TTB Extends Alternate Procedure For Excise Taxes Credits through 2019
Today TTB announced in Industry Circular 2018-1A that it is extending until December 31, 2019 the ”Alternate Procedure” under which wine producers can tax pay wine stored at bonded tax wine cellars (“BWC”) without having to physically transfer their wine back from the BWC in bond. This update to TTB’s prior procedure is a welcome extension to the previous deadline of June 30, 2018 that had many in the industry scrambling.
For background—effective January 1, 2018—the federal Tax Cuts and Jobs Act (Public Law 115-97) (“The Act”) changed various provisions of the Internal Revenue Code related to alcohol beverages. Included in these changes were new tax credits[i] for wine (“New Credits”) that will be in place through 2019. The New Credits are available for all domestically produced wines removed from the producer’s own bonded premises in 2018 or 2019 regardless of when the wine was produced. During this time, the small producer tax credit is suspended, as are the provisions that allow for the transfer of such credits.
While the New Credits are welcome news for the industry, a number of issues arose in implementing them that led to a good deal of confusion and stress. One of the main problems was that the Act did not provide a mechanism (similar to what had previously existed) for a producing winery to transfer the New Credits to other facilities to be used on its behalf. Under the Act, a winery can only receive the benefit of the New Credits for wines it produces if it tax pays and removes those wines from its own bonded premises. Any wines that are removed from a BWC or other bonded premises—for example, where a winery may be storing its wines—are not eligible for the New Credits. A winery therefore would have to engage in an absurd exercise to be able to claim the New Credits on wines in storage at a BWC- the winery would have to physically transfer the wines back to its premises before tax paying the wines. Clearly, this was not ideal.
In light of the above, TTB issued Industry Circular 2018-1 setting forth an Alternate Procedure that allows wine producers to do a paper “transfer” of wines in bond at a BWC “back” to the producing winery’s own premises, tax pay the wine, and then apply the New Credits without physically returning the wine to the winery’s own bonded premises. However, the Alternate Procedure was only available until June 30, 2018, leaving wine producers and warehouses scrambling to meet the deadline.
By extending the Alternate Procedure until December 31, 2019 (when the New Credits are set to expire), TTB has provided the industry with some flexibility and time to deal with implementation and application of the New Credits. This extension will allow producers to take advantage of the New Credits, as intended, on wines they produced but may have stored elsewhere, without having to engage in a shell game of sorts, physically transferring product back and forth between bonds or rushing to meet a looming deadline. TTB also expanded the reach of the Industry Circular to apply to wines stored at other bonded wineries.
While this is good news for the industry, there are still issues with the Act that remain outstanding. For example, wine producers still cannot transfer the New Credits to BWCs as they could with the small producer credits. Wineries that want to take advantage of the New Credits must tax determine and tax pay the wines themselves from their own premises.
What does this mean in practice? It means that wineries that typically don’t pay excise taxes directly to TTB (because they are paid by the BWC) are suddenly responsible for doing so. And while wineries have always had to report movements in bond on TTB Form 5120.17, they will now have to report when the wines are tax paid. Further, the Alternate Procedure does not change the fact that the New Credits are only available on wines produced by the winery itself, and cannot be used for wines custom crushed for the winery by another winery.
Finally, the Alternate Procedure is not available for any wines that have previously been tax paid by a BWC on behalf of a winery in 2018. Unfortunately, any such wines will be subject to the full standard tax rates and cannot retroactively take advantage of the New Credits or the Alternate Procedure.
For any questions on the excise tax changes discussed above, please contact Bahaneh Hobel.
[i] For new tax credits, see 26 U.S.C. 5041(c)(8).