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Don’t Assume Nonalcoholic Beverage Ingredients Are OK for Alcoholic Beverages

As we enter 2024, more and more brands are joining the nonalcoholic beverage space. An increasing variety of nonalcoholic, single-serve, ready-to-drink beverages are marketing the innovative use of indigenous botanicals, herbs or novelty ingredients found in other foods. This innovation has led to product development teams exploring the use of those ingredients for their alcoholic beverage products, but in many instances those ingredients have not been used in or approved for alcoholic beverages in the United States by the Alcohol and Tobacco Tax and Trade Bureau (TTB), leading to challenges with obtaining formula approvals.

BACKGROUND

As a reminder, the TTB requires that all ingredients added to an alcoholic product be determined generally recognized as safe (GRAS) for use in alcohol. If the TTB finds that a product’s ingredient is not GRAS, it can cause significant delays for your product’s market launch. Currently, the TTB’s GRAS determination relies directly on the advice and approval of the ingredient’s use in alcoholic beverages by the US Food and Drug Administration (FDA).

In line with the historic Memorandum of Understanding (MOA) between the two agencies, the FDA (not the TTB) is responsible for determining which ingredients are prohibited from use in food and/or beverage products under the US Federal Food, Drug, and Cosmetic Act. These include food additives, such as substances added intentionally to food, and color additives. The TTB is authorized by law to utilize the services of a government department or agency to carry out its powers and duties under the Federal Alcohol Administration Act. Pursuant to its MOA with the FDA, the TTB regularly consults with the FDA regarding the approval of ingredients in alcoholic beverages and the requirements of label disclosure for certain substances. The TTB’s Beverage Alcohol Laboratory also analyzes alcoholic beverage products for limited and prohibited compounds and enforces these restrictions for alcoholic beverages as per FDA guidance.

OUR GUIDANCE

In light of these challenges, we recommend that before submitting your formula, double-check to make sure all the ingredients and substances added are GRAS and allowable for use in alcoholic beverages specifically. This will help streamline the approval process and avoid potential delays. Below are some tips you should consider:

  • Check with the ingredient supplier or manufacturer for the regulatory status of the ingredient and ask for a Technical Data Sheet or Product Specification Sheet that likely contains the relevant information.
  • Refer to the TTB’s Limited Ingredients page, which contains both the “Flavoring Substances and Adjuvants Subject to Limitation or Restriction” and “Flavoring Substances and Adjuvants that are Used Only in Certain Situations.” These list many ingredients that may be used in alcoholic beverages only. It is not an exhaustive list of all substances that have limitations in foods or beverages but useful in determining whether a limit is exceeded in an alcoholic beverage product.
  • Search your ingredient on the FDA’s The Substances Added to Food inventory (formerly called Everything Added to Foods in the United States) to determine [...]

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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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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.

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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.




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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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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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