Does a Tennessee distillery that sells its own spirits for on-premises consumption owe the 15% liquor-by-the-drink tax?

Plain-English summary

Tennessee distilleries can sell drinks of their own spirits on the distillery premises (other than the bonded premises) under Tenn. Code Ann. § 57-3-202(i)(4)(A). Sen. Bill Ketron asked whether the same 15% liquor-by-the-drink tax that bars and restaurants pay under § 57-4-301(c)(1) also applies to those distillery on-premises sales. AG Slatery answered yes for the 15% tax, no for the chapter 4 annual privilege taxes that depend on facility type.

The structure of the tax statute matters. Section 57-4-301(a) declares it the legislative intent that "every person is exercising a taxable privilege who engages in the business of selling at retail in this state alcoholic beverages for consumption on the premises." That language is general and follows the activity, not the license. A distillery selling its own drinks for on-premises consumption is doing exactly that activity, so it pays § 57-4-301(c)(1)'s 15% tax.

The annual privilege taxes in § 57-4-301(b)(1) work differently. They are tied to the type of facility holding an on-premises consumption license under chapter 4 (private clubs, hotels, restaurants, etc.). Distilleries do not need that chapter 4 license because their distiller's license already authorizes on-premises sales. So the chapter 4 facility-type annual taxes do not apply.

A drafting argument for distilleries: the wineries' statute (§ 57-3-207(t)(1)) explicitly cross-references § 57-4-301(c) for on-premises tax; the distilleries' statute (§ 57-3-202) does not. Doesn't that imply distilleries are exempt? AG Slatery rejects this. Tax exemptions are not implied. Hutton v. Johnson, 956 S.W.2d 484 (Tenn. 1997) makes that the strict rule: exemption statutes are construed against the taxpayer, every presumption runs against exemption, and any well-founded doubt defeats a claim. The legislature did not exempt distilleries; the absence of a redundant cross-reference does not create one.

Currency note

This opinion was issued in 2018. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: What's the 15% tax?
A: Tenn. Code Ann. § 57-4-301(c)(1) imposes a 15% tax on the sales price of all alcoholic beverages sold for consumption on the premises. The retailer remits the tax and is supposed to collect it from the consumer (§ 57-4-302(1)).

Q: Why don't distilleries owe the chapter 4 annual privilege taxes?
A: Those taxes are facility-type-specific (e.g., private clubs pay $500). They are pegged to chapter 4 on-premises consumption licenses. A distillery selling its own products for on-premises consumption is operating under a chapter 3 distiller's license that authorizes the on-premises sale, so it is not the chapter 4 licensee that subsection (b)(1) targets.

Q: Why aren't distilleries exempt from the 15% tax just because their statute doesn't cross-reference it?
A: Because Tennessee tax-exemption rules are strict. Hutton v. Johnson confirms that exemptions are construed against the taxpayer, every presumption disfavors exemption, and any well-founded doubt defeats a claim. The omitted cross-reference does not create an exemption when the underlying tax statute (§ 57-4-301(a) and (c)(1)) reaches the activity directly.

Q: What about wineries?
A: Wineries and farm wine producers sell wine for on-premises consumption under § 57-3-207(s)(2). Section 57-3-207(t)(1) explicitly says those sales are subject to § 57-4-301(c). The opinion notes the parallel and uses it to confirm that the activity-based tax reaches both wineries and distilleries.

Q: Who collects and remits?
A: The Commissioner of Revenue collects (§ 57-4-302). The retailer (here, the distillery) collects from the consumer when possible and remits to the state. Standard sales tax also applies.

Q: What about samples and tastings?
A: The opinion addresses only sales for on-premises consumption under § 57-3-202(i)(4). Tasting room operations are governed by separate provisions and may have separate tax treatment. The AG's reasoning suggests that any "sale at retail . . . for consumption on the premises" triggers the 15% tax; non-sale tastings are a different question outside the opinion's scope.

Background and statutory framework

Tennessee's alcohol regulation splits across chapters 3 and 4 of title 57. Chapter 3 governs manufacture (including distilleries and wineries) and licenses through the Alcoholic Beverage Commission. Chapter 4 governs on-premises consumption at facilities like restaurants, hotels, and clubs, with its own license under § 57-4-201 and its own tax under § 57-4-301.

Section 57-3-202(i)(4)(A) lets a licensed distillery sell alcoholic beverages for on-premises consumption at the distillery (excluding the bonded premises) for legal-age customers, where federal law also permits it. The drinks must be made on the distillery premises.

Section 57-4-301(a) imposes a privilege framework keyed to activity, not license. Subsection (b)(1) layers on annual taxes by license type. Subsection (c)(1) layers on a flat 15% rate on sales price for on-premises consumption.

The opinion's logic: read each subsection on its own terms. Activity-based taxes follow the activity (so distilleries owe (c)(1)). Facility-type-based taxes follow license category (so distilleries don't owe (b)(1)).

The opinion's anti-implied-exemption move is the key analytical tool. Tennessee follows Hutton v. Johnson rigorously; statutory drafting that fails to repeat a cross-reference does not by itself create an exemption.

Citations

• Tenn. Code Ann. §§ 57-3-201, 57-3-202, 57-3-202(a), 57-3-202(i)(4)(A)
• Tenn. Code Ann. §§ 57-3-207(s)(2), 57-3-207(t)(1)
• Tenn. Code Ann. §§ 57-4-101 et seq.; 57-4-103; 57-4-201; 57-4-202(i)(4); 57-4-207(t)(1)
• Tenn. Code Ann. § 57-4-301(a), (b)(1), (b)(1)(A), (c)(1); § 57-4-302; § 57-4-302(1)
• Hutton v. Johnson, 956 S.W.2d 484 (Tenn. 1997)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2018/op18-12.pdf

Original opinion text

March 16, 2018
Opinion No. 18-12

Taxation of Licensed Distilleries Selling Their Own Alcoholic Beverages for On-Premises Consumption Under Tenn. Code Ann. § 57-3-202(i)(4)

Question
Is a licensed distillery that sells its own alcoholic beverages for consumption on the premises, as authorized by Tenn. Code Ann. § 57-3-202(i)(4), required to remit the tax that is imposed under Tenn. Code Ann. § 57-4-301 on businesses that sell alcoholic beverages at retail for consumption on the premises?

Opinion
Licensed distilleries that sell their own alcoholic beverages for consumption on the premises, as authorized by Tenn. Code Ann. § 57-3-202(i)(4), must remit the 15% tax imposed on the sales price of each alcoholic beverage sold under Tenn. Code Ann. § 57-4-301(c)(1), because they are exercising the taxable privilege of "engag[ing] in the business of selling at retail in this state alcoholic beverages for consumption on the premises." Tenn. Code Ann. § 57-4-301(a). These distilleries are not, however, required to remit the annual taxes imposed by Tenn. Code Ann. § 57-4-301(b)(1), which are specific to facilities licensed under Tenn. Code Ann. §§ 57-4-101 et seq.

ANALYSIS

Tennessee Code Ann. §§ 57-3-201 and -202 authorize the Alcoholic Beverage Commission to issue manufacturer's or distiller's licenses "for the manufacturing of alcoholic spirituous beverages or vintage alcoholic beverages." Tenn. Code Ann. § 57-3-202(a). "Any person, firm, or corporation desiring to manufacture for commercial purposes any alcoholic spirituous beverages shall make application to the commission for a license to manufacture the same." Id. A distiller's license issued or renewed under Tenn. Code Ann. § 57-3-202 authorizes the distillery "to sell to any person of legal drinking age alcoholic beverages for consumption on the premises of the distillery, other than the bonded premises, where such consumption is also permitted by federal law." Tenn. Code Ann. § 57-3-202(i)(4)(A). Alcoholic beverages sold under Tenn. Code Ann. § 57-3-202(i)(4) "must be manufactured on the premises of the distillery." Id.

Tennessee Code Ann. § 57-4-101 authorizes the sale of wine and other alcoholic beverages for consumption on the premises of certain enumerated facilities, such as hotels, restaurants, commercial airlines, premier type tourist resorts or clubs, and convention centers, provided that the facilities are located in a jurisdiction that has authorized the sale of alcoholic beverages for on-premises consumption. See Tenn. Code Ann. §§ 57-4-101, -103. Owners of any of the enumerated facilities who desire to sell wine or other alcoholic beverages for on-premises consumption must apply to the Commission for a license to do so. See Tenn. Code Ann. §§ 57-4-201, -301.

Tennessee Code Ann. § 57-4-301(a) provides that "[i]t is hereby declared the legislative intent that every person is exercising a taxable privilege who engages in the business of selling at retail in this state alcoholic beverages for consumption on the premises." Applicants for an on-premises consumption license must pay a $300 fee to the Commission when their applications are submitted. See Tenn. Code Ann. § 57-4-301(b)(1). Once the license is approved, for the exercise of the privilege described in Tenn. Code Ann. § 57-4-301(a), licensees must pay annual taxes to be earmarked for and allocated to the Commission for administrative and enforcement expenditures. See Tenn. Code Ann. § 57-4-301(b)(1). The amount of the annual tax is based on the type of facility holding the license to sell alcoholic beverages for on-premises consumption. For example, private clubs holding an on-premises-consumption license must pay an annual tax of $500. See Tenn. Code Ann. § 57-4-301(b)(1)(A).

Tennessee Code Ann. § 57-4-301(c)(1) further provides:

In addition to the privilege taxes levied in subdivision (b)(1), there is further levied a tax equal to the rate of fifteen percent (15%) of the sales price of all alcoholic beverages sold for consumption on the premises, the tax to be computed on the gross sales of alcoholic beverages for consumption on the premises for the purpose of remitting the tax due the state, and to include each and every retail sale thereof.

The Commissioner of Revenue is charged with the responsibility for collecting the taxes described in Tenn. Code Ann. § 57-4-301. See Tenn. Code Ann. § 57-4-302. The taxes "shall be collected by the retailer from the consumer insofar as it can be done." Tenn. Code Ann. § 57-4-302(1).

Licensed distilleries that sell their own alcoholic beverages for on-premises consumption are not required to obtain the on-premises consumption license required by Tenn. Code Ann. §§ 57-4-101 et seq., because their distiller's licenses authorize them to sell their own alcoholic beverages for on-premises consumption. See Tenn. Code Ann. § 57-4-202(i)(4). The annual taxes imposed under Tenn. Code Ann. § 57-4-301(b)(1) are specifically imposed on on-premises consumption licensees and are based on the type of facility holding the license. Since licensed distilleries are not required to hold an on-premises consumption license to sell their own alcoholic beverages for on-premises consumption, they are not required to pay the annual taxes imposed under Tenn. Code Ann. § 57-4-301(b)(1).

The taxable privilege is not, however, limited to persons licensed to sell alcoholic beverages for on-premises consumption. By selling their own alcoholic beverages for on-premises consumption, as authorized by Tenn. Code Ann. § 57-3-202(i)(4), licensed distilleries are exercising the taxable privilege described in Tenn. Code Ann. § 57-4-301(a) of "engag[ing] in the business of selling at retail in this state alcoholic beverages for the consumption on premises." Because Tenn. Code Ann. § 57-4-301(c)(1) imposes a tax for the exercise of this privilege that is not limited to those generally licensed for on-premises consumption sales, licensed distilleries are also required to pay the privilege tax of 15% of the sales price of all alcoholic beverages sold for consumption on the distillery premises.

Similar to the authorization for distilleries under Tenn. Code Ann. § 57-3-202(i)(4), Tenn. Code Ann. § 57-3-207(s)(2) authorizes licensed wineries and farm wine producers to "serve wine manufactured by the winery or the farm wine producer for consumption on the premises of the winery or farm wine producer." Tennessee Code Ann. § 57-4-207(t)(1) provides that sales of wine by wineries or farm wine producers for on-premises consumption "shall be subject to taxation pursuant to § 57-4-301(c) in addition to any sales tax which is due."

It might be argued that the legislature's specific declaration in Tenn. Code Ann. § 57-3-207(t)(1) that winery sales of wine for on-premises consumption are taxable under Tenn. Code Ann. § 57-4-301(c), together with the absence of such a declaration in Tenn. Code Ann. § 57-3-202, indicates that it intended for winery sales of wine for on-premises consumption to be taxed under Tenn. Code Ann. § 57-4-301(c), but did not intend for distillery sales of alcoholic beverages for on-premises consumption to be taxed under that section. This argument is not likely to prevail. It is, essentially, an argument that an exemption from taxation under Tenn. Code Ann. § 57-4-301(c) should be implied for distilleries because the legislature did not expressly provide that Tenn. Code Ann. § 57-4-301(c) applies to distilleries. But tax exemptions will not be implied; indeed, exemption statutes are to be construed against the taxpayer, every presumption is against exemption, and any well-founded doubt defeats a claimed exemption. Hutton v. Johnson, 956 S.W.2d 484, 488 (Tenn. 1997). Thus, regardless of statutory cross references, wineries that sell wine for on-premises consumption and distilleries that sell alcoholic beverages for on-premises consumption are both exercising a privilege that the legislature has granted to them through their respective licenses and declared to be taxable in Tenn. Code Ann. § 57-4-301(a). The exercise of that privilege by distilleries is thus subject to the tax imposed under Tenn. Code Ann. § 57-4-301(c).

HERBERT H. SLATERY III
Attorney General and Reporter

ANDRÉE SOPHIA BLUMSTEIN
Solicitor General

R. MITCHELL PORCELLO
Senior Counsel

Requested by:
The Honorable Bill Ketron
State Senator
425 5th Avenue North, Suite 704
Nashville, Tennessee 37243-0213