Last week, the Alcohol & Tobacco Tax & Trade Bureau ("TTB") issued new guidance on its FAQ page regarding the Craft Beverage Modernization Act, specifically pertaining to Distilled Spirits Plants ("DSP's").
The updated guidance focuses mostly on DSP's transferring product in bond for bottling/canning purposes, tax implications, and what a DSP can and cannot do in the process. Below is a summary of the guidance:
FAQ: Under what circumstances are transfers of distilled spirits in bond allowed?
Answer: A DSP may transfer bulk distilled spirits in bond without payment of tax to another DSP under 26 U.S.C. 5212.
Effective January 1, 2021, bottled beverage distilled spirits may be transferred in bond without payment of tax only:
between DSPs belonging to the same person or members of a controlled group, or
if the distilled spirits are transferred in bond from the DSP who distilled or processed the spirits (“transferor”) to another DSP (“transferee”) for bottling or storage and returned to the transferor for removal, but only if the transferor retained title during the entire period between such distillation, or processing, and removal.
Takeaway: TTB has received a lot of questions about the Transfer in Bond process, and is trying make it clear that bottled Transfer in Bond is only allowed in limited circumstances, described above, in which the receiving DSP bottles/cans, and then returns back to the original DSP, and only if the original DSP retains title throughout the process.
FAQ: When distilled spirits are transferred in bond for bottling or storage and returned via transfer in bond to the original DSP for removal, may the bottler/copacker DSP conduct any operations other than bottling or storage?
Answer: The bottler/copacker DSP may add water to the product "as necessary to ensure appropriate label proof during bottling." The amount of water added cannot change the class or type (as set forth in 27 CFR 5.35) of the product.
Transferees who conduct other operations on the distilled spirits are not permitted to return the distilled spirits in bond to the original DSP.
Takeaway: A DSP that receives spirits in bond and transfers said spirits back in bond in bottled form may add water to the product prior to bottling/canning, and still be within the definition of bottling/canning, so long as the water added is to ensure proofing matches the label, but does not change the class or type of the product.
FAQ: What activities constitute “processing” for the purpose of determining eligibility for the reduced distilled spirits federal excise tax rates?
Answer: A DSP is considered a processor of distilled spirits if it “manufactures, mixes, or otherwise processes distilled spirits”. The term ‘processor’ includes (but is not limited to) a rectifier, bottler, or denaturer.”
Per TTB's guidance, for distilled spirits removed after December 31, 2021, “[a] distilled spirit shall not be treated as processed [for reduced rate purposes] unless a process described in [26 U.S.C. 5002(a)(5)(A)] (other than bottling) is performed with respect to such distilled spirit.” See 26 U.S.C. 5001(c)(5).
TTB's guidance further provides that, for purposes of the reduced federal excise tax rates, "a DSP is considered a processor of distilled spirits if it:
manufactures distilled spirits,
mixes distilled spirits with materials including flavors, wines, water (except that the addition of water during the normal process of bottling for the purpose of ensuring label proof does not constitute “processing” for reduced rate purposes), or other distilled spirits of any type, and/or
otherwise physically changes the distilled spirits inside the container, including filtering distilled spirits to remove material from those distilled spirits."
TTB's guidance further provides that "[p]rocessing does not include changing the marks or labels on distilled spirits containers or repacking containers of distilled spirits without physically changing the distilled spirits inside the containers."
Takeaway: It could just be me, but this guidance seems less clear than the other two provided. For instance, TTB uses the word "processes" when defining the activity of a "processor". I suspect we will see more updates on this particular guidance as the industry reacts and seeks additional clarification.
Stay tuned for updates.
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