For those that operate in the beverage alcohol world, you are probably well aware that the Alcohol and Tobacco Tax and Trade Bureau (TTB) has a large Federal regulatory presence with respect to the production and distribution of beer, wine and distilled spirits for beverage purposes. What you may not know, and what may surprise you is how much TTB also regulates the area of what is known as industrial alcohol production and distribution. This blog article will attempt to provides some background and insights with respect to the agency’s regulatory authority in this area.
TTB JURISDICTION AND AUTHORITY
TTB has extensive Federal jurisdiction, pursuant to the Chapter 51 of the Internal Revenue Code (IRC) and the Federal Alcohol Administration Act (FAA Act) with respect to the production and distribution of alcohol products in the United States. The TTB statutory scheme generally imposes permit requirements with respect to the production, importation, and distribution of various alcohol products, including beer, wine and distilled spirits.
The IRC also imposes a Federal excise tax on the production and importation of alcohol products. Although the rate of tax has recently been reduced for smaller producers, pursuant to 26 U.S.C. Section 5001, the excise tax imposed upon distilled spirits has generally been at a rate of $13.50 per proof gallon. Since the days of Prohibition, most of the regulatory emphasis pursuant to the IRC and the FAA Act has been directed towards the imposition of the Federal excise upon the production, importation, and removal of beverage alcohol products from the bonded premises of a qualified alcohol producer.
1. Beverage alcohol
With respect to beverage alcohol, pursuant to the Federal Alcohol Administration Act, industry members are generally required to obtain basic permits from TTB to produce, import and wholesale the alcohol products in question. See 27 U.S.C. Section 203. The Federal Excise tax on domestic alcohol production is imposed by the Internal Revenue Code and is paid directly to TTB. The excise tax on the importation of distilled spirits and other alcohol products, although imposed pursuant to TTB’s statutory authority, by regulation, must be paid to U.S. Customs upon entry into the United States. In this regard, pursuant to the TTB regulation at 27 C.F.R. Section 27.48, the payments of Federal Excise tax on the importation of alcohol are payable to U.S. Customs.
Moreover, for shipments of alcohol imported into the United States, the entity determined by TTB to be the importer of the products in question, is specifically liable for payment of excise tax on the products.
2. Industrial Alcohol
With respect to industrial alcohol, the IRC generally contains provisions which allow for the production, removal and distribution of distilled spirits products to be used for industrial purposes without the payment of the Federal excise tax. In this regard, 26 U.S.C. Section 26 USC Section 5214(a)(1) provides in pertinent part that that:
Distilled spirits on which the internal revenue tax has not been paid or determined may, subject to such regulations as the Secretary shall prescribe, be withdrawn from the bonded premises of any distilled spirits plant in approved containers— (1) free of tax after denaturation of such spirits in the manner prescribed by law for . . . use in the arts and industries . . . .”
To qualify for this tax exempt status, the IRC generally requires compliance with the TTB laws and regulations as they relate to the manufacture, removal and distribution of the industrial alcohol related products. For example, the regulations require proper TTB industrial alcohol permits and that the distilled spirits be properly rendered unfit for consumption by the addition of denaturants so that the products in question become either specially denatured (SDA) or completely denatured (CDA) within the meaning of the TTB regulations. With regard to industrial alcohol permits, Section 5271 of the IRC provides that: “no person shall . . . procure, deal in, or use specially denatured distilled spirits . . . until he has filed an application with and received a permit to do so from the Secretary.”
Moreover, the statutory scheme is set up so that manufacturers, users and dealers of specially denatured alcohol may not distribute or transfer SDA to entities who do not have the required TTB Industrial permit to obtain the SDA. See e.g. 27 C.F.R. Section 20.235 (A user may dispose of specially denatured spirits to another permittee.); See also: Section 20.161 (The permit authorizes a person to withdraw specially denatured spirits from the bonded premises of a distilled spirits plant or a dealer.); Section 20.181 (The dealer may not ship specially denatured spirits before receiving the consignee's permit.).
3. Articles
The Internal Revenue Code also allows for industry members to employ the tax free use of industrial alcohol in the manufacture of industrial products that are defined by TTB as “articles.” “Articles” are defined by TTB as “any substance or preparation in the manufacture of which denatured spirits are used.” See 26 U.S.C. Section 5002(a)(14). “Articles” include many different types of industrial products such as cleaners, brake fluid, and solvents. With respect to articles, 26 U.S.C. Section 5214(a)(11) provides that: “distilled spirits on which the internal revenue tax has not been paid or determined may, subject to such regulations as the Secretary shall prescribe, be withdrawn from the bonded premises of any distilled spirits plant in approved containers— (11) free of tax when contained in an article (within the meaning of section 5002(a)(14)).”
Although a TTB industrial permit is required to manufacture articles, provided the regulations are complied with, the IRC generally allows for industry members to enjoy an exemption from tax and much less regulation, as long as the article conforms to either a specific TTB approved formula, or is within the definition of one of the general use formulas in 27 CFR Part 20.
With respect to the use of specially denatured alcohol to manufacture articles, the regulations require the appropriate TTB permit such as a user permit. For example, 27 C.F.R. Section 20.41 provides that:
§ 20.41 Application for industrial alcohol user permit.
(a) Dealers. A person who desires to withdraw and deal in specially denatured spirits shall, before commencing business, file an application on Form 5150.22 for, and obtain a permit, Form 5150.9.
(b) Users. A person who desires to withdraw and use or recover specially denatured spirits shall, before commencing business, file an application on Form 5150.22 for, and obtain a permit, Form 5150.9. The provisions of this paragraph also apply to persons desiring to recover denatured spirits from articles.
See also: 27 C.F.R. Section 19.91 (TTB Industrial Alcohol Operating Permit also allows for an industrial distilled spirits plant to produce articles).
As noted above, as with beverage alcohol, with respect to the production and distribution of denatured alcohol and articles for industrial purposes, a number of regulatory requirements are imposed by the Internal Revenue Code and the corresponding regulations such as the compliance with the IRC permit and formula requirements, including the general formula requirements set forth in the TTB regulations.
Moreover, the law and the regulations generally mandate compliance in order for the specially denatured alcohol and articles to be eligible for the ability to be removed and distributed without payment of tax or free of the Federal excise tax. Importantly, in this regard, 27 C.F.R. Section 20.31(b) provides generally that “any person who produces, withdraws, sells, transports, or uses completely denatured alcohol, specially denatured alcohol, specially denatured rum, or articles in violation of laws or regulations shall be required to pay the distilled spirits tax on those substances.”
4. What happens if the TTB laws and regulations are not complied with?
As noted above, if the laws and regulations are not complied with, pursuant to Section 20.31(b) above, the TTB may seek to impose the distilled spirits excise tax liability. Pursuant to 26 U.S.C. Section 6201, "[t]he Secretary [TTB] is authorized and required to make assessments of all taxes". Furthermore, although rare for industrial permittees, there can potentially be permit action to suspend or revoke a TTB Industrial Permit for statutory or regulatory violations such as non-payment of taxes, recordkeeping and formula violations although the law allows for an administrative hearing process. See: 26 U.S.C. Section 5271(c) In addition, under the authority of 26 U.S.C. Section 6651, TTB may seek to imposes tax penalties for delinquent excise taxes and returns. Section 6651 sets forth the authority to implement the failure to file penalty as well as the failure to pay penalty.
5. TTB’s Offer in Compromise process
Finally, we would be remiss if we did not to mention TTB’s offer in compromise process. Many alcohol industry members have been fortunate to take advantage of TTB’s compromise process. In this regard, TTB has in place an Offer in Compromise (OIC) process whereby industry members are allowed to submit proposed compromises to resolve any potential statutory or regulatory violations and potential tax liabilities. ] 26 U.S.C. Section 7122 provides that:
26 U.S. Code § 7122 Compromises
(a) Authorization
The Secretary [TTB] may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.
While the facts and circumstances of each case vary greatly, in our experience, TTB has, in the past, had a history of generally being more lenient for compromises in industrial alcohol cases particularly where there is no evidence of diversionary activity of alcohol for beverage purposes. With that said, the compromise process is one that should not be overlooked by the industrial alcohol industry member.
We hope that you have found our perspective of this overview of TTB’s role in regulating industrial alcohol to be of assistance.
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