In the Alcohol and Tobacco Tax and Trade Bureau’s (TTB) final Industry Circular of the year, they provided DSPs guidance on how to calculate effective tax rates for distilled spirits products eligible for the Craft Beverage Modernization Act (CBMA) reduced tax rates, as well as providing importers with guidance on calculating and using effective tax rates or standard effective tax rates (SETRs) for imported products that are eligible for CBMA tax benefits. This Industry Circular supersedes Industry Circular 2018-4. This 2022 iteration essentially restates the procedures for DSPs calculating effective tax rates for distilled spirits products subject to CBMA reduced tax rates, but updates guidance for importers on how to calculate and use effective tax rates or SETRs for imported products that are eligible for CBMA tax benefits.
Because the guidance for DSPs on calculating effective tax rates remains essentially unchanged, we summarize the updated guidance for importers set forth in the Industry Circular below:
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 transferred responsibility for administering the CBMA tax benefits for imported alcohol from US Customs and Border Protection (CBP) to the US Department of the Treasury (Treasury) beginning with products entered for consumption in the US on or after January 1, 2023. That responsibility was then delegated by the Treasury to TTB.
Generally, the Internal Revenue Code of 1986 (IRC) imposes a tax of $13.50 per proof gallon on distilled spirits produced or imported into the U.S. See 26 USC § 5001(a)(1). However, reduced tax rates of $2.70 and $13.34 per proof gallon may be available under certain circumstances. Id. at § 5001(c). Section 5010 of the IRC allows certain credits against the tax imposed in Section 5001 on each proof gallon of alcohol in a distilled spirits product derived from eligible wine or from eligible flavors to the extent the eligible flavors do not exceed 2.5 percent of the finished product on a proof gallon basis (5010 credits).
An effective tax rate for an imported distilled spirits product is the tax rate applicable to the product after subtracting allowable 5010 credits. TTB must approve an effective tax each time a distilled spirits product containing eligible wine or eligible flavors is imported into the US. The procedure for securing approval of an effective tax rate is located in 27 CFR § 27.76.
An SETR for an imported distilled spirits product is established under 27 CFR § 27.77 based on the least quantity and lowest alcohol content of eligible wine or eligible flavors used in the manufacture of the distilled spirits products. TTB must also approve an SETR for distilled spirits in accordance with the procedure set forth in 27 CFR § 27.77.
Beginning January 1, 2023, importers who want to take advantage of CBMA tax benefits must pay the full tax rate to CBP and then submit a claim to TTB for a refund of their claimed benefits. TTB advises importers to follow the procedures set forth in 27 CFR § 27.76 to establish effective tax rates and § 27.77 to establish SETRs. Importers are directed to calculate the effective tax rates or SETRs in accordance with § 27.41 based on the full $13.50 per proof gallon tax rate. For importers that have secured approval for SETRs based on the $13.50 tax rate (including approvals secured prior to January 1, 2023), they may pay this approved rate to CBP for spirits entered for consumption in the US on or after January 1, 2023. Importers must pay the full tax rate to CBP on all other distilled spirits products entered for consumption in the US on or after January 1, 2023. Importers looking to take advantage of CBMA tax benefits may then submit a refund claim to TTB electronically. Note that an importer may not claim a CBMA tax benefit refund for a product that exceeds the effective tax rate or SETR the importer paid to CBP.
See TTB Industry Circular 2022-3.
For questions about taxes assessed on domestically produced or imported distilled spirits, please contact Alva Mather or McDermott’s Alcohol Regulatory Team.
To read more on Industry Circular 1: Consignment Sales, please click here.
To read more on Industry Circular 2: Social Media Advertising, please click here.