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2022 TTB Industry Circular 1: Consignment Sales

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

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

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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The Expanding Landscape of Alcohol Delivery Services

Following consumer trends and fueled by the pandemic and related loosening of restrictions on in-state retailer alcohol delivery regulations, the marketplace for alcohol delivery services has expanded exponentially over the last several years and shows no signs of slowing down. Industry forecasts predict double-digit growth year-over-year until at least 2025 for alcohol-focused e-commerce platforms. However, like anything in the alcohol beverage space, various avenues of penetration for new or existing companies come with certain restrictions that need to be balanced against opportunities for delivering customer convenience through alcohol delivery services.

Available Models

As alcohol delivery has grown and expanded in nearly every US state, numerous delivery models have developed to bring alcohol to a consumer’s doorstep. Of the various models, three have emerged as the most dominant go-to-market approaches to service this new industry sector.

The first are purely e-commerce platforms that connect consumers directly with a wide variety of licensed alcohol retailers but are themselves unlicensed (such as Drizly). The second are unlicensed white-labeled alcohol delivery services which appear as a branded website but integrate with a network of licensed retailers (like Thirstie). And the third are delivery platforms that themselves hold alcohol licenses (such as Gopuff).

Regulatory Opportunities and Impediments

While each of these models presents growth opportunities to service consumers’ desires to receive alcohol at their doorsteps, they also come with a host of restrictions that entities—and any investors in these companies—need to understand. Chief among these considerations are:

  • “Sale of Alcohol”: If the alcohol delivery service is itself unlicensed, the “sale” of alcohol must be between the consumer and the ultimate retail license holder. This means that the service cannot itself first receive the funds for the sale, take its fee and then pass the monies forward to the license holder. In some states, the provider may, however, be able to direct funds in the first instance to an escrow account or other independent account if the licensee retains a degree of control over the account. The licensed retailer should also always maintain control over the “sale” of alcohol, including setting pricing and accepting or rejecting orders.
  • Fee Structure: While state regulators allow for platforms to charge for their delivery and hard costs related to their services, how that fee is derived can be of particular significance if it is or can be correlated with alcohol sales. This restriction is premised on the fact that only a licensed entity should receive the benefit or privilege of the sale of alcohol. Accordingly, certain states like New York have suggested that if the fee structure is not a “flat fee” for services, receiving more than 10% of the revenue from a retailer as part of the sale of alcohol renders the platform a “Co-Licensee” and subject to the state’s authority and licensee vetting process.
  • Supplier Advertising: The ability of alcohol suppliers to pay to advertise on alcohol delivery platforms is of particular focus to alcohol state regulators. First, if the platform is itself unlicensed, the [...]

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TTB Publishes Phase 2 of Labeling and Advertising Modernization Rule

On February 9, 2022, the Alcohol and Tobacco Tax and Trade Bureau (TTB) published a final rule that implements Phase 2 of its rulemaking modernizing certain labeling and advertising regulations for malt beverages and distilled spirits. This follows Phase 1, implemented on April 2, 2020, which undertook multiple liberalizing measures, including increasing the tolerance applicable to the alcohol content statements of distilled spirits labels, removing the prohibition against age statements on certain classes and types of distilled spirits, and removing outdated prohibitions on the term “strong.”

Phase 2 is focused on improving the clarity and usability of the regulations regarding labeling and advertising of malt beverages and distilled spirits products. Note that these changes do not require industry members to make changes to labels or advertisements but will allow industry members greater flexibility in labeling and advertising their products moving forward. This final rule is effective March 11, 2022. The below provides a selection of the key changes implemented as part of Phase 2 rulemaking:

  • “Brand label” to “single field of vision.” TTB will no longer require mandatory labeling information appear on the so-called “brand label.” Previously, labeling mandatories had to appear on the “brand label,” defined as the “principal display panel that is most likely to be displayed, presented, shown or examined under normal retail display conditions.” Under the revisions of Phase 2, TTB will allow mandatory information to appear anywhere on the label so long as it appears within the same field of vision—meaning a single side of the container (which for a cylindrical container is 40% of the circumference)—where all the pieces of information can be viewed simultaneously without the need to turn the container.
  • Wholesaler, retailer or consumer information on malt beverage labels. TTB will allow the addition of a label identifying the wholesaler, retailer or consumer to malt beverages, so long as the label does not reference the characteristics of the product, does not violate the labeling regulations and does not obscure any existing labels on the product.
  • “Disparaging” statement prohibitions revised. TTB will prohibit only false or misleading statements that explicitly or implicitly disparage a competitor’s product. TTB does not prohibit statements of opinion or non-misleading comparisons between products.
  • Revised guidance on use of flags and certain US symbols. TTB has removed the blanket ban on the use of flags and other symbols of the United States and Armed Forces. The regulations now reinforce TTB’s existing policy of prohibiting the use of these symbols only when they create a misleading impression that there was an endorsement by, or affiliation with, the governmental entity represented.
  • Adding a “distilled spirits specialty products” class. TTB is adding a “distilled spirits specialty product” class designation for distilled spirits that do not meet one of the other standards of identity. Distilled spirits specialty products must be designated in accordance with trade and consumer understanding, or, if no understanding exists, with distinctive or fanciful name (which may be the name of a cocktail) appearing in the same field of [...]

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Legal Considerations for Ready-to-Drink Cocktails

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.




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Oregon Issues New Guidance on Hard Seltzer Classification

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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TTB Relaxes Consignment Sale Restrictions in Wake of Coronavirus Cancellations

On Friday, March 13, 2019, in the wake of growing concerns and related mass cancellations of large events all across the United States, the federal Alcohol and Tobacco Tax and Trade Bureau (TTB) announced that it is relaxing federal restrictions on alcoholic beverage returns that might otherwise violate prohibitions associated with consignment sales.

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Eighth Circuit Strikes Down Multiple Missouri Alcohol Beverage Advertising Laws

In another blow to the constitutionality of alcohol beverage laws, the Court of Appeals for the Eighth Circuit struck down on First Amendment grounds a number of Missouri’s alcohol beverage advertising laws on the basis that Missouri failed to meets it burden to demonstrate that such laws both advanced the state’s substantial interest and were narrowly tailored to achieve that interest.

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Craft Beer Mergers and Acquisitions

Over the past several months, 15 notable deals have taken place in the craft beer space, continuing a trend toward consolidation in the industry. While the terms of most transactions remain undisclosed, the deals generally fall into three buckets:

  1. Strategic deals designed to combine leading brands and brewers and leverage distribution capacity;
  2. Targeted asset acquisitions designed primarily to expand brewing capacity; and
  3. Restructuring transactions.

McDermott’s Marc Sorini, Thomas Conaghan and Daniel McGuire walk through notable strategic deals, asset/capacity purchases and restructurings.

Access the full article.

Originally published in The New Brewer, November/December 2019.




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