Tasting room at Hardywood

A meals tax dispute between the city of Richmond and Hardywood Park Craft Brewery has flared up again, with the city threatening to refer the matter to collections and Hardywood asking the city to rethink its position to avoid ending up in court.

The fight stems from the city’s efforts to collect about $50,000 in back meals taxes it believes Hardywood should have collected on pitchers and pints served from July 2012 to July 2013.

The brewery contends that, in a period of confusion over whether the 6 percent meals tax applies to craft breweries without kitchens, the city told Hardywood on multiple occasions that it did not need to collect the tax.

In a letter last week, the city said it had made its “final determination” and gave Hardywood 10 days to pay the $50,000, saying a failure to do so would result in the account being referred to the city’s collection attorney. The letter was signed by T. Wayne Lassiter, the city’s interim finance director.

In a reply sent Wednesday, Hardywood’s attorney rejected the city’s letter, calling it “the latest in a series of procedural deficiencies, inconsistent messaging and apparent lack of sincere interest” in resolving the issue.

The attorney, Andrew Lohmann of Hirschler Fleischer, suggested the letter was “hastily drafted” after the city realized it had already caused collection notices to be sent to Hardywood without giving any verbal or written notice.

“We aren’t trying to ask for forgiveness from a tax bill,” Hardywood’s co-founder and president, Eric McKay, said in an interview. “We feel we don’t owe this tax because we were told we didn’t need to pay it and we never collected it from customers.”

McKay said Hardywood has collected and paid meals taxes since August 2013. He added that paying the back taxes would slow the company’s growth.

“Everything we make goes into hiring more people and investing in equipment, both of which create more tax revenue for the city,” he said. “We would likely have to tap into our equity line to make this payment, and hold off on new hires or new equipment for a while.”

Hardywood has offered to settle the dispute with a payment of $5,000. The city said it is willing to waive an additional $9,500 in late fees and penalties, but only if the brewery pays the $50,000 within 10 days.

Tammy D. Hawley, press secretary to Mayor Dwight C. Jones, said the matter is “very fluid.”

“It is also important to note that state law does not give local tax officials authority to deviate with respect to collecting meals taxes,” Hawley said.

When Virginia law changed in 2012 to allow breweries to sell beer for on-premises consumption without also serving food, McKay and co-founder Patrick Murtaugh reviewed the city’s tax rules. They said they also checked with the Finance Department and were told they didn’t need to collect the tax.

City tax rules state that all “food establishments” must collect 6 percent of the cost of prepared food and beverages intended “for immediate consumption.” When the brewery law changed, the city’s definitions for food establishments included bars and lounges as well as restaurants and coffee shops. But there was no language dealing with breweries.

After the Hardywood tax issue came to light in August 2013, Councilman Jonathan T. Baliles, 1st District, said the city should not try to collect back taxes because breweries were not listed as a food establishment.

He then introduced legislation to clarify in the city’s tax code that breweries should be treated as food establishments. The City Council passed the amendment unanimously that September.

Since then, Hardywood has argued that case law is on its side because that amendment amounts to a substantive legal change and cannot be applied retroactively.

In an interview Wednesday, Baliles said he has urged the city to drop its effort to collect the taxes because he agrees that the law is on Hardywood’s side.

“It’s astonishingly bad form that the city is choosing to punish some of the craft brewers that have put Richmond on the map in the first place,” Baliles said.

Legend Brewing Co., which has operated in Richmond for two decades, has always collected a meals tax because it has an attached restaurant.

Triple Crossing Brewing Co. and Ardent Craft Ales, which both opened after the council clarified the meals tax rules for breweries, both said the city told them upon opening that they need to collect the tax.

Adam Worchester, an owner at Triple Crossing, noted that “this tax, along with regular sales tax, means that on a single pint of beer there is 11.3 percent in taxes levied.”

Worchester said he doesn’t think his brewery should be considered a food establishment, since it does not have a kitchen or serve food.

The taxes do not apply to sales of kegs or growlers, reusable, refillable glass containers that allow a customer to take draft beer home.

Neil Burton, owner of Strangeways Brewing Co., said Henrico County does not require his brewery to collect and pay meals tax.

Albemarle County, home to more than 25 breweries, cideries and wineries, does not charge its 4 percent meals tax at those establishments unless an alcoholic beverage is being consumed as part of a meal.

The Hardywood dispute is bubbling back up at a time when beer and back taxes are in the news for other reasons.

The city is offering California-based Stone Brewing Co. a generous incentive package to open a brewing facility and restaurant in the Greater Fulton area.

The city also recently forgave a $1.75 million real estate tax bill owed by the for-profit affiliate of the CenterStage Foundation. That tax issue also arose from confusion over what was owed.

The city characterized its decision to give the foundation $1.75 million to pay its tax bill as financially neutral, but in doing so, the city gave up more than $250,000 in revenue that had been built into the budget forecast. This week, city finance officials said that was a non-issue, characterizing $250,000 as little more than a drop in the bucket.

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