ALCOHOL LAW ADVISOR

How Alcohol Industry Members Can Prepare for a Government Shutdown

by Isabelle Cunningham | Sep 21, 2023 | TTB COLAs and Formulas

With less than a week and a half remaining to avert a government shutdown, Congress appears no closer to finding a solution. This means that a shutdown could occur as early as October 1, 2023. Alcohol industry members should understand what this means for the Alcohol and Tobacco Tax and Trade Bureau (TTB).

While TTB would continue to provide essential services during a shutdown, the agency would not process formula approvals, permit applications or Certificate of Label Approval (COLA) applications. If a shutdown materializes, the length of the shutdown may determine the downstream impacts on the industry, but significant delays and backlogs within TTB are possible (and have occurred with previous government shutdowns).

Industry members should begin to plan for these shutdowns and/or delays as much as possible. For example, we recommend expediting the submission of seasonal labels traditionally submitted later in the fall in order to secure a COLA prior to a shutdown (TTB’s current label processing time is between 3 and 8 days, depending on the commodity).

We also recommend industry members communicate with their trade organizations about the business impacts of a shutdown and urge Congress to fund the government to avoid a shutdown altogether.

California Steps Up Liquor License Enforcement

by Alice Chung and Alva C. Mather | Sep 11, 2023 | Licensing

We always recommend you regularly review your state liquor licenses to ensure you hold the correct licenses for your business needs. However, given recent feedback from California regulators, you may want to expedite such a review. We have learned that California is scrutinizing liquor licenses and enforcing regulations that prohibit licensees from obtaining licenses that could create tier violations.

California recently provided guidance on which industry members can hold a Type 13 Distilled Spirits Importer’s General license. As a reminder, a Type 13 license authorizes licensees to import and sell distilled spirits to other distilled spirits manufacturers, wholesalers, rectifiers and importers within the state. Historically, California issued a Type 13 license to out-of-state supplier-tier companies importing distilled spirits in their name. These companies would use licensed public warehouses for storage before distributing their products to authorized California licensees, such as licensed California wholesalers.

However, the California Department of Alcoholic Beverage Control (CA ABC) asserts that CA BPC § 23771 prohibits distilled spirits suppliers from holding a Type 13 license if they have any interest in manufacturing within or outside of the state. This prohibition applies to suppliers who manufacture distilled spirits outside of California or have a parent company that manufactures distilled spirits overseas. The state has said that these suppliers should hold a manufacturer-type license, such as a Type 5 license.

A Type 5 Distilled Spirits Manufacturer’s Agent license is frequently held by an agent of out-of-state distilleries or manufacturers who promotes the products and does missionary work for the out-of-state distillers or manufacturers. They can also solicit sales from licensed distilled spirits manufacturers, rectifiers or distilled spirits wholesalers and hold possession of distilled spirits in public or private warehouses. Although Type 5 licensees cannot import distilled spirits into California, they can sell distilled spirits to other Type 13 license holders who may import into the state.

While we have not seen proactive enforcement from CA ABC on this matter, the issue may arise when or if Type 13 license-holding companies renew a license or file a person-to-person transfer or premises transfer for a current license. CA ABC has indicated that Type 13 license-holding suppliers will not be penalized for holding an improper license; the agency will expect these suppliers to work with it to determine if they should hold a different set of licenses to meet their business needs.

If you have any questions about California ABC liquor licenses, please contact Alva Mather, Nichole Shustack, Alice Chung or McDermott’s alcohol team.

TTB Issues Updated Guidance on Transfers of Beer Between Breweries Under Separate Ownership

by Isabelle Cunningham | Aug 28, 2023 | Alcohol Excise Taxes

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:

The name and address of the shipping brewer;
The date of shipment;
The name and address of the receiving brewer; and
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 [...]

Continue Reading

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

by Alva C. Mather | Aug 10, 2023 | Alcohol Excise Taxes, Transactions

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 [...]

Continue Reading

Alcohol’s Next Innovation: ESG

by Parker Lee and Alva C. Mather | Jun 29, 2023 | Transactions

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.