A Buellton wine company had a $400,000 tax bill erased in a Board of Equalization decision that could set a precedent for classifying “custom crush” producers and microbreweries that lease space and equipment to other vendors.
On Jan. 21 the Board of Equalization voted 3-2 in favor of an appeal filed by Terravant Wines, a custom crush operation that argued it should not be responsible for a onetime sales tax on the purchase price of winemaking equipment or acquisition but instead pay use taxes over time based on its contract agreements with other “alternating proprietor,” or AP, vintners. The board decided that the company’s previous payment of $182,408 in use taxes over a four-year audit period between January 2008 and December 2011 was sufficient, and thus its remaining balance of $416,457 could be eliminated. Terravant Wines declined to comment on the matter.
In an earlier decision, board staff decided that Terravant Wines owed a total balance of nearly $600,000, which included a tax redetermination amount of $390,323, seven years’ worth of interest through Jan. 31 totaling $169,509 and a negligence penalty of $39,032. The board stated in a hearing summary that Terravant Wines owed this total because its contract agreements with outside vintners did not qualify as leases since these winemakers did not have full possession and control of the equipment and premises.
“While the AP vintner provides instructions for each stage of the winemaking process and may be present during any stage of the process, the AP vintner may not operate any of the equipment used to produce the wine at any time,” the report states. “The fact that [Terravant Wines] employees actually operate the equipment means that [Terravant Wines] did not lease the equipment to the AP vintners, but instead provided a service.”
At the time, Terravant had countered that it did lease equipment and space to the AP vintners and did so under “alternating proprietor agreements,” or APAs, even if its staff helped these outside vintners with operating machinery and other winemaking processes.
“[Terravant Wines] asserts that it leases its premises and equipment to third-party licensed winemakers under the APAs and that the APAs constitute leases, pursuant to California Code of Regulations, title 18, section 1660, because the AP vintners exercise true control over [the Terravant Wines] facility and employees during the winemaking process under those agreements.”
According to Fiona Ma, a CPA and member of the Board of Equalization, the board originally ruled against the winery on the grounds that it should pay a full one-time sales tax on the purchase price if it was using the equipment rather than leasing it.
“They wanted Terravant to pay upfront on the equipment because they said that Terravant was using it themselves,” Ma said. “And because the equipment was physically on Terravant’s property and controlled by their personnel [so] they said Terravant should have paid a onetime sales tax.”
However, Ma voted in favor of Terravant’s appeal because, she explained, the winery’s agreements with AP vintners do qualify as lease agreements because these winemakers have “constructive possession and actual control” over Terravant’s facility at the time of each lease.
“Terravant is not using the equipment themselves,” she said. “They bought the equipment with that business model in mind.”
As dozens of custom crush wineries line the wine trails of Paso Robles, the Santa Ynez Valley and other wine destinations throughout the Tri-Counties, the decision could be precedent-setting for the financial sustainability of these businesses, according to Ma.
“Because of our ruling, this is going to encourage the growth of this industry because this is an emerging trend,” she said. “We’re the No. 1 wine-producing state in the country so we should keep up with the times.”
A former assemblymember, Ma won a seat on the five-member Board of Equalization in November. This was her first meeting.
Clarification: An earlier version of this article stated that the board decided Terravant Wines owed a total balance of nearly $600,000. The Board of Equalization as a whole did not come to this decision, but rather a division of the organization.