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ALCOHOL LAW ADVISOR
Regulatory and Distribution Law Updates for the Alcohol Industry
ALCOHOL LAW ADVISOR
Regulatory and Distribution Law Updates for the Alcohol Industry
Alcohol and Tobacco Tax and Trade Bureau
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The Tax Implications of Purchasing Craft Producers in the First Half of a Year

by | Aug 10, 2023 | ,

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

by and | Apr 21, 2022 |

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

by and | Feb 22, 2022 | , , ,

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

by , and | Jan 11, 2021 | , , , ,

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

by and | Aug 19, 2019 | , ,

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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TTB Spring 2019 Updates to Semi-Annual Regulatory Agenda

by | May 28, 2019 | , , , ,

The spring edition of the federal government’s semi-annual Unified Agenda of Federal Regulatory and Deregulatory Actions (Regulatory Agenda) has been published. Like other federal agencies, the Alcohol and Tobacco Tax and Trade Bureau (TTB) uses the Regulatory Agenda to report on its current rulemaking projects.

The Regulatory Agenda provides glimpses into TTB’s policy focus and aspirations. But, readers should recognize that TTB rulemaking moves very slowly, and the Agency often does not meet the aspirational dates published in the Regulatory Agenda.  (more…)



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TTB Publishes Updated Guidelines for Formula Approvals for Domestic Producers and Importers

by | Oct 12, 2018 |

On September 18, 2018, the Alcohol and Tobacco Tax and Trade Bureau (TTB) issued TTB Industry Guidance 2018-10, a webpage consisting of questions and answers related to formulas. According to TTB, this new guidance “essentially replaces” Industry Circular 2007-4, which provided the framework for pre-COLA product evaluations. TTB has removed Industry Circular 2007-4 from its website.

The release of Industry Guidance 2018-10 comes with troubling implications. TTB has essentially revoked an Industry Circular signed by TTB Administrator John Manfreda and replaced it with a series Frequently Asked Questions (FAQs) with no clear authorship or authority. Furthermore, they have deleted Industry Circular 2007-4, preventing industry members from reviewing how these FAQs differ or alter the previous method for determining when formulas are required. Indeed, TTB seems to be significantly expanding the types of products that require formula approval. TTB notes in the new FAQs that “there may be circumstances when we will require a formula . . . even though the product does not generally require a formula.” See Industry Guidance 2018-10, FAB4.

TTB has recently required formulas for products, such as particular varieties of mezcal and spirits aged in previously used cooperage, where formulas were not previously required. It appears where no regulatory restrictions on aging (e.g., length of time or type of barrel) exists for a particular type/class of distilled spirits, TTB will more than likely request a formula approval prior to reviewing a Certificate of Label Approval (COLA) application. Some products may not require a formula if the label text only specifies the type of barrel used for aging, i.e., “Aged in used bourbon barrels.” But if the label mentions any attribute the aging provides to the liquid (e.g., “notes of sweet corn” or “hints of charred wood”) then TTB will likely require a formula.

Although TTB previously made strides in increasing speeds in which COLAs and formulas were reviewed, these new requirements will increase the compliance workload and approval timelines for TTB as well as alcohol beverage industry members. In addition to the challenges created by increasing the number of products requiring formulas, more questions are likely to arise under the anonymous FAQs, which replaced the longstanding protocols in Industry Circular 2007-4.



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TTB Issues Guidance on Transfers of Beer between Breweries of Different Ownership

by | Jul 23, 2018 | ,

Last week, the Alcohol and Tobacco Tax and Trade Bureau (TTB) published a TTB Procedure governing the transfer in bond of beer between breweries of different ownership. See TTB Procedure 2018-1 (July 17, 2018). In bond transfers between breweries of different ownership were authorized by the 2017 tax reform act and like many provisions of that act, the transfer provision is scheduled to sunset at the end of 2019.

Some highlights:

  1. The beer transfers can include both packaged and bulk beer.
  2. Transferred beer can be re-consigned while in transit or returned to the shipping brewery.
  3. Most recordkeeping and recording rules are the same as the current regulations governing transfers between breweries of the same ownership.
  4. Because the 2017 tax reform act’s lower tax rates apply to beer “produced” by the removing brewery, beer transferred in bulk does not benefit from the lower rates if the receiving brewer makes no changes or only de minimis changes to the transferred beer.
  5. For excise tax purposes, a beer is “produced” by a brewer if it is “brewed by fermentation or produced by the addition of water or other liquids during any state of production.” Blending alone does not qualify as “production.”
  6. Packaged beer that was transferred does not receive any lower rate of tax and will be taxed at the $18/barrel rate upon removal.
  7. Absent evidence of theft or diversion, in-transit losses of up to 2 percent are permitted without the need to file a report or a claim with TTB.
  8. Bulk containers used to transfer beer between breweries are subject to certain marking requirements.


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TTB to Allow Proprietors to Request Alternating Premise Variances for Storage of Tax- and Non-Tax-Determined Commodities

by | Jun 6, 2018 | ,

On May 16, 2018, the Alcohol and Tobacco Tax and Trade Bureau (TTB) issued Industry Circular 2018-3, allowing proprietors of distilled spirits plants (DSPs), bonded wine cellars (BWCs) and breweries to submit a request for a variance to the typical method for storing tax-determined and non-tax-determined products. Under TTB regulations, a proprietor designates areas of the premises as bonded and non-bonded. With few exceptions, tax-determined products can only be stored on non-bonded areas of the premises and non-tax-determined products can only be stored in bonded areas.

Under Industry Circular 2018-3, proprietors may request a variance to the bonded/non-bonded designations established in existing regulations. This variance would allow an “alternation” of a specific area or multiple areas between a bonded and non-bonded designation. An “alternation” allows two practices (e.g., brewing and winemaking) statutorily prohibited from occurring at the same premise to occur through the creation of a legal fiction. The premise “alternates” between one type of premise to accomplish one task and reverts to another type of premise to accomplish another task. (more…)



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