Winery owners fear end of Single Business Tax exemption

REGION – As area vineyards hit the peak of the 2004 growing season, wineries were hit with new taxation problems stemming from a 25-year-old law.

More than 20 winery owners, industry representatives and lawmakers gathered at Chateau Grand Traverse July 14 to forge a plan for dealing with the state treasury department’s intention to eliminate the Single Business Tax (SBT) agriculture exemption for winemakers.

Interpretation of the 1977 act was changed in the 1990s but has been sitting on the books, according to Ed O’Keefe, owner of Chateau Grand Traverse, the largest and oldest commercial vineyard operation in northwest Michigan. The interpretation, recently put into effect, abolishes the exemption to growers as soon as an agriculture product is processed from its raw or natural state.

“If you crush the grape, you’ve lost your exemption,” O’Keefe said.

The measure spells trouble not only to winemakers, but also to those in the cherry industry and every other agriculture producer engaged in creating a value-added product from their crop.

O’Keefe fears elimination of the exemption would have a devastating impact on Michigan’s wine producers. Many wineries, including most local operations, produce their own grapes. Varieties of grapes grown for winemaking are not suitable as foodstuff and are of value only after processing as wine.

“I think it could be a death blow to our industry,” he said. “My worry is they can go back four years with penalties and interests. You’re talking big money for everybody.”

O’Keefe became the first winery owner the state applied the interpretation to July 16 when the Treasury Department slammed him with a $50,000 bill for back penalties and interest. He’s yet unsure of the annual liability if the interpretation stands. But the new interpretation of the SBT would likely also change depreciation schedules for pricey farm equipment, further attacking winery profitability.

The impact of the measure extends beyond the winemaker’s neatly planted rows of vines and tourist-filled tasting rooms. Loss of exemptions could shake up problems for local communities serving as home to the wineries. If the area’s Riesling, Pinot Noir, Chardonnay and other grapes used by the vintners lose agriculture classification because of processing, wineries could be required to seek zoning changes for their properties.

Those attending the meeting agreed township officials would not welcome appeals to shift zoning from agriculture to commercial status.

“In Lansing these days they are looking for every penny they can find,” State Senator Michelle McManus (R-Lake Leelanau) told the group during the meeting.

However, winemakers see the measure as a betrayal of government’s movement during the past 20 years to help the agriculture industry develop value-added products and of land conservancy efforts.

“No one has fought the battle harder than we have on this peninsula,” said Bern Kroupa of Old Mission Fruit Co. “We’ve shed a lot of blood to get where we are today.”

Bowers Harbor Vineyards owner Jack Stegenga believes Michigan’s wine industry has vast potential, having proven it can produce wines on scale with the best in the world. Consisting of 40 wineries with more in development stages, Michigan’s wine industry and winery tourism has become a significant tandem force, together contributing more than $75 million annually to the state’s economy.

“We’re still a fledgling industry,” Stegenga said. “To put a damper on it today would be a detrimental step on the part of government.”

Shrinking potential for viability in the form of added tax burdens could force some growers to halt expansion or even relinquish land to developers. Chuck Goodman hopes he won’t have to surrender his 75-acre family farmstead on Old Mission Peninsula. Goodman’s cherry orchards have been stewarded by the family for 50 years. His plans for revitalizing the acreage include grape plantings. Goodman said the exemption issue won’t change his plans, but he finds it disheartening.

“It’s a very discouraging process overall,” he said.

Several proposals emerged from the assembly. McManus and State Senator Jason Allen (R-Traverse City) suggested wine industry representatives invite treasury department officials to tour their vineyards for a first-hand look at winery operations. McManus, a member of the state Senate Finance Committee, said the SBT act is expected to come up for review soon, providing a chance for reevaluation.

Both lawmakers encouraged the group to collaborate with the influential Farm Bureau (Michigan’s largest agriculture organization) to develop policy in preparation for legislative action. O’Keefe prompted the group to follow the lead of the California Wine Council by initiating an impact study to emphasize to state officials the importance of the wineries to Michigan’s economy and the wisdom of protecting the industry’s ability to fulfill its prodigious potential. BN