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Regulatory and Distribution Law Updates for the Alcohol Industry
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Regulatory and Distribution Law Updates for the Alcohol Industry
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TTB Issues Updated Guidance on Transfers of Beer Between Breweries Under Separate Ownership

By on Aug 28, 2023
Posted In

On July 13, 2023, the Alcohol and Tobacco Tax and Trade Bureau (TTB) published Procedure Number 2023-1, providing brewers with updated guidance on the transfer of beer without tax payment between breweries not of the same ownership.

The Craft Beverage Modernization Act (CBMA) provisions of the Tax Cuts and Jobs Act of 2017 temporarily permitted the transfer of beer between breweries under different ownership without the payment of tax (previously, transfers of beer in bond were limited to breweries under the same ownership). TTB issued Procedure 2018-1 to provide brewers with guidance on how to effectuate these newly approved transfers; however, it stated it was effective only through December 31, 2019.

Although the Taxpayer Certainty and Disaster Tax Relief Act of 2020 made a brewer’s right to transfer beer without the payment of tax to a brewer of different ownership permanent, TTB did not update the Procedure issued in 2018. TTB informally communicated that brewers could continue to rely on Procedure 2018-1 even though it was no longer “effective,” but it has now published updated guidance on such transfers.

Recording and Reporting Transfers

As set forth in Procedure 2021-1, a shipping brewer must prepare an invoice covering the transfer. The invoice must show that the brewer transferred the beer without the payment of tax. It must also feature the following:

  1. The name and address of the shipping brewer;
  2. The date of shipment;
  3. The name and address of the receiving brewer; and
  4. For cases, the number and size of cases and the total barrels; for kegs, the number and size of kegs and the total barrels; for shipments in bulk containers, the type of container, the identity of the container and total barrels.

A shipping brewer should use the transfer invoice to prepare its required daily records and monthly Brewer’s Report of Operations (BROP) or Quarterly Brewer’s Report of Operations (QBROP). A receiving brewer should use the transfer invoice showing beer received from another brewery without the payment of tax in preparing its required daily records and the BROP or QBROP.

Permissible Containers and Labeling Requirements for Transferred Beer

Transfers of beer without the payment of tax may be made in a brewer’s packages or in bulk containers.

Beer transferred in a brewer’s packages from one brewery to another brewery under separate ownership must meet the marking, branding and labeling requirements set forth in 27 CFR § 25.141–25.143. Beer transferred in bulk containers (containers with a capacity larger than one barrel of 31 gallons) from one brewery to another brewery under separate ownership must meet the marking, branding and labeling requirements set forth in 27 CFR § 25.145.

Taking Advantage of Reduced Tax Rates for Transferred Beer

The CBMA establishes a reduced excise tax rate of $16 per barrel on the first 6,000,000 barrels of US-produced beer brewed by a brewer and removed during the calendar year. For brewers producing 2,000,000 barrels or less, an excise tax rate of $3.50 per barrel applies on the first 60,000 [...]

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The Tax Implications of Purchasing Craft Producers in the First Half of a Year

By on Aug 10, 2023
Posted In ,

If a large beverage company is considering purchasing or selling a craft beverage producer, it’s essential to understand how the craft producer may lose its earlier eligibility for reduced tax rates under the Craft Beverage Modernization Act (CBMA) in the first half of a calendar year once it becomes a member of the purchaser’s larger controlled group.

The CBMA provides for certain reduced tax rates on the initial quantities of production and/or removal of beer, wine and spirits. More specifically, it permits a reduced rate of $16 per barrel of beer on the first six million barrels brewed and removed by a domestic brewer, a reduced rate of $2.70 per proof gallon on the first 100,000 proof gallons of distilled spirits removed from bond and different, but reduced, tax credits on domestically produced wine credits.

However, to protect against larger manufacturers unjustly benefiting from these reduced tax rates through ownership in different corporate entities, the CBMA made permanent certain controlled group rules. These rules apply the availability of the reduced rates across the overall quantity limitations associated with the greater corporate structure of controlled groups of distilled spirits plants, wine premises and breweries.

The industry has understood the application of these rules for several years. Yet, pursuant to 26 US Code § 1563, it is the Alcohol and Tobacco Tax and Trade Bureau’s (TTB) position that if a company (whether that be a corporation or an LLC) is a member of a controlled group of companies for more than six months (one-half) of any calendar year, that such member is then a component member of the controlled group for the entirety of the calendar year.

So, if a large beverage company purchases a smaller producer in the first two quarters of the year, the reduced tax rates the smaller producer took in the first six months prior to the acquisition may be forfeited based on the larger company’s rates of removal.

Consider this example:

  • Company A is a craft distiller. From January 1 to May 1 of any calendar year, it was eligible for and paid the reduced tax rate of $2.70 on its spirit removals under the CBMA.
  • Company B is a larger distiller. It exhausted its eligibility for the reduced rates within the first two weeks of the same calendar year.
  • If Company B were to purchase Company A on May 1, the two companies would be treated as members of the same controlled group from May 1 to the end of the year. Company A’s eligibility for the reduced rates it lawfully took for the first four months of the year would be forfeited and subjected to either the $13.34 or $13.50 per proof gallon rates for which the combined controlled group would have been eligible depending on the controlled group’s removals.
  • In other words, following a TTB audit, Company A would have underpaid its tax liability to TTB prior to its acquisition by Company B and exceeded the quantity limitations for which the [...]

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2022 TTB Industry Circular 1: Consignment Sales

By , and on Jan 5, 2023
Posted In , , , , , ,

Each year the Alcohol and Tobacco Tax and Trade Bureau (TTB) issues “Industry Circulars” that apply statutory or regulatory requirements to a “specific circumstance or set of facts” or restate existing requirements. TTB also uses Industry Circulars to announce new statutory requirements or to discuss certain corrective actions. The last few years have been relatively quiet in terms of TTB Industry Circulars, with only seven released in the last three years. Industry Circulars are an incredibly useful tool for a range of industry members and can provide clarity and direction on complicated regulatory issues.

In 2022, TTB issued three Industry Circulars. The first, released March 4, 2022, provided clarity on TTB’s views on the Federal Alcohol Administration Act’s (FAA Act) consignment sales provisions. The second, released November 16, 2022, reminded industry members of certain advertising rules, as well as clarified how those rules apply in the world of social media advertising. The third and final Industry Circular, released December 29, 2022, provided guidance for distilled spirits plants and importers on how to calculate certain reduced or effective tax rates under the Craft Beverage Modernization Act (CBMA).

As we gear up for 2023, the following is our take on how TTB’s guidance may be useful for you and your business.

Industry Circular 1: Consignment Sales

TTB issued its first Industry Circular of the year to clarify how it views extended payment terms under the consignment sales provisions of the FAA Act. The FAA Act makes it unlawful for an industry member (supplier or wholesaler) to sell, offer for sale, or contract to sell to any trade buyer (wholesaler or retailer), or for a trade buyer to purchase, offer to purchase or contract to purchase any products:

  1. On consignment
  2. Under conditional sale
  3. With the privilege of return
  4. On any basis other than a bona fide sale, or
  5. Where any part of the sale involves, directly or indirectly, the acquisition by the industry member of other products from the trade buyer or the agreement to accept other products form the trade buyer.

See 27 USC § 205(d). Sales “on consignment” are arrangements where a trade buyer is under no obligation to pay for product until they have been sold by the trade buyer. See 27 CFR § 11.22.

This Industry Circular reminds industry members that although TTB generally prohibits consignment sales, the regulations do not specifically impose payment term limitations for sales between industry members and trade buyers. That does not mean, however, that all payment terms are “beyond scrutiny as potential sales on consignment.”

In particular, TTB advised that “in the absence of explicit terms that violate the consignment sale regulations, payment terms of up to 30 days are unlikely to constitute consignment sales.” Conversely, payment terms exceeding 30 days may invite scrutiny from TTB to determine whether those payment terms were “merely a subterfuge” to sell goods on consignment because the buyer is effectively under no obligation to pay for product until the trade buyer has sold [...]

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2022 TTB Industry Circular 2: Social Media Advertising

By , and on Jan 5, 2023
Posted In , , , , , ,

Due to the uptick in alcohol advertisement on social media platforms, the Alcohol and Tobacco Tax and Trade Bureau (TTB) issued guidance on advertising via social media and how TTB’s rules on advertising generally apply in this new and important context, as summarized below.

  • TTB views an entire page or site as a single advertisement, so mandatory statements need only appear once on the page, but they should be conspicuous and readily apparent to the viewer.
    • This includes Facebook, LinkedIn, your brand’s Instagram or YouTube, TikTok, etc.
  • On social networking sites where providing all the mandatory information may be difficult because of space restrictions, TTB allows you to provide a link to another webpage that contains the mandatory information.
    • You must clearly name or mark it to indicate that the mandatory company and/or product information can be found by clicking the link.
    • The link should take users directly to the mandatory information and not to a “general website” that would require additional action to find the information.
  • TTB also considers content created by another party that is reposted or “liked” by an industry member or other similar action that would cause the content to show up in the feed of their page followers to be “advertising” and therefore subject to the advertising rules.
  • Your brand’s Instagram, for example, is considered a single advertisement by TTB but if a photo or video is posted to a site and is not associated with a profile section that bears mandatory information about the product, the industry member must include the mandatory statements within the photos/videos themselves.
    • Influencer marketing, for example, requires the same mandatory advertising statements that are required for industry members’ social media sites. This requirement may also be satisfied with the influencer including a clearly marked link to another website that contains all the mandatory information

SeeTTB Industry Circular 2022-2.

As a reminder, below are the basic TTB requirements for mandatory information that must appear on all alcohol advertisements:

Basics of Alcohol Advertising

TTB requires certain mandatory statements appear in advertising for a malt beverage, wine and distilled spirits products:

  • For malt beverages and distilled spirits: the name, city, and state OR the name and other contact information (phone number, website or email address) where the responsible advertiser may be contacted.
  • For wine: the name and address (city and state) of the permittee responsible for the advertisement (TTB has modernized the advertising rules for malt beverages and distilled spirits but has not yet finalized modernization of wine advertising rules).
  • For all commodities: the class to which the product belongs, corresponding with the information shown on the approved label.
  • For distilled spirits only: the alcohol content presented as a percentage of alcohol by volume (the same alcohol content that appears on the label of the distilled spirits you are advertising) and, if needed, the percentage of neutral spirits and the name of the commodity.

There are several [...]

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TTB Industry Circular 3: Calculating Tax Rates and Tax Credits on Imported Distilled Spirits

By , and on Jan 5, 2023
Posted In , , , , , ,

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 [...]

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Legal Considerations for Ready-to-Drink Cocktails

By and on Jan 21, 2022
Posted In , , , ,

The ready-to-drink cocktail or “RTD” category has exploded in recent years, and it’s occupied by more than merely craft distillers familiar with a carefully made cocktail. Brewers, distillers and even vintners have joined in, capitalizing on consumers’ desires for pre-made, no-fuss beverages. The most unexpected development to emerge with RTDs, however, is the legal complexity surrounding these products—something the industry is only beginning to understand.

Many of these legal issues stem from the fact that the legal regulatory landscape in most states has not caught up with the rapidly evolving alcohol industry. That leaves ready-to-drink cocktails, much like hard seltzers, as not having a specific class or type in certain states. Suppliers looking to enter the space have plentiful options when creating a new product, subject to what licenses the manufacturer holds and what those licenses allow them to produce.

Ready-to-drink cocktails can be spirits, malt, sugar, cider or wine-based. The base of the RTD product, nonetheless, is the key federal factor. It is also an important factor in most states when determining how the product will be treated from a legal perspective in the following areas:

  • Licensing needed to manufacture, distribute and sell the product;
  • Applicable franchise law (Do beer franchise laws apply to low-proof spirits?);
  • Available channels of distribution (Can you sell this product in grocery or convenience store?);
  • Excise tax rate charged to the manufacturer (Does state law have a lower excise tax rate for low ABV products?);
  • Labeling and advertising considerations (Is your product a modified traditional product?); and
  • Trade practice considerations/promotions (Do spirits laws apply?).

Industry members dabbling in a sphere that is relatively new to the market, state regulators and legislatures should be mindful of the patchwork of emerging regulations. Like hard seltzer, ready-to-drink cocktails are not a clearly defined category under existing alcohol law. Meanwhile, states are working quickly to legislate in this domain. New Jersey is considering a reduced alcoholic beverage tax rate on low-ABV liquors to align with the beer tax rate (NJ SB 701), Vermont is considering legislation to define “low alcohol spirits beverage” and treat it as a “vinous beverage” (VT HB 590) and the Washington State Senate has a bill pending that would establish a tax on low-proof beverages (WA SB 5049).

From franchise issues to excise tax, the issues discussed here are only a glimpse of the nuanced and complicated legal landscape that governs the distribution of RTDs and alcoholic beverages across all categories. Consulting with competent legal counsel with experience in the industry is crucial to ensuring compliance with applicable federal, state and local regulations.



Podcast: 2021 Legal Landscape for Brewers

By and on Feb 26, 2021
Posted In , ,

Between pandemic-driven changes to shipping and home delivery privileges, the rise of e-commerce and the nebulous definition of hard seltzer for tax and regulatory purposes, there is a lot that brewers need to know to remain on the right side of the law in 2021. Alva Mather, head of the Firm’s Alcohol Regulatory & Distribution Group and Counsel Nichole Shustack join the Brewbound Podcast to break down all the pressing legal issues facing the beer industry.

Listen to the podcast.



Oregon Issues New Guidance on Hard Seltzer Classification

By , and on Jan 11, 2021
Posted In , , , , ,

Recently, Oregon issued clarification pertaining to the classification of hard seltzers in the state. The guidance, as summarized below, impacts the majority of hard seltzers in the market. Classification of hard seltzer has a number of impacts, most notably on excise tax (or “privilege tax”) rates and licensing needed to produce, import, distribute and sell hard seltzers in the state. Specifically, Oregon has signaled that should the state’s guidance result in the reclassification of a supplier’s hard seltzer product, there may be retroactive tax liability imposed. This alert should assist those engaged in the production or sale of hard seltzer in Oregon in determining whether reclassification is necessary and the implications thereof. For specific questions on the implications of this guidance on your business, please do not hesitate to reach out to McDermott Will & Emery.

Classifications of Hard Seltzer
“Hard seltzer” must meet the following to be categorized as a malt beverage in Oregon:

  1. 100% of the alcohol by volume (ABV) is obtained through the fermentation of grain and the ABV is more than 0.5% but not more than 14%; or
  2. At least 98.5% of the ABV is obtained through the fermentation of grain and the ABV is more than 6% but not more than 14%. Once those criteria are met, not more than 1.5% of the ABV may be obtained through other flavoring agents containing alcohol; or
  3. At least 51% of the ABV is obtained by the fermentation of grain and the ABV is more than 0.5% and not more than 6%.

Once the criteria above is met, up to 49% of the ABV may be obtained through other flavoring agents containing alcohol.

Oregon relies on the federal definition of “grain” to mean barley, canola, corn, flaxseed, mixed grain, oats, rye, sorghum, soybeans, sunflower seed, triticale and wheat, and the subsequent definition for each grain. This may exclude hard seltzers deriving alcohol primarily through the fermentation of cane sugar from meeting the malt beverage definition in Oregon. The state may require verification that a product claimed to be a malt beverage for tax purposes is in fact produced through the fermentation of grain via the submission of an ingredients list or documentation describing the manufacturing process.

“Hard seltzer” must meet the following to be categorized as a wine in Oregon:

  1. An alcoholic beverage obtained by the fermentation of vinous or fruit juice, or other fermented beverage fit for beverage purposes, and contains more than 0.5% ABV and does not contain more than 21% ABV.
  2. Wine may contain distilled liquor and other “non-traditional” ingredients, provided that it does not contain more than 21% ABV.
  3. “Wine” does not include malt beverage, cider or distilled liquor.

“Hard seltzer” must meet the following to be categorized as a cider in Oregon:

  1. An alcoholic beverage obtained by the fermentation of the juice of apples or pears; contains more than 0.5% ABV but does not contain more than 8.5% ABV.
  2. The juice is not required [...]

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Pennsylvania Governor Calls for Cannabis Legalization and State Alcohol Tax Relief

By on Aug 31, 2020
Posted In , , ,

Pennsylvania’s governor is urging the state’s legislature to legalize recreational marijuana and pass a six-month reduction or cancellation of the state’s alcohol tax on the hospitality industry. Pennsylvania would join 11 other states and Washington, D.C., in fully legalizing marijuana, which can be lucrative for states.

“It’s almost, from a legislative and a state government perspective, a no brainer, because it’s a new source of revenue that you don’t have at a time where you need it desperately,” McDermott Will & Emery partner Alva C. Mather said in a recent Brewbound article. “And there’s lots of precedent for how to make it work in many other states, so the tide has turned quite a bit in the last several years where I think it’s not as taboo as it used to be.”

“States are in a very difficult situation in light of the pandemic, in terms of how they’re going to be able to generate more revenue and more job opportunities,” Mather said. “This is an entirely new industry that brings both to the table.”

Read more.



Detailed Summary of Federal Requirements for Production of Hand Sanitizing Products

By on Apr 1, 2020
Posted In , , , ,

To meet the growing need for hand sanitizing products, various federal agencies including the Alcohol Tobacco Tax and Trade Bureau (TTB), Federal Drug Administration (FDA), Health and Human Services (HHS) and Congress have been rapidly updating and providing guidance for alcohol manufacturers interested in producing or supplying alcohol for the production of these important products. The below neatly summarizes the key issues surrounding the production of alcohol for use in or production of hand sanitizers for distilled spirts plants (DSPs).

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