Duluth’s microdistilleries are bracing for a “perfect storm” materializing at the start of the new year.

With federal distillery taxes slated to increase fourfold at the start of 2020 and Minnesota’s tight distilling laws, some microdistilleries are uncertain if they’ll turn a profit — or even stay open — next year.

“(It’s) becoming impossible for us to survive and compete,” said Joel Vikre, co-founder of Duluth’s Vikre Distillery. “I honestly don’t know what we’re going to do next year.”

Duluth Whiskey Project CEO Kevin Evans (left) and Vikre co-founder and CEO Joel Vikre pose in front of a still at Vikre recently. The Canal Park distillery was distilling vodka in the still. (Steve Kuchera / skuchera@duluthnews.com)
Duluth Whiskey Project CEO Kevin Evans (left) and Vikre co-founder and CEO Joel Vikre pose in front of a still at Vikre recently. The Canal Park distillery was distilling vodka in the still. (Steve Kuchera / skuchera@duluthnews.com)

President Donald Trump’s 2017 tax bill that brought $1.5 trillion in tax cuts included an act reducing the federal excise tax for distilled spirits — or the amount of tax distillers pay per proof gallon.

Under the bill, distillers pay $2.70 per proof gallon for the first 100,000 proof gallons created. Any proof gallon made after this up to 22.13 million gallons is then taxed at $13.34 per proof gallon. All spirits made after 22.31 million proof gallons are taxed at $13.50 per proof gallon.

But the three-bracket tax plan isn’t permanent. It’s set to expire at the end of 2019, bringing the tax back up to a flat $13.50 per proof gallon — no matter how much or how little a distillery produces.

Although the distillery opened its Canal Park location in 2014, Vikre said the passage of the tax bill was its first “prayer of making any money.” It was also the point at which craft distilleries “exploded” in the state, he said.

Even with a majority of Congressional members being supportive of another three-bracket distillery tax law, Vikre said it likely won’t pass as they’re in the midst of impeachment hearings.

Members could take action and apply a law retroactively after the new year starts. “(But) there's no guarantee we're going to be able to stay in business and keep paying all our people while they're coming up with a retroactive solution,” he said.

At the Duluth Whiskey Project, CEO Kevin Evans is expecting a “dramatic” increase in taxes for his new business.

He has operated out of Vikre’s space since Duluth Whiskey opened in the past year. Evans was eyeing his own distilling space, but now revenue will likely go to taxes instead of future development.

“(I) got in this industry with eyes wide open, knowing it’s highly regulated and highly taxed,” Evans said. “It’s just part of the game.”

Shelves at Vikre hold 375 ml bottles of several kinds of their product. The bottles are the largest size that microdistilleries can sell at their businesses in Minnesota. (Steve Kuchera / skuchera@duluthnews.com)
Shelves at Vikre hold 375 ml bottles of several kinds of their product. The bottles are the largest size that microdistilleries can sell at their businesses in Minnesota. (Steve Kuchera / skuchera@duluthnews.com)

Vikre said they can’t pass the tax increase on to its customers, as microdistilleries are competing with mass-producing, national brands. To mitigate costs, it may have to reconsider what it pays its 35 employees, he said.

Jon Kreidler, who co-founded Tattersall Distilling, said the Minneapolis distillery is also bracing for upcoming changes.

He’s expecting its federal taxes to increase by almost half a million dollars.

“It's gonna hurt us pretty bad. To be completely honest … we're going to have to make some serious cuts and really change up our business to be able to stay afloat,” Kreidler said.

An increase in federal taxes comes as Minnesota distillers say state laws haven’t kept up with the growing industry.

Self-distribution and bottle sale laws in Minnesota add stress to the upcoming situation, as they create an unfavorable business climate for distillers, some say.

At Tattersall, Kreidler said his main concern is with the state’s production cap. Minnesota laws dictate that microdistilleries can produce only 40,000 proof gallons a year — one of the lowest production caps in the nation.

The distillery is approaching this cap and when it does, it will either have to close down its taproom — which is critical to its business and brand — or move its production. Kreidler said they’re currently pursuing the latter in case the laws don’t change.

“We're gonna have to spend even more money to build another facility in another state — move jobs (and) move production to another state,” he said.

Vikre bartender Micah Tigner (left) waits on customers Jim and Noelle Starr Wednesday. (Steve Kuchera / skuchera@duluthnews.com)
Vikre bartender Micah Tigner (left) waits on customers Jim and Noelle Starr Wednesday. (Steve Kuchera / skuchera@duluthnews.com)

For Evans of Duluth Whiskey, moving across the water to Superior where liquor laws are more relaxed isn’t feasible. He will continue doing his best within the system here. “Minnesota is home,” he said.

Minnesota microdistilleries also can sell only one 375-milliliter bottle — half the size of the standard 750-milliliter bottles — to a person per day. Because bottle sales are the “backbone” of the craft industry, Vikre said this and the increasing federal tax make the company’s future uncertain.

“Our business model for this not-mature-but-at-least-kind-of-functioning, sustainable business that we have, it’s no longer going to work — between the excise tax and then our local laws being so antiquated,” he said.

All three distillers belong to the Minnesota Distillers Guild, made up of spirit creators from across the state, which leads advocacy efforts at the state Capitol.

In the upcoming session, the guild is aiming to increase the production gallon cap to 100,000 proof gallons, as well as increase the size and amount of liquor people can buy and take home from distilleries, Kreidler said.

As they currently stand, Kreidler said the laws prevent the industry from growing. “By doing that, what you're really doing is supporting the big brands … that are out of state. And you're supporting those instead of local businesses who are hiring people here and paying taxes here. It just logically doesn't make sense from any angle."