer for donation to the American Red Cross, and French alcoholic beverage giant Ricard SAS pledged to donate 70,000 liters of alcohol to hydroalcoholic gel supplier Laboratoire Cooper. Bermuda-based Bacardi Ltd. said it has helped produce over 267,000 gallons of hand sanitizer, and Smirnoff maker Diageo, headquartered in London, has pledged to aid in the production of over 8 million bottles of hand sanitizer through alcohol donations.
Smaller distilleries have contributed to the cause via business models ranging from donations of hand sanitizer directly to first responders, to giving away sanitizer for a suggested donation, to outright sales — often for just enough money to cover their costs or subsidize donations. Many of those models are evolving, and distilleries in several jurisdictions have been able to increase their output as a direct result of tax relief measures, some of which have been more effective than others.
U.K. Distillers as Unlikely Heroes
Psychopomp Microdistillery, a small-batch spirits producer in Bristol, England, decided near the end of February to produce hand sanitizer to give away to locals. “Everyone was having difficulty finding sanitizer,” and making it free was the company’s answer to stockpiling and price gouging, Liam Hirt, co-founder of Psychopomp, told Tax Notes.
The company requested donations in exchange for its 100-milliliter giveaways, all of which went to a local children’s hospital, Hirt said. When the United Kingdom went on lockdown, Psychopomp’s public distribution approach was no longer appropriate and the distillery began providing hand sanitizer to charities and vital services, he said.
The excise duty on pure, potable alcohol in the United Kingdom is £28.74 per liter, compared to £0 for denatured alcohol — the kind that isn’t suitable for drinking — is not taxed. When Psychopomp began making sanitizer, the hefty excise tax applied to the alcohol it used. It was expensive, Hirt said, but “we decided to accept the cost in order to help people quickly.” Meanwhile, the British Distillers Alliance and individual distilleries were lobbying HM Revenue & Customs to permit excise-tax-free sanitizer production using potable alcohol.
Verdant Spirit Co., which produces gin in Dundee, Scotland, also began making hand sanitizer before tax relief was available. Verdant launched a fundraising campaign to help cover the duty, which enabled the distillery to donate sanitizer to local National Health Service authorities and others in need, according to Verdant’s founder, Andrew Mackenzie.
Mackenzie was in touch with HMRC about excise duty relief for distillers, but said he got mixed messages. “One side of HMRC wasn’t agreeing that turning the alcohol into sanitizer was effectively denaturing it,” Mackenzie said, but “adding glycerin and hydrogen peroxide to alcohol turns it into something that nobody would really want to drink.”
On March 23 HMRC issued temporary guidance permitting licensed distillers and gin manufacturers to denature ethanol — the kind of alcohol you can drink — by producing hand sanitizer according to the World Heath Organization’s formulations. The WHO formulation that includes ethanol combines it with hydrogen peroxide, glycerol, and sterile distilled or boiled water.
“It was brilliant that the [WHO] put this recipe up; that was fantastic,” Mackenzie said. Normally, a distillery would need to jump through several hoops to get its sanitizer certified as safe, which Verdant still plans to do, Mackenzie said. But that process can take weeks or even months, and “obviously, we need to get it out the door before that,” he said.
Production Hits a Snag in U.S.
A similar process has been unfolding in the United States. The Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136), signed into law March 27, temporarily waives the U.S. excise tax on distilled spirits used in hand sanitizer production, but that waiver is tied to Food and Drug Administration guidance that requires alcohol in hand sanitizer to be denatured. The tax on distilled spirits in the United States is generally $13.50 per proof gallon, which is 50 percent alcohol.
The FDA is concerned about inadvertent ingestion, especially by children, but the denaturing requirement can actually make the product more toxic and is becoming increasingly problematic, according to a DSCUS spokesperson. There has been one shortage after another of ingredients in the FDA-approved formulas. "It’s gotten really difficult to just procure the components that are necessary for this otherwise very simple product to make,” which has led to an aggressive bidding system, the group said.
The result is that businesses that are already grappling with layoffs and concerns about keeping their doors open are having trouble making a product that satisfies the tax waiver. “People should not be penalized with a massive beverage alcohol tax when they’re just trying to serve their country . . . but also, this is just exacerbating the shortage now,” the DSCUS spokesperson said.
The FDA’s temporary policies have helped make it possible for nontraditional manufacturers, including distilleries, to help with hand sanitizer production, but the denaturant issue remains a sticking point, the group said. There have been reports of distilleries that are able to find a qualified denaturant sharing it with other local distilleries, and hand sanitizer shortages have been said to play a role in threatened strikes by Instacart and waste management workers. “Being able to keep society clean is a critical component, even in the best of times,” the spokesperson said.
A New Normal for Distilleries
Across the pond, tax relief seems to be helping quite a bit. Verdant’s production has far outpaced Mackenzie’s initial projections. “Originally, I thought this was going to be a little 100-liter project for local care homes and doctors’ surgeries and things like that,” Mackenzie said. Now the company is on track to produce 1,000 liters per week; “it just went ballistic,” he said.
“When the excise exemptions came into force, we could help many, many more people,” Hirt said. “We went from having a few hundred liters available to a few thousand liters.”
It has also been helpful that the learning curve hasn’t been terribly steep, according to Mackenzie. Verdant has a compounder’s license that permits it to mix alcohol with other ingredients; “that’s something we’re quite used to doing,” he said. “The products we’re normally mixing aren’t those that you’d use in sanitizer, but the procedures and the processes are pretty much the same.” Bottling, however, is a different story, he said. Using nonstandard bottles and preventing contamination of the existing bottling line makes the process more labor-intensive, he said.
Verdant has at least doubled the donations it initially expected to make and is able to offer discounted prices to charities and nonprofit organizations. Finding ways to price the product without taking advantage of the situation while still covering overhead is an evolving process, Mackenzie said. “If we’re not open, we can’t do anything for anybody,” he said.
That concern is weighing heavily on small distilleries. While demand for potable alcohol in many regions has increased during the health crisis, supermarkets are often the primary beneficiaries. Both Psychopomp and Verdant said their sales are way down. “The bottom has fallen out of our market completely,” Mackenzie said. Very few craft distillers in the country have outlets in supermarkets for a variety of reasons, so they rely on high-end restaurants and bars, he said. “That market has just collapsed, so we haven’t made a commercial sale of spirits for six weeks,” Mackenzie said. Online sales have gone up, but it’s not enough to make up for the commercial losses, he added.
There are also market risks involved in getting into the hand sanitizer business, notwithstanding the current global demand, Mackenzie said. “We could get into a situation where we’ll gear ourselves up to produce sanitizer on a major scale and suddenly that market just falls off the edge of the cliff,” he said, citing the large donations of alcohol by multinationals like Diageo. Further, “the regulations regarding certification for supplying sanitizer are still quite relaxed at the moment,” but that is bound to change, he said.
Mackenzie said the U.K. government could help distilleries recover from the economic effects of the health crisis by reducing alcohol taxes for small craft distilleries. There are reduced rates for brewers producing 60,000 hectoliters of beer in a year in the form of a small breweries relief scheme, but that scheme was approved “prior to the craft distilling movement really coming online, so it didn’t apply to us at all when we started producing,” Mackenzie said. American makers of spirits, wine, and beer enjoy similar excise tax breaks, though so far they are temporary.
Asked if he thought Verdant would produce hand sanitizer once the pandemic is over, Mackenzie said he didn’t think so. “We’re in the business to make gin and rum, and that’s what I’d really like to get back to,” he said.