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The Tax Implications of Purchasing Craft Producers in the First Half of 2024

We have republished this August 2023 blog post ahead of the start of 2024.

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 [...]

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Alcohol Industry M&A: Common Pitfalls for Founders (and Avoiding Them) Part One: Formulas and Processes

Given the continued strength of the US alcoholic beverage market, the alcohol industry presents numerous opportunities for acquisitions, investments and other strategic transactions from a wide variety of players. These range from small craft start-ups to larger strategic buyers, as well as investors of all shapes and sizes. In such a highly regulated industry, however, it is crucial for potential buyers and sellers to understand the complexities of the rules and regulations in order to negotiate and structure such transactions effectively.

In this blog post, the first in a series, we examine one of the common industry pitfalls and the related overlooked issues founders face when growing their alcohol business and positioning the company for a possible future transaction: failure to protect formulas and processes.

It is common for founders to focus on growing revenue during their start-up phase without dedicating time and resources to protecting their trade secrets. Trade secrets are a vital part of any company—they are the information you would not want your competitors to know, such as customer or supplier information, prices, marketing strategies, formulas/processes/recipes and any other confidential business information.

Whether you are an established brand or entering the alcohol beverage space, the ingredients that you choose for the base of your alcohol beverage can have a large impact on many aspects of your business. First, brands should consider working with flavor houses or ingredient sourcing companies who regularly collaborate with alcohol beverage companies. These companies will be the most familiar with the legal prohibitions, restrictions and limitations on certain ingredients added to alcohol beverages. Additionally, working closely with flavor houses will ensure that the ingredients used support the product’s label and advertising material claims. For example, you must avoid making any implied statements that the product contains certain ingredients when it does not. So, if a label or advertising material says, “Made with real fruit juice,” consider directly adding fruit juice or fruit concentrate as an ingredient.

Second, brands should provide any supporting documentation from the flavor houses/sourcing companies to their co-manufacturers (Flavor Ingredient Data Sheets, ingredient specification sheets, and Consejo Regulador del Tequila approvals for Tequila, for example). This will ensure that the product is being produced in accordance with the formula on file with, and approved by, the Alcohol and Tobacco Tax and Trade Bureau (TTB). Experienced alcohol counsel can review your formulas and identify any potential issues to help minimize the risk of a TTB formula rejection.

Formulas and manufacturing processes are not subject to trademark, patent or copyright protection, so how can you protect them from your competitors? Trade secrets are the only practical mechanism. The Uniform Trade Secrets Act defines “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique, or process that:

  1. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use, and
  2. Is the subject of efforts [...]

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

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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Alcohol’s Next Innovation: ESG

The ever-evolving alcohol industry seems to be at the forefront of yet another major innovation, this time embracing sustainability with a focus on environmental, social and governance (ESG) initiatives. We see this through the installation of renewable energy production on-site, the incorporation of recycled materials in packaging and the embracement of like-minded enterprises to serve as suppliers, vendors and business partners. How else can alcohol industry members build sustainability into their production process?

Recent evidence suggests that finding ways to contribute some of the waste streams from the production of alcohol to the production of biogas may be the answer. Some examples of this trend are listed below.

  • Biogas is produced from converting waste materials (livestock manure, food waste and brewery waste) into methane gas, which can be used as a heating fuel or more broadly as a feedstock for electricity production. Spent grain from beer production can be a great source for biogas generation.
  • The Molly Pitcher brewery in Carlisle, Pennsylvania has teamed up with the Dickinson College Farm to supply grain waste to a digester facility that is creating clean, burnable methane gas. One of this partnership’s ultimate goals is to power Dickinson College and some local dairy farms exclusively through biogas produced from brewer’s grain from Molly Pitcher, cow manure from local dairy farms and food waste from Dickinson College.
  • At South Australia Water’s Glenelg Wastewater Treatment Plant near Adelaide in South Australia, expired beer is being used to power digesters at the site and contribute to powering 1,200 homes. The beer is proving to be a highly efficient ingredient to feed the digesters and has fueled record energy generation at the plant.
  • In a similar trend for a parallel industry, both Jim Beam and Jack Daniels have recently entered partnerships with a biogas producer to build a biogas production facility and use still from the whiskey production process to create biogas. This biogas is intended to power the adjacent distilleries and potentially the surrounding neighborhoods as well.

These are just a few examples of how alcohol industry participants are reducing their carbon footprints and being more resourceful in disposing of waste products and powering their facilities. For smaller industry members, teaming up with others to form a co-op or consortium to pursue these opportunities may help build scale and share costs.

Additionally, there are a whole host of renewable energy tax credits that may be available to alcohol industry members in connection with these types of projects, and we are actively helping clients find ways to obtain, maximize and potentially transfer those credits.

Our alcohol, renewable energy and tax teams work together to take these initiatives from an idea to executed contracts and subsequent development. Reach out to our authors if you’d like to learn more and see how you can be part of the beer-to-biogas movement.




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Key Takeaways | Going Green: Environmental and Sustainability Risks and Opportunities for Alcohol Companies

In a recent webinar, Alva MatherJacob HollingerCarl Fleming and Parker Lee guided attendees through the unique energy-related challenges and opportunities for alcoholic beverages companies presented by current megatrends relating to environmental, social and governance (ESG), carbon and sustainability.

Some of the significant topics discussed included:

  1. Sustainability Trends
  2. Related Trapdoor Risks
  3. Sustainability Opportunities Across the Alcohol and Other Industries
  4. New Tax Opportunities Under the Inflation Reduction Act of 2023
  5. Case Study: Beam Suntory’s Renewable Energy-Powered Jim Beam Expansion

Access the webinar and key takeaways.




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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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Second Prop 65 Amendment Effective April 1, 2021: New Warnings Required

The Safe Drinking Water and Toxic Enforcement Act of 1986, also known as Proposition 65 (Prop 65), was enacted as a ballot initiative and requires businesses to inform Californians about exposures to chemicals that are known to cause cancer, birth defects or other reproductive harm. The regulation prohibits knowing or intentional exposure of any individual to a “chemical known to the state to cause cancer or reproductive toxicity without first giving clear and reasonable warning to such individual.” (See: 27 CCR § 25249.6.)

The state maintains and updates a list of chemicals known to cause cancer or reproductive toxicity, with alcoholic beverages being added to the list April 29, 2011, and requiring suppliers to comply with Prop 65’s “clear and reasonable warning” mandate. (Click here for more information.) This includes, without limitation, beer, malt beverages, wine and distilled spirits. (See: 27 CCR § 25607.4(a).) Generally speaking, for alcoholic beverages, it is the responsibility of the manufacturer or its distributors to ensure proper compliance with Prop 65. (See: 27 CCR § 25600.2(a).) Further, any consequences for failure to comply with Prop 65 typically rests with the manufacturer or its distributor, provided that the retailer has not frustrated the manufacturer’s reasonable efforts to properly display the warning.

The warning provided must read: “WARNING Drinking distilled spirits, beer, coolers, wine and other alcoholic beverages may increase cancer risk, and, during pregnancy, can cause birth defects. For more information go to www.P65Warnings.ca.gov/alcohol.” (Id. at § 25607.4(a)(1)-(2).) To comply with Section 25607.3, among other specific requirements, the warning must be made at either point of sale (for off-premises consumption) or on a menu or list identifying the alcoholic beverages sold on-premises. (See: 27 CCR § 25607.4.) Note, however, that a supplier who is a party to a “court-ordered settlement or final judgment, establishing a warning method or content is deemed to be providing a “clear and reasonable” warning for that exposure if the warning complies with the order or judgment,” even if the requirements set forth in the order or judgment differ from the specific requirements set forth in the regulations. (See: 27 CCR § 25600(e).)

Prop 65 is enforced by the California attorney general, any district attorney or city attorney for cities whose population exceeds 750,000 and/or any private individual or group acting in the public interest. (See: 27 CCR § 25249.7.) Penalties for violating Prop 65 can be as high as $2,500 per day. (Id.) The fine is paid to the party that brought the litigation, including individuals or groups acting in the public interest, which creates a powerful incentive for private parties to enforce Prop 65. (Id.)

Prop 65 has undergone multiple amendments, two of which are in direct response to the ever-growing e-commerce market for alcoholic beverages. The first amendment, effective August 30, 2018, required the Prop 65 warning language be displayed on websites and on or in packages containing direct-to-consumer orders sent to California addresses. (Click here for [...]

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Podcast: 2021 Legal Landscape for Brewers

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.




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