New TTB Guidance on Excise Tax Credit / Transfer of Wine To Bonded Wine Cellar
TTB issued new guidance earlier today regarding the Craft Beverage Modernization and Tax Reform components of the Tax Cuts and Jobs Act, specifically in regard to the application of the new excise tax credit to wines that are transferred from a winery to a bonded wine cellar. We have excerpted some of the relevant language below, and encourage clients that have wine stored in bond at a premise other than their bonded winery to review TTB’s guidance carefully.
FROM THE TTB WEBSITE – https://www.ttb.gov/alcohol/craft-beverage-modernization-and-tax-reform.shtml
W7: I am a Bonded Wine Cellar (BWC) and I do not produce my own wine. How does the new law affect my ability to take a tax credit on wine that I hold for other wineries that produced the wine?
The new law that went into effect January 1, 2018, set forth new tax credits for wine (referred to as the “Special Rule”) and suspended, through the end of calendar year 2019, the previous tax credit for wine. The statutory provisions that allowed for a transfer of tax credits are also suspended, as they apply specifically only to the tax credit that has now been suspended by the new law. There is no provision in the new law that provides for a transfer of the new tax credits that apply to wine removed in 2018 and 2019. (See the addition of the “Special Rule” at 26 U.S.C. 5041(c)(8), stating that the tax credit provisions of 26 U.S.C 5041(c)(1) and (c)(2) do not apply after December 31, 2017 and before January 1, 2020, and the provisions of section 5041(c)(6) providing for the transfer of the credit by any person eligible for the credit under section 5041(c)(1).)
As a result, for calendar years 2018 and 2019, any wine that is removed from a wine premises that did not produce the wine is not eligible for the new tax credits. See FAQ G6 for additional guidance on credits and reduced rates for products transferred in bond. See FAQ W8 for what activities are considered “production” for purposes of the new tax credit.
While the Special Rule is in effect (that is, calendar years 2018 and 2019), a winery can only apply the new tax credits to wine produced by the winery. During this time, if wine is being held at premises that did not produce the wine, the producing wine premises can bring the wine back to its premises and remove the wine taxpaid from its premises in order to apply the new tax credits to the wine. Otherwise, a BWC or other wine premises that removes wine that it did not produce must tax pay the wine at the applicable tax rate, without application of credits that would otherwise be available to the producing wine premises under the Special Rule.
The Act was signed into law on December 22, 2017, and its provisions became effective within 10 days, on January 1, 2018. TTB recognizes that the exceptional circumstances of the short period between passage of the new law and its effective date limited the ability of businesses to adjust to the provisions in the new law, and that the transfer of wine from a BWC back to the producing winery may be expensive and burdensome, particularly for small wine producers. Based on these unique circumstances, TTB is authorizing an alternate procedure, applicable for a limited period of time, by which the wine producer may tax determine and tax pay the wine without physically returning the wine to its premises. See Industry Circular 2018-1.
W8: The Act says I may take a credit on wine I “produce” and remove. For purposes of taking the new tax credit, what activity counts as “produced”? May I take the new tax credit on wine that I’ve sweetened or blended? May I take the credit on wine that I’ve received in bond?
For the purpose of taking the credit allowed by the Act, the activities considered to be “production” that are set forth at 27 CFR 24.278(e) will apply. These are the activities that were used prior to the Act to determine whether a person’s production of wine was within the production limit for the currently-suspended small domestic producer credit at 26 U.S.C. 5041(c)(1). In addition to the entire volume of wine produced by fermentation, a winery may count as production wine that has undergone the following activities, if undertaken in good faith in the ordinary course of production, and not solely for the purpose of obtaining a tax credit:
Sweetening – Sweetening material is added after fermentation for the purpose of sweetening the wine.
Addition of wine spirits – Certain brandy or wine spirits authorized to be used in wine production are added.
Amelioration – Water, sugar, or a combination of both is added to wine to adjust the wine’s acid content.
Production of formula wine – Formula wine includes wine that may contain added flavoring or wine treating materials.
The entire volume of wine that has undergone one of these production activities would be considered “produced” for purposes of applying the new tax credit. Blending that does not involve one of the operations listed above is not considered production. The eligibility for the new tax credit is also subject to controlled group and single taxpayer rules similar to those in section 5051(a)(5), which may further limit the wine eligible for the new tax credit. See 26 U.S.C. 5041(b)(4).
FROM THE TTB INDUSTRY CIRCULAR – https://www.ttb.gov/industry_circulars/archives/18-1.shtml
Through this Industry Circular, TTB is authorizing an alternate procedure, in effect through June 30, 2018, under which wine producers will be allowed to tax determine and tax pay wine of their production stored untaxpaid at a BWC without the wine producer being required to physically receive its wine back from the BWC in bond. Rather, this alternate procedure will allow such wine producers to “receive” their wine “in bond” solely through documentation and reporting. The wine producer will report the wine on the TTB F 5120.17temp, Report of Wine Premises Operations, as “received in bond” and “removed taxpaid,” and the wine producer must then invoice the wine as taxpaid back to the BWC. The transfer documents used for this special procedure must be clearly marked with reference to this alternate procedure. These “transfers” through documentation, including invoicing the BWC, must be concluded so that all of these documented removals from bond occur on or before June 30, 2018, and the wine must be taxpaid by the due date for the wine producer’s first applicable tax return covering the date of such removal. (Wine producers who file the tax return and submit the report of operations annually must invoice the BWC showing the wine as “taxpaid” on or before June 30, 2018, but may report the “receipt in bond” and the “taxpaid removal” on the next annual submission of TTB F 5120.17temp and pay the tax with the next annual return following the invoicing.) Wine producers may take advantage of this alternate procedure without seeking TTB approval.
After the wine producer completes this process, including providing the invoice of the wine as “taxpaid” back to the BWC, the BWC will record, store, and ultimately remove that wine as taxpaid. The wine changes status from untaxpaid to taxpaid via transaction records only. On its next regular Report of Wine Premises Operations after June 30, 2018, the BWC will (1) report any wine it “transfers” to a wine producer under this alternate procedure on TTB Form 5120.17temp in Part I, Section A, on line 15, and/or in Part I, Section B, Line 9, and (2) list the names of any wine producer for whom the BWC is storing taxpaid wine under this alternate procedure on TTB Form 5120.17temp in Part X, Remarks. At the BWC, once the wine changes status, the wine must then clearly be shown in the BWC records as taxpaid and, if the BWC has a taxpaid area, the wine must be moved to that area. In instances in which the BWC does not already have a taxpaid area, the BWC will not be required to file an amendment to designate one solely for the storage of products “taxpaid” under this procedure, unless the BWC intends to store taxpaid wine other than in connection with this procedure. Rather, the BWC who does not already have a taxpaid area must clearly identify the wine in the records as “taxpaid” and must mark the outermost packaging of taxpaid wine in such a way that it is readily identifiable as taxpaid. This allowance applies only to wine covered under this alternate procedure.