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VOL. 42 | NO. 20 | Friday, May 18, 2018

Jack Daniel's may no longer be sacred cow

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When Van Halen front man David Lee Roth opened a bottle of Jack Daniel’s on stage back in the ’80s, the last thing he thought about was taxes and court appeals when he took a big swig of whiskey.

It was all about selling rock ‘n’ roll to thousands of screaming fans, even if he was faking it with tea instead of Jack.

Roth, a constant talker, supposedly defended himself at the time saying, “The only people who put iced tea in Jack Daniel’s bottles is the Clash baby.”

Fast-forward 35 years as Chris Stapleton sings “Tennessee Whiskey,” and still it ain’t so smooth when you consider the business side of the bottle.

Jack Daniel’s pushed two major pieces of legislation in the last few years, one in which it persuaded the Tennessee General Assembly to codify its process for making Tennessee whiskey and another one this year enabling it to avoid paying a $2.78 million assessment on 2 million white oak barrels it uses to age its sipping whiskey – despite misgivings from the state attorney general.

Even so, sources say Jack Daniel’s is appealing the assessment at the state level, one stemming from a first-time assessment on the aging barrels at Jack Daniel’s in Lynchburg, a tiny town in rural Moore County about 80 miles southeast of Nashville.

Jack Daniel’s spokesmen didn’t respond to questions about the potential appeal.

“We appreciated the support of the Tennessee General Assembly and those who agreed with not only Jack Daniel’s, but the entire Tennessee Distillers Guild, that aged barrels should be considered manufactured articles and not subject to a property tax,” Jack Daniel’s says in a statement after receiving unanimous support in the Senate and 78-12 backing in the House (some House members won’t vote for any alcohol-related bills). “The legislation simply reaffirmed what has been on the books for years. This was an attempt to add a new and punitive tax on all the distilleries in the state, and we are pleased that it will not happen.”

The company could go through three appeals levels, an administrative law judge, the Assessment Appeals Commission and finally the State Board of Equalization – three shots at relief, no pun intended – before potentially winding up in Chancery Court.

Some people speculate Jack Daniel’s is preserving its ability to appeal in case Gov. Bill Haslam vetoes the bill. The governor’s office says he is deferring to the will of the Legislature, but he had not reviewed the legislation as of last week.

Either way, Jack Daniel’s, a sacred cow with nearly as much pull as Elvis and Johnny Cash in Tennessee lore, caught the ire of property assessors statewide this year in reframing the Constitution to sidestep the tax.

Tennessee’s property assessors argued throughout the 2018 legislative session that Jack Daniel’s should go through the process already in place, says Will Denami, executive director of the Tennessee Association of Assessing Officers.

“The assessors of property have felt like the entire time all taxpayers should be treated the same, and that’s how you have a fair and equitable property tax system. So, when any taxpayer receives special treatment from the Legislature to allow them to bypass an appeals process, we think that’s not a good way to go,” Denami explains.

Rob Mitchell, property assessor in Rutherford County, isn’t so kind in a letter written to Gov. Haslam before the Legislature took final action.

“The goodwill which Jack Daniel’s has created over generations is being spent in a frivolous pursuit of unwarranted exceptions to state law,” Mitchell’s letter states. “The millions of dollars they just benefited from with the change in federal tax law is being squandered in pursuit of an illegal and immoral local property tax exemption. Only the lawyers profit from the continuance of this legislative process.”

Mitchell and the assessor group contend the equipment used in manufacturing processes across the state are taxable items. And once the Jack Daniel’s barrels are used to store and age the whiskey they become part of the manufacturing process. Brown-Forman, the holding company for Jack Daniel’s, and the whiskey maker itself both contend the barrels are products because they’re sold to other companies that use them to produce everything from Scotch to tequila and even hot sauce.

The Rutherford County assessor points out Jack Daniel’s must be calling its whiskey a part of the manufacturing process, as well, since it is transforming the barrels at the same time it is aging.

Oddly enough, the 2013 legislation defines “Tennessee whiskey” as: a spirit manufactured in Tennessee; filtered through maple charcoal before aging, also known as the Lincoln County process; made of grain consisting of at least 51 percent corn; distilled to no more than 160 proof (80 percent abv); aged in new charred oak barrels; placed in the barrel at no more than 125 proof; and bottled at not less than 80 proof (40 percent abv).

That law would appear to show the oak barrels are part of the manufacturing process.

But under the legislation passed this year all barrels made of timber from any state in the country used to age whiskey shall be exempt from ad valorem taxes when the barrels are used and owned by a person producing or manufacturing whiskey in them.

Legal arguments

Tennessee Attorney General Herbert Slatery did not take kindly toward this legislation, calling it unconstitutional in two opinions. A 2015 AG’s opinion on the “Tennessee whiskey” bill also left a harsh taste.

The first opinion this March points out the whiskey maker “is not converting the barrel into an article different from the barrel that the whiskey maker bought; thus the barrel in the hands of the whiskey maker is not a ‘manufactured article’ within the scope of section 30 (of state law) as construed by the Tennessee Supreme Court,” the opinion states. “The whiskey maker may sell used whiskey barrels to a third party after the whiskey has been emptied from it, but that does not change the fact that a whiskey maker is a manufacturer of whiskey, not a manufacturer of barrels.”

The second opinion put forth in late March again says the legislation is unconstitutional and, based on case law, further states, “it is not within the legislative power to override or modify a judicial interpretation of the Constitution.”

In other words, the Legislature overstepped its bounds by reinterpreting the “judicial construction of ‘manufactured’” to substitute its own meaning.

“It is the exclusive province of the courts to interpret the Constitution,” the opinion states, noting the constitutional separation of powers also bars one department, in this case the legislature, from exercising the power of the judiciary.

The 2015 AG’s opinion more or less accuses Jack Daniel’s and the Legislature of outflanking the federal Alcohol and Tobacco Tax and Trade Bureau, which already defines different types of whiskey. Some might say the state of Tennessee has about as much business defining whiskey as it does claiming to be the birthplace of jazz.

The “Tennessee Whiskey” law passed in 2013 to differentiate Jack Daniel’s from bourbon included a grandfather clause allowing an existing whiskey maker to continue calling its product Tennessee whiskey even though it didn’t use the Lincoln County process.

But the attorney general opinion states, “There is no discernable reason to distinguish one distillery from other existing distilleries on this basis, especially since the exemption at issue is purportedly the one that distinguishes Tennessee whiskey from bourbon. Thus Tenn. Code Ann. 57-2-106(c) constitutes impermissible discrimination in violation of the equal protection provisions of the Fourteenth Amendment to the United States Constitution, as well as impermissible class legislation in violation of the article XI, section 8, of the Tennessee Constitution.”

Those don’t sound like the words of someone who sits down with a bottle of Jack every evening after work.

Their own view

Tennessee legislators don’t care whether the attorney general agrees with them. In fact, they disagree with Slatery so often one could question why Tennessee even needs an attorney general – at least with this Legislature.

State Rep. David Alexander, the Winchester Republican who sponsored the barrel exemption bill, says the Legislature made the right move regardless of the AG’s opinions.

“There were two attorney general’s opinions that were issued almost in a month’s time, and they both said the very same thing: that what we were trying to do was unconstitutional. And that was too quick in our opinion, and I don’t believe they did any research into the process,” says Alexander, who is leaving the Legislature for a Franklin County mayoral run.

Alexander concedes he isn’t certain the attorney general is supposed to undertake the kind of research needed to get to the bottom of a Jack Daniel’s barrel. (Has anyone ever made it that far without getting too wasted to walk? Maybe that’s why David Lee Roth always forgot the words to the songs.)

“But if they had taken the time to research the process of how you make Tennessee whiskey, they would have realized the scientific evidence was over-whelmingly in our favor,” Alexander says.

One of Jack Daniel’s arguments is that the whiskey transforms the barrels at the same time the barrels transform the whiskey, giving both a value they didn’t hold at the start.

State Sen. Ken Yager, who sponsored the Senate version of the bill, simply says “we respectfully disagree” with the AG’s opinion.

“The General Assembly has the authority to enact tax exemptions under Article 2 of Tennessee’s Constitution as evidenced by 40 known instances when the Legislature has done this. The law in question merely clarifies Tennessee property tax laws to prevent unlawful property tax from being imposed on distilleries statewide.”

Money matters

While Jack Daniel’s argues it has never paid this type of tax, Kentucky distillers are paying $17.8 million in ad valorem taxes on bourbon barrels this year, according to the Kentucky Distillers’ Association.

Meanwhile, the exemption for Jack Daniel’s would affect taxes in Gibson, Madison, Montgomery and Williamson counties, as well as tiny Moore County where Jack is made, causing a loss of more than $2.9 million in taxes.

So while Jack Daniel’s says this is a “new and punitive tax” dumped on it in 150 years of making sipping whiskey, the people running the company know the possibility of this tax is floating out there in the world of spirits. Even if Kentucky offers a franchise and excise credit back to bourbon makers, which Alexander calls a convoluted way of doing business, Brown-Forman didn’t have the covers over its head.

With that in mind, Jack Daniel’s, like most other major companies, spreads the love to lawmakers’ campaign funds. Just since fall 2012, the company has given $391,700 to Tennessee legislators and their political action committees.

Alexander, who has received about $7,000 from Jack Daniel’s over the last six years, says the money simply gives the company a chance to bend his ear but doesn’t necessarily determine the outcome of his vote.

“They can come in and say, hey, have you got a minute, and I don’t think that’s any different than any of the other lobbyists that are up there,” he points out.

Yager, chairman of the State and Local Government Committee, who received $39,300 from Jack Daniel’s PAC since fall 2012, adds his sponsorship of the legislation was “absolutely not” affected by the company’s donations. His committee passed the measure 9-0.

In chairing the committee, Yager, a Kingston Republican, says, “I’m sometimes asked to carry major bills of statewide importance. This bill not only affects the Jack Daniel’s distillery, which happens to be one of the state’s largest exporters, but 40 distilleries across the state would be adversely affected without the passage of this bill.”

About the only ones who received more than Yager in that time frame were House Speaker Beth Harwell’s PAC and former Lt. Gov. Ron Ramsey’s PAC. Jack Daniel’s also gave to Democrats such as Reps. Craig Fitzhugh, Johnny Shaw and Jason Powell.

The analysis

Legislative donations are nothing new. And even though legislators often say they aren’t swayed by the money pouring into the campaigns, what would they do without it? Probably start drinking Mad Dog 20/20.

Money is the life blood of political organizations. Without it, they can’t put out their campaign fliers and help pay for other birds of a feather to win elections.

Of course, Jack Daniel’s won with Republicans and Democrats in Tennessee, doling out large sums to the caucuses and members of both parties. Except for those hardcore opponents of alcoholic beverages, everybody in the Legislature is backing Jack Daniel’s.

Let’s be honest. Jack and Coke is a great drink. A shot of Jack here and there is probably good for the soul. But if anyone believes David Lee Roth could turn up a fifth of Jack and drink it like tea, well, they should have front-row tickets to the next Van Halen reunion tour.

At the rate they’re aging, you’d probably need several shots of Jack to listen anymore. The older I get the better Johnny Cash, Waylon Jennings (God rest their souls) and Chris Stapleton sound.

And every time you take a shot, forget about taxes and attorney general opinions and all that money the company pours into legislative coffers. Just enjoy the whiskey and forget all your woes.

Sam Stockard is a Nashville-based reporter covering the Legislature for the Nashville Ledger, Memphis Daily News, Knoxville Ledger and Hamilton County Herald. He can be reached at sstockard44@gmail.com.