October 26,2004

Grassley, Baucus: Coffee Brewing Does Not Qualify for Manufacturing Tax Break


To: Reporters and Editors
Re: Manufacturing tax relief and eligibility
Da: Tuesday, Oct. 26, 2004

A Bloomberg article this week incorrectly asserts that the Starbucks Corp. will getmanufacturing tax relief for brewing coffee under the newly enacted business tax law. Sen. ChuckGrassley, chairman of the Committee on Finance, and Sen. Max Baucus, ranking member, todaymade the following comment on this.

“The article contains a point that is factually and legally incorrect. The bill does not treatcoffee brewing as manufacturing. Food preparation at restaurants is specifically excluded frommanufacturing. The example in the conference report is meant to draw a distinction between theroasting of coffee beans, which qualifies for the manufacturing tax break, and the brewing of coffee,which does not. The suggestion that brewing a vanilla latte constitutes manufacturing demonstratesa fundamental misunderstanding of the conference report.

“The coffee roasting example simply illustrates that the manufacturing rate cut is neutralregarding a manufacturer’s choice of distribution channels. For example, computer manufacturersmay sell to customers over the Internet, through third-party retailers, or in their own retail stores. Themanufacturing tax break does not discriminate against any of these choices. In the coffee roastingexample, sales of the company’s roasted beans in a company-owned store are treated no differentlythan sales of beans to an unrelated coffee shop. To the extent a company’s beans are used in brewingits coffee, the profits attributable to roasting those beans would qualify for the manufacturing ratecut, but the profits attributable to brewing the latte and serving it in the retail store would not. Thisensures that the company is not prejudiced for using its own beans rather than selling them to acompetitor. The conference report specifically states that profits from brewing coffee do not qualifyas manufacturing.

“The article’s implication that Starbucks received special treatment under the bill ismisplaced. The specific example in the conference report was necessary to clarify that the foodservices exception does not taint all of the ‘upstream’ manufacturing activity of a verticallyintegrated manufacturer. A vertically integrated manufacturer may own part or all of its raw materialssources, the factory, and the retail stores for selling its manufactured product. This is not a commonownership structure for most American manufacturers, the majority of which buy raw materials frommultiple sources and sell their products to various unrelated retailers.

“The article’s implication that coffee bean roasting is a new manufacturing activity inventedunder the bill is also erroneous. According to Starbucks, it would have been eligible forextraterritorial income benefits for beans that it roasted in America and exported to its foreign retailstores.”