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How Industry Members Can Prepare for Alcohol Theft

While there has always been theft in the alcohol industry, there has been a significant uptick in large-scale larceny in recent months. Because of this reality, alcohol industry members should take steps to prepare for missing product. Below are some ideas to consider.

  • Ensure you have adequate insurance coverage: While reviewing your insurance policy is not always top of mind, you should understand what coverage you have and the steps you must take in the event of theft. Many policies have timelines in which theft must be reported and requirements about what steps must be taken to report a claim. Understanding these policy elements will help ensure you do not miss the chance to make a future claim.
  • Review your contractual obligations: Agreements with carriers, shipping companies, storage facilities, third-party manufacturers or other business partners often, or should, have clauses related to each party’s obligations in the event of theft of product. Carefully review facility operation provisions and indemnification clauses to understand each party’s responsibilities in the event of theft, especially if a theft is potentially the result of a party’s negligence or willful misconduct. When negotiating new agreements with a vendor that may store or handle product, ensure the party has sufficient security measures and protocols in place to prevent theft. Some industry members may look for protections and facility security beyond what federal or state regulators look for in order to issue a license to store or handle alcohol.
  • Create an internal policy and training program: Having a clear protocol for employees to follow in the event of a theft will ensure your business doesn’t unintentionally jeopardize its ability to file an insurance claim or to obtain taxes back on lost goods. Because time is typically of the essence, it is crucial that your employees know how to respond to theft.
  • Understand if you can retrieve taxes back for product that has been stolen: The Alcohol and Tobacco Tax and Trade Bureau (TTB) will not pay claims for stolen product if insurance covers excise tax or if you have indemnification from other parties. Alcohol losses due to theft are also not eligible as a disaster claim. However, relief can still be sought if the industry member can demonstrate to the TTB that the loss was not due to fraud or negligence by the member or its agents or employees. The conditions that must be met to determine if a tax refund can be sought, and the process for seeking a claim for remission of tax liability, can be found here:
    • Distillers: 26 USC § 5008; 27 CFR § 19.263; 27 CFR § 70.413
    • Brewers: 26 USC § 5056; 27 CFR § 25.282; 27 CFR § 70.413
    • Wineries: 26 USC § 5370; 27 CFR § 24.265; 27 CFR § 70.413

Due to the sizable uptick of theft, we encourage industry members to ensure not only that their current insurance coverage and contractual obligations provide adequate protection but also [...]

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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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Key Takeaways | Seeing Around the Corner: Alcohol Industry Updates

In this webinar, Alva Mather, Lesli Esposito, Rachel Gartner and Nichole Shustack teamed up to unpack how recent regulatory shifts will significantly affect alcohol companies and distributors. They discussed product innovation in the spirits industry, “zero-proof” beverage options and how companies are leveraging the benefits of artificial intelligence for advertising and marketing.

Top takeaways included:

  1. Introducing a nonalcoholic beverage may mean getting to know a new federal agency. For alcohol brands looking to launch a zero-proof or nonalcoholic beverage, the Alcohol and Tobacco Tax and Trade Bureau (TTB) may not be the only federal agency regulating your product. The Food and Drug Administration (FDA) oversees the safety and efficacy of various consumer products, including nonalcoholic and conventional beverages. How a product is manufactured (e.g., dealcoholized products versus products that never contain alcohol) will play an important role in determining how a product is regulated. Industry members should be aware of what their obligations are to the FDA, TTB and relevant state agencies before launching a zero-proof or nonalcoholic beverage.
  2. In alcohol advertising, claim substantiation is the key to risk mitigation. Across all industries, we are seeing an uptick in sustainability claims, the use of reviews as part of advertising, claims around diversity, equity and inclusion efforts, and the continued use of social media influencers in marketing. Industry members should understand what constitutes a “claim” in advertising (e.g., what an influencer does with your product may be as important as what they say about it) and ensure they have the evidence to back up those claims.
  3. Keep an eye on the FTC. The Federal Trade Commission (FTC) is busy, both updating guidance for industry and taking sweeping enforcement actions. The FTC is in the process of revising its Guides for the Use of Environmental Marketing Claims (Green Guides). As sustainability claims become more prevalent, and as consumers rely on them more to make buying decisions, these updated Green Guides will be an important tool for industry members. As for enforcement, the alcohol industry has not been spared, and where the FTC’s current investigations ultimately go will be determinative of how the agency, under the Biden administration, views antitrust issues in the alcohol space.
  4. A new wave of direct-to-consumer shipping litigation is here. The familiar debate about direct-to-consumer (DTC) shipping laws returns. The litigation is primarily coming from out-of-state retailers challenging laws that allow in-state retailers to ship DTC but prohibit the same for out-of-state retailers. A new batch of litigants, primarily smaller suppliers, are also challenging laws that allow in-state self-distribution and DTC sales but prohibit the same for out-of-state suppliers.

Access webinar and slides.




How Alcohol Industry Members Can Prepare for a Government Shutdown

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.




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

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

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

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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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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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 Publishes New Nonbeverage Product Formula Form

On August 12, 2019, the Alcohol and Tobacco Tax and Trade Bureau (TTB) published its updated Formula and Process for Nonbeverage Product, TTB Form 5154.1. The Nonbeverage Product approval process is critical to obtain “drawback” (a refund) on most of the alcohol excise tax on distilled spirits used to make such products deemed “unfit for beverage purposes.” The Nonbeverage Formula Form accordingly is important to producers of flavorings and extracts, soft drink concentrates and other non-beverage products made using potable alcohol. (more…)




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