ALCOHOL LAW ADVISOR

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

by Alva C. Mather | Jan 5, 2023 | Advertising and Marketing, Alcohol Excise Taxes, Import/Export, Legislation, Trade Practices, Transactions

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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Alcohol Suppliers Hit with ADA Website Accessibility Lawsuits

by Jeremy White and Alva C. Mather | Jun 7, 2022 | Advertising and Marketing

The increasing popularity of online shopping is placing e-commerce businesses—specifically those in the alcohol beverage industry—in legal crosshairs. In lockstep with a recent uptick in website accessibility cases, plaintiff firms are sending pre-suit demand letters to alcohol suppliers and, in some cases, even filing a state or federal court lawsuit. These lawsuits—which are typically filed in California or New York—involve claims that a supplier’s website is not accessible to individuals who are blind in violation of Title III of the Americans with Disabilities Act (ADA) and related state laws. In these cases, plaintiffs seek attorneys’ fees, damages (only under state law) and injunctive relief that would require the website to conform with the Web Content Accessibility Guidelines (WCAG) standards, which have been broadly adopted by courts and regulators.

To prevail on a website accessibility claim, plaintiffs must first show that a defendant is a private entity that owns, leases or operates a “place of public accommodation.” Courts, however, are split on what it means for a website to be considered a place of public accommodation under Title III of the ADA. While some jurisdictions require that there be a “physical nexus” between the website and a brick-and-mortar store, other jurisdictions have permitted these cases to go forward against a website-only company that does not own or operate any physical retail location.

In addition to establishing that the supplier’s website is a place of public accommodation, the plaintiff must satisfy certain jurisdictional requirements which will depend upon whether products can be purchased directly from the website as well as whether the supplier ships to the state in which the suit was filed. Leveraging these defenses (among others) will be critical when it comes to either convincing the plaintiff to withdraw the claim, filing a motion to dismiss or achieving an early resolution on favorable terms.

Due to the rise in these website accessibility lawsuits, we encourage industry members to take a proactive approach:

Train personnel on accessibility requirements and WCAG standards.
Test the website against WCAG standards (through independent consultants or user testing).
Retain testing documentation to demonstrate that users with disabilities can fully use the website.
Assess potential areas of non-conformance with WCAG standards.
Work with internal/external technical teams to implement accessibility features into the website.
Develop an accessibility policy that informs users about the company’s accessibility practices.
Consider including a link to the website accessibility policy on every webpage, including a reporting option that is appropriately routed to address accessibility issues.
Regularly audit the website to assess its level of accessibility (particularly after website updates).
Engage legal counsel to minimize litigation risk associated with website accessibility issues, including whether the ADA is applicable to the company’s website in light of the current state of the law.

For questions about these lawsuits, please contact Jeremy White, Alva Mather or McDermott’s Alcohol Regulatory & Distribution Group.

The Expanding Landscape of Alcohol Delivery Services

by Alva C. Mather | May 4, 2022 | Advertising and Marketing, Distribution, Licensing, Trade Practices

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 Issues Four-Part Series on Health-Related Alcohol Marketing Claims

by Alva C. Mather | Apr 21, 2022 | Advertising and Marketing

As consumers continue to trend toward more health-conscious options, including in their choice of alcoholic beverages, the Alcohol and Tobacco Tax and Trade Bureau (TTB) has responded with guidance on health-related marketing claims in a four-part weekly newsletter. The guidance is in response to what TTB categorized as an “increasing number of alcohol beverage advertisements…suggesting a relationship between alcohol beverage consumption and purported health benefits or effects” and provides industry members general guidance utilizing specific examples to help the industry navigate marketing in this space.

As a reminder, the TTB prohibits industry members from making any health-related statement in advertising that is (1) untrue or (2) tends to create a misleading impression of the effects of alcohol consumption on health.

Throughout the four-week focus, TTB provided some examples of unsubstantiated advertising statements that suggest consuming a particular alcohol beverage will mitigate health consequences typically associated with alcohol consumption that would be considered prohibited:

“No headaches”
“Hangover free”
“Diabetic friendly”

TTB also provided examples of unsubstantiated advertising statements that suggest consuming an alcoholic beverage will result in health benefits that would also be considered prohibited:

“Recovery drink”
“Anti-inflammatory”
“Aphrodisiac”
“Health benefits”

In week three, TTB weighed in on the use of the term “clean” in alcohol labeling and advertising. TTB reminded readers that it does not define the word “clean,” nor does it have a standard for the use of the term on labels or in advertisements. Accordingly, it alerted consumers that the use of the term should not be interpreted as suggesting a product is organic or has met any other production standard set by TTB. Whether the use of the term is permissible depends upon the totality of the label or the advertisement in which the term appears.

TTB did provide some examples of when the term is used permissibly and when its use may be misleading:

If the term “clean” is used as a descriptor for the taste of the beverage and is considered puffery, it may be used permissibly. For example, “X winery makes clean, crisp wine.”
If the term “clean” is used in a way that suggests that consumption of alcohol will have health benefits and/or that the health risks otherwise associated with alcohol consumption will be mitigated, the term’s use may be prohibited. For example, “X malt beverage is clean and healthy” or “Y vodka’s clean production methods mean no headaches for you.”

The final iteration of the four-part series reminded readers simply that “TTB advertising regulations prohibit any health-related statement that is untrue in any particular or tends to create a misleading impression as to the effects of alcohol consumption on health.”

With the amount of attention the TTB has dedicated to this area, we encourage industry members to monitor health-related advertising and marketing closely. For questions about health-related claims in the alcohol industry, please contact Alva Mather, Nichole Shustack, Isabelle Cunningham or McDermott’s Alcohol Regulatory [...]

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A Toast to Celebrate Women’s History Month

by McDermott Will & Emery | Mar 31, 2022 | Uncategorized

As we celebrate Women’s History Month, our women-led Alcohol Legal Team would like to make a toast to the future and to the women who have paved the way.

Our team has worked in-house at some of the most well-known alcohol companies in the world. Led by Alva Mather, partner and head of the Alcohol Regulatory & Distribution Group, our industry-leading women work together to provide businesses with innovative insight and legal strategies needed to navigate the complex regulatory landscape.

Get to know our team of 10 – some of their favorite spirits – and join us in being inspired by what they do for the industry.