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).
Grapegrowing and FSMA Compliance
As of 2018, winegrape growers are now required to adhere to the burdensome requirements of the Food Safety Modernization Act (FSMA) Produce Safety Rule when selling winegrapes to wineries for processing. However, most winegrape growers will qualify for an exemption from the FSMA rule (see FDA flow chart for rule and exemption applicability).
For winegrape growers with more than $25,000 of annual produce sales, the applicable exemption is based on the intended commercial processing- winemaking- that will adequately reduce pathogens. Growers who produce less than $25,000 in annual produce sales are not covered by the Produce Safety Rule. Growers may only benefit from the exemption if they adhere to the following notice, assurance and recordkeeping requirements upon delivery of grapes and after winery processing (21 CFR 112.2(b)(2)-(6)).
Beginning in 2018, growers of winegrapes must:
- Disclose in documents accompanying the winegrapes that the grapes are “not processed to adequately reduce the presence of microorganisms of public health significance;” and
- Annually obtain written assurance from the grape processor that the processor has established and is following procedures that adequately reduce the presence of microorganisms of public health significance.
All records required to maintain compliance with the exemption, as identified above, must also include:
- The name and location of the vineyard from which the grapes were harvested;
- An adequate description of the covered produce, such as the specific variety of the grapes; and
- The location of the growing area within the vineyard (i.e. the specific block where the grapes were grown).
Growers utilizing the commercial processing exemption will be required to retain the notice and assurance records above for two years for all loads delivered.
Although certain produce is broadly excluded from the applicability of the FSMA, including, but not limited to, asparagus, various bean varieties, sweet corn, eggplant, ginger, potatoes and cranberries, winegrapes and hops are not exempted by statute even though they are almost certainly consumed without processing less frequently than the ginger we put in our green juice. California Association of Winegrape Growers (CAWG) has requested the FDA add winegrapes to the exempt “produce rarely consumed raw” list, in which case the notices and recordkeeping described above would no longer apply.
China To Add 15% Tariff on U.S. Wine
As discussed in our previous post, Steel and Aluminum Tariffs Could Impact U.S. Alcohol Beverage Producers, retaliatory tariffs presented a risk to goods unrelated to those subject to U.S. tariffs.
Now, China has indicated it will retaliate against U.S. tariffs on $60 billion of Chinese goods by imposing an additional 15% import tariff on U.S. wine imported to China, among other measures. China will also target other iconic U.S. agricultural products, including pork, fruit and nuts. China is among the largest U.S. wine export markets, importing $79 million of California wine alone last year according to the Wine Institute.
At least for now though, the much larger U.S. wine export markets of the European Union and Canada — accounting for nearly $1 billion in California wine exports combined — have been excluded from new U.S. tariffs. Those larger markets have not enacted any retaliatory tariffs at this point.
Steel and Aluminum Tariffs Could Impact U.S. Alcohol Beverage Producers
As has been widely reported, the President of the United States has proposed enacting steep tariffs on U.S. imports of steel and aluminum. These tariffs could both directly impact U.S. alcohol beverage products that use those materials such as beer, and result in retaliatory tariffs targeting U.S. goods nominally unrelated to steel and aluminum, including U.S. wine and spirits.
The direct impacts on the costs of steel and aluminum containers, particularly in canned beer and the growing canned wine segment, could obviously impact the competitiveness of U.S. beer and wine. Major beer manufactures have expressed strong objection to the tariffs and projected job losses throughout the industry. As the Wall St. Journal reported, some industry experts have speculated that this cost increase may push consumers away from beer and towards other alcohol beverages typically packaged in glass.
But Washington Post reporting suggests U.S. wine manufacturers, especially those that export their products, should temper any expectations of a gain from such a shift. Retaliatory tariffs are a distinct possibility, including from some of the U.S.’s historically strongest trade partners. The E.U. has already threatened retaliatory tariffs against Kentucky bourbon. Canada, the largest exporter of steel and aluminum to the U.S. and the second largest export market for U.S. wine behind the European Union, may follow suit. One Canadian trade lawyer, Lawrence Herman, has suggested a tariff on U.S. wine exported to Canada as a first response: “‘Canadian consumers are not going to be prejudiced’ because there are many alternative sources of wine in the world.”
A number of affected alcohol beverage industry groups have already spoken out on their plans to contact the Commerce Department to voice their concerns. It remains to be seen whether the tariffs will actually be implemented, and if so, whether they will apply to all countries, or exclude favored trading partners.
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.
DP&F’s Katja Loeffelholz Presented at Vancouver, BC, International Wine Festival Law Seminar
Dickenson Peatman & Fogarty attorney Katja Loeffelholz presented “USA Wine Labeling Regulations” to the Wine & Liquor Law Seminar held in conjunction with the Vancouver International Wine Festival this past Monday. The seminar was the Ninth Annual Wine & Liquor Law gathering of wine and liquor industry professionals and covered new wine and liquor regulation, enforcement and business trends. A copy of Katja’s presentation is attached.
If you are interested in learning more about the Wine & Liquor Law Seminar or have branding questions please contact Katja Loeffelholz. If you have any questions about U.S. wine labeling regulations, please contact John Trinidad.
New Wine Excise Tax Credit Raises Questions
While many in the industry have celebrated the passage of the Craft Beverage Modernization and Tax Reform components of the Tax Cuts and Jobs Act of 2017, there are a lot of lingering questions about how TTB will interpret these new laws.
Many wineries, for capacity reasons or otherwise, have wine made at a facility other than their own bonded winery. Up through December 31, 2017, such wine was eligible for a small producer tax credit because the law stated that the credit was available for wine “produced at qualified facilities in the United States” provided that other prerequisites were met. 26 U.S.C. Sec. 5041(c)(1). TTB interpreted this statute in a manner that allowed a small winery to apply a tax credit on wine produced for it at another bonded winery, so long as that wine was transferred in bond to the small producer and removed from that bonded facility.
Under the new law, wines “which are produced by the producer” and removed from bond in 2018 and 2019 are eligible for a tax credit. 26 U.S.C. Sec. 5041(c)(8)(A). It is unclear if, in drafting the law in this manner, Congress intended to prohibit a winery from claiming a tax credit on wines produced for it at another winery. To date, TTB has not issued any guidance on this front.
In short, if you are a winery that has some wine made at a winery other than your bonded premise, that wine may not be eligible for a tax credit under the new law, though further action from TTB is needed to say so conclusively. We’ll be sure to keep our readers informed of any developments.
NOTE – Hat tip goes to Liz Holtzclaw of Holtzclaw Compliance, who raised this issue in a comment on the WineBusiness.com website!
New York Imposes $3.5 Million Penalty Against Wine Wholesaler
The New York State Liquor Authority announced a $3.5 million civil penalty against Southern Glazers Wine & Spirits arising from an investigation into the wholesaler’s business practices in New York. The NYSLA concluded that Southern had provided illegal gifts and services to retailers to induce them to carry Southern products in violation of state tied house restrictions, and that the wholesaler had engaged in discriminatory sales practices in violation of the state’s price posting regulations.
According to the NYSLA, Southern representatives engaged in a practice commonly called “credit card swipes” where they would have the retailers charge their cards for a certain dollar amount, but not receive anything in return. The result was a payment to the retailer that would lower the cost of products purchased from Southern and “incentivize additional purchases.”
This is yet another example of increased federal and state enforcement actions against “Pay to Play” and other tied house infractions that we have reported on over the past year.
Click on the link below to read the full NYSLA announcement:
Governor Signs Executive Order Granting Some Relief to Licensees Affected by Fires
Yesterday, the Governor signed an Executive Order that could provide some relief to alcohol beverage licensees whose premises were damaged or destroyed by the recent fires in Napa and Sonoma Counties.
The California ABC Act typically allows alcohol beverage licensees whose premises have been destroyed as a result of fire or other causes to temporarily relocate their business operations for a period up to 6 months to a location within 500 feet of their premises, while their premises is being repaired or rebuilt.
Pursuant to Executive Order B-43-17, the ABC now has the discretion to waive the 500 foot limitation and 180-day time period described above for any businesses that have been forced to relocate as a result of the wildfires. The ABC also have the discretion to waive transfer fees beyond the time limitations set forth in the ABC Act related to such transfers.
Note that because this Executive Order only deals with California licenses, in practice, it will only allow the relocation of premises such as tasting rooms or offices, where a federal permit is not required at the premises. Thus, moving winery production facilities would not be possible under this Executive Order, since such operations would require that the licensee hold a federal winery permit at any facility where production was occurring.
For questions or more information on how to relocate your licensed operations as a result of damage from the fires, please contact Bahaneh Hobel.
TTB and County of Napa Info for Businesses Affected by Wildfires
Our hearts go out to our friends and neighbors who are dealing with damage and destruction caused by the California fires. Although there are certainly more pressing concerns, we wanted to provide some information that may prove useful in the days and weeks ahead.
The U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) announced that it will waive late filing, payment, or deposit penalties for those impacted by the California wildfires on a case-by-case basis. This waiver is available to taxpayers with businesses located in, or whose records are stored in, areas declared as Major Disaster areas, which includes Mendocino, Napa, and Sonoma Counties. Please go to the TTB website for additional information: https://www.ttb.gov/announcements/waiver-excise-tax-penalties-businesses-affected-california-wildfires.shtml
Also, in 2015, TTB issued guidance for wineries impacted by wildfires which has helpful information on (1) reporting losses at bonded premises, (2) filing claims for refund or credit of federal excise tax on wine lost in a wildfire; (3) handling untaxpaid wine damaged during a wildfire; and (4) moving wine in bond to another bonded wine facility for temporary storage. We have been in touch with TTB, and the Bureau may be issuing an updated version of this prior guidance in response to the current wildfires. We will be sure to let you know if so.
Napa County Agricultural Commissioner Office
For those of you in Napa County that are looking to conduct harvest or other agricultural activities in areas that have been evacuated or wherein access is restricted, please be advised that the County has established a protocol for approving requests for access to engage in such activities. That protocol can be found through the Ag Commissioner’s website and Facebook page. The initial protocol was issued on Saturday evening, and revised on Sunday evening, so we encourage you to revisit the Commissioner’s Facebook page for any updates.
Also, the Ag Commissioner’s notice states: “According to CalFire officials, grapes that have been contacted by flame retardant are not safe for humans and should not be harvested.” We asked the Ag Commissioner’s office how growers are supposed to determine that their grapes have been in contact with fire retardants. They responded that the retardants are a very noticeable bright pink / red color, and that it should be evident even after flaking off of the grapes.
Finally, the Napa Valley Vintners, Sonoma Valley Vintners and Growers, and the Wine Institute have created pages with some very helpful information for wineries in wildfire affected areas. Those links are below.
- Napa Valley Vintners 2017 Fires Resources
- Sonoma Valley Vintners and Growers 2017 Fire Resources
- Wine Institute Wildfire Resources
If you have any questions regarding the above topics, please contact John Trinidad at firstname.lastname@example.org.
Tied House Enforcement: TTB Cracks Down on “Pay to Play” Schemes
The federal crackdown on “pay to play” arrangements in the alcohol beverage industry continues. In a press release issued on Friday, the U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau announced that it was conducting a joint operation with the Illinois Liquor Control Commission to look into alleged “pay-to-play” in Chicago, the Quad Cities, and Peoria. Illinois is no stranger to these types of tied house violations: in 2009, 10 Illinois wine distributors paid over $800,000 as a result of a TTB investigation into payments made by distributors to retailers for shelf space.
There has been a recent uptick in tied-house enforcement actions by TTB. Just a few months ago, the TTB launched a coordinated effort with the Florida Division of Alcoholic Beverages in what it described as “the largest trade practice enforcement operation that TTB has initiated to date.” The Illinois and Federal joint federal-state efforts come less than a year after the TTB reached a $750,000 settlement with a Massachusetts distributor that had spent approximately $120,000 in payments to Boston retailers in exchange for favorable product placement and shelf space.
Under federal tied-house law, it is unlawful for an alcohol beverage supplier to “induce,” directly or indirectly, any alcohol beverage retailer (e.g. bottle store, bar or restaurant) to purchase any products from that supplier to the “exclusion,” in whole or in part, of other suppliers’ products. Inducement under federal law can arise from a supplier furnishing or giving retailers anything of value anything of value, subject to various exceptions. “Pay-to-play” schemes generally involve payments by an alcohol beverage supplier to an on- or off-premise retailer for tap or shelf space.
California Tied House Law Upheld by Federal Appeals Court
An en banc panel of the U.S. Court of Appeal for the Ninth Circuit (the federal appeals court with jurisdiction for the nine western states) has rejected a First Amendment challenge to California’s tied house laws. In so doing, the court overturned an earlier decision by a three-judge panel that had applied a more rigorous standard for regulations that restrict commercial speech and, thereby, raised questions about the state’s ability to enforce certain laws that restrict supplier-sponsored advertisements at alcohol beverage retail premises. The case is Retail Digital Network v. Prieto, Case No. 13-56069 (9th Cir. June 14, 2017).
The case involved a company, Retail Digital Network (“RDN”), that installed and operated digital displays in wine and spirit retail stores. RDN sold advertising space on those displays to companies, and RDN shared a portion of its advertising revenue with retail stores. Alcohol beverage manufacturers were wary of buying advertising on the RDN displays in light of California ABC Act Section 25503 which prohibits alcohol beverage manufacturers, importers, and wholesalers from “paying money” or providing “anything of value for the privilege of placing or painting a sign or advertisement…on or in any” alcohol beverage retail premises. RDN filed suit, claiming that Section 25503 impermissibly restricted commercial speech in violation of the First Amendment.
The Ninth Circuit concluded that Section 25503 did not violate the First Amendment, holding in pertinent part that the regulation directly advances the government’s interest in preventing the undue influence of manufacturers and wholesalers over alcohol beverage retailers, and that the regulation was not more extensive than necessary to serve that interest.
If you have any questions regarding tied house laws, please contact John Trinidad at email@example.com.
TTB Issues Guidance for Cider Producers
On May 17, 2017, the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) issued additional guidance for cider producers on federal excise tax, labeling and formula requirements through Industry Circular 2017-2 (“Amendments to the Criteria for the Hard Cider Tax Rate and Information on Other Requirements that Apply to Wine that is Eligible for the Hard Cider Tax Rate”).
This guidance explains in detail the modified criteria for the hard cider tax rate described in our previous blog post, “Federal Rule Changes Make More Products Eligible for (Lower) Hard Cider Tax Rate.” Of particular note, the guidance makes clear that some effervescent ciders may now be eligible for the small producer tax credit even though wines classified as “champagne and sparkling wines” are not eligible.
The criteria set forth under the temporary rule have not changed; rather, TTB is providing this additional information to assist industry members in understanding how existing requirements may apply to their cider or perry products. If you have any questions about this modified definition of “hard cider” and the potential tax benefits for your business, please contact Katy Stambaugh via email or by phone at (707) 252-7122.
New Bill Targets California Alcohol Delivery Services
California lawmakers are considering legislation that would regulate companies offering alcohol delivery services, such as Instacart and Drizly.
Senate Bill 254 stops short of requiring “delivery network services” from obtaining a license from the Department of Alcoholic Beverage Control (“ABC”), but does require that the ABC review and approve of their “system” before they engage in alcohol deliveries. The delivery services company’s “system” would have to meet certain criteria, including ensuring that consumers and delivery personnel were over age 21. If passed, SB 254 would also prevent delivery network services from delivering to locations on college or university campuses.
To date, many of these delivery service companies have adopted models that closely follow the third party provider guidelines issued by the ABC in 2011 and have not had to submit a summary of their system for ABC review. If passed as currently drafted, SB 254 may require these companies to suspend operations until such time as the ABC has reviewed and approved of the company’s system. Also of note, SB 254 does not appear to apply to other third party marketers that do not engage in delivery of alcoholic beverages, but instead forward orders to wineries or retailers who are ultimately responsible for delivery.
For more information on alcohol beverage laws and regulations for third party marketers and delivery services, please contact John Trinidad.
TTB Pumps the Brakes on CBD Infused Alcohol
Despite a slew of news reports on Cannabis-wine/beer/spirits over the past year, recent actions by the Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) have brought into question whether CBD-infused alcoholic beverages can be legally produced in the United States, even in states that have legalized cannabis for adult use.
Last fall, a Colorado brewery, Dad & Dudes Breweria, announced that it had secured TTB formula approval for a CBD-infused beer to be marketed as General Washington’s Secret Stash, and that it planned to distribute the beer nationwide. But in December, after the Drug Enforcement Agency concluded that marijuana extracts that contain cannabinoids are considered a Schedule I drug, TTB asked the Breweria to surrender the formula. The parties have since entered into negotiations as to next steps and the Breweria has agreed to (at least temporarily) stop producing the CBD-infused beer.
California newspapers have recently reported on in-state breweries and wineries that are making CBD-infused products. Given TTB’s treatment of Dad & Dudes Breweria, however, it is clear that the federal government believes that any such product requires a TTB-approved formula. Moreover, given recent statements by the U.S. Attorney General, it seems unlikely that the current administration would permit TTB to grant formulas for the production of a product that involves the infusion of a Schedule I drug. Producers engaged in making CBD-infused alcohol products absent a formula may be putting their federal licensing at risk until such time, at least, as the DEA changes its mind about the classification of marijuana extracts.
We reported on Oregon Liquor Control Commission’s guidance on marijuana-infused alcohol earlier this year. For more information regarding alcohol beverage production and ABC/TTB issues, please contact John Trinidad at firstname.lastname@example.org.
Recent Uptick in Tied House Enforcement Actions by State and Federal Agencies
Clients often ask us about enforcement of the various alcohol beverage regulations and tied house laws that apply to industry members. “Tied-house” laws generally prohibit supplier-side licensees (including producers and wholesalers) from giving, directly or indirectly, any premium, gift, or “thing of value” to retail licensees, unless a specific exception applies.
Over the past year, we have seen an increase in enforcement actions by the California Department of Alcoholic Beverage Control (“ABC”) and the federal Alcohol and Tobacco Tax and Trade Bureau (“TTB”) in connection with state and federal tied house laws. These actions serve as important reminders that the agencies are both monitoring the activities of industry members and taking action to ensure that the rules and regulations are complied with.
Last month, ABC announced a $400,000 settlement with Anheuser-Busch, LLC wholesalers for the wholesaler’s engagement in marketing practices prohibited under California’s tied house laws. Approximately 34 retail licensees were also sanctioned. The settlement and related sanctions arise from an investigation by ABC’s Trade Enforcement Unit that found that the wholesaler paid for, or at least partially financed, refrigeration units, television sets and draught systems on behalf of various Southern California retailers. ABC’s settlement with Anheuser-Busch, LLC is the largest monetary penalty in ABC history.
As we highlighted in a blog post last year, TTB has issued guidance regarding the extent to which “category management” practices by wholesalers are permissible under federal tied house laws. In that ruling, TTB stated unequivocally that any “category management” services provided by wholesalers to retailers beyond the development of a shelf plan or schematic constitute tied house violations if the services result in the exclusion of competitor products. While this ruling was not surprising considering the language of the regulation that allows wholesalers to provide retailers with shelf plans, suppliers and retailers had long been engaging in practices aimed at optimizing the promotion of a particular “category” of products for years that exceeded the scope of this regulation. Read more about TTB’s ruling here.
We have also seen an increase in ABC’s investigation of supplier-side events occurring at retail premises.
Considering this increase in focus and enforcement of trade practice issues by both ABC and TTB, supplier-side licensees should seek legal counsel prior to planning events at retail premises or engaging in any other marketing activities that involve a retail licensee.
Cannabis Wine? Not so fast, says Oregon Liquor Control Commission
With the legalization of marijuana spreading across major wine producing states, including Washington, Oregon and (most recently) California, many believed that it was only a matter of time before licensed cannabis retailers would stock their shelves with marijuana-infused wines.
But earlier this month, the Oregon agency in charge of regulating the sale of alcohol and recreational marijuana in the state, the Oregon Liquor Control (OLCC), issued guidance that prohibits the sale of marijuana-infused alcohol beverage products. Under Oregon Rev. Statute 471.446(2), OLCC may “prohibit any licensee from selling, any brand of alcoholic liquor which in its judgment …contains injurious or adulterated ingredients.” OLCC concluded that any alcohol beverage that contains “marijuana or marijuana items” (including extracts) should be deemed adulterated and, therefore, prohibited the sale of such products. OLCC, however, created an exception for alcoholic beverages produced using industrial hemp (as that term is defined under ORS 571.300) so long as the U.S Alcohol and Tobacco Tax and Trade Bureau has issued a formula for that product and the product’s label complies with TTB requirements.
California may adopt a similar view of the sale of marijuana-infused alcohol beverage products. Under California law adopted pursuant to Prop 64, a licensed marijuana retailer will be the only entity that could sell products infused with marijuana for recreational use (such as marijuana-infused wine). However, in order to do so, that retailer would also have to hold an alcohol beverage retail license issued by the Department of Alcoholic Beverage Control, and laws adopted under Prop 64 specifically prohibit a party from holding both licenses. Thus, unless new rules are enacted that allow either an alcohol beverage retailer or a licensed marijuana retailer to sell marijuana infused alcoholic beverages, there is no legal sales outlet for such products in California.
There is also a serious question as to whether such products could be legally produced by a state licensed and federally bonded winery. Those concerns are entirely separate from, and in addition to, concerns as to whether the current administration will impede state-sponsored efforts to legalize adult-use marijuana.
In short, cannabis wine entrepreneurs should proceed cautiously.
Federal Rule Changes Make More Products Eligible for (Lower) Hard Cider Tax Rate
The start of the New Year brought federal tax relief to certain cider producers. The PATH Act of 2015 made various changes to the Internal Revenue Code, which took effect on January 1, 2017. Included in the changes was a modification of the definition of products eligible for the “hard cider” tax rate. Under the new rule, more hard cider products can qualify for this tax rate and enjoy a much lower rate per gallon than the rates that might otherwise apply.
In order to meet the “hard cider” definition and be eligible for the lower tax rate, the product in question must meet certain criteria related to carbonation, alcohol content and contents. The modified definition of “hard cider” under the PATH Act allows for an increased carbonation level (up to 0.64 grams of carbon dioxide/100 milliliters versus the previous 0.392 grams/100 milliliters), increased alcohol by volume (up to 8.5% versus the prevision limit of 7%) and the use of pear and pear concentrates, rather than just apple and apple concentrates. Similar to the previous definition, the product may not contain any fruit product or flavoring other than apple or pear.
If a hard cider product does not meet the foregoing criteria, it will be taxed as a wine, for which there are various classifications and corresponding tax rates. For example, a hard cider that contains more than 0.64 grams of carbon dioxide/100 milliliters is considered an effervescent wine and will be taxed as either a sparkling wine or artificially carbonated wine (depending on the source of the carbon dioxide). The producer would pay $3.40/wine gallon if the product is classified as “sparkling wine” or $3.30/wine gallon if the product is classified as an “artificially carbonated wine.” If, however, the product qualified as a “hard cider,” the applicable tax rate would be only $0.226/wine gallon.
On January 23, 2017, the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) published a temporary rule to implement these changes to the definition of “hard cider” under the Internal Revenue Code. TTB is also imposing a new labeling requirement which requires the statement “Tax Class 5041(b)(6)” on any container of wine for which the hard cider tax is claimed. TTB is providing a one year grace period for this rule, but products removed after January 1, 2018 must include the statement “Tax Class 5041(b)(6)” in conjunction with the designation of the product as “hard cider.” This statement may appear anywhere on the label.
TTB is currently soliciting comments on the temporary rule within Docket No. TTB– 2016–0014 on the regulations.gov website. If you have any questions about this modified definition of “hard cider” and the potential tax benefits for your business, please contact Katy Stambaugh via email or (707) 261-700.
Taking Advantage of the New Law Allowing Service of Beer and Wine by Salons & Barbershops
As of January 1, 2017, California beauty salons and barber shops in good standing with the State Board of Barbering and Cosmetology are permitted to serve their customers, where local zoning permits, no more than 12 ounces of beer or 6 ounces of wine by the glass for no charge.
Many of our winery, brewery and retail clients have asked whether they are permitted to sell wines and beer directly to salons and barber shops under this new rule. Because salons and barber shops do not hold alcohol beverage licenses, they are treated like consumers under the California ABC Act and are only permitted to purchase wine and beer directly from persons who can legally sell to consumers, such as licensed retailers or licensees with retail privileges.
Licensed wineries and breweries in California luckily do have retail privileges, and thus they have the right to sell their products directly to consumers in California. As such, they can sell wine and beer directly to salons and barbershops in the state, just as they would to a consumer. Similarly, retail licensees with off-sale privileges may sell wine and beer to qualified salons or barbershops. Note, however, that licensees holding a type 17/20 license combination may only sell wine (and not beer) to consumers, including salons and barbershops.
For all such sales to salons and barbershops, licensees must ensure that they charge and collect sales tax and report such sales and taxes to the California State Board of Equalization.
For any questions, please contact Bahaneh Hobel.
Supporting Non-Profits through Cause-Related Marketing
The start of 2017 has seen an outpouring of support from the business community for non-profit groups, including marketing campaigns that promise a certain percentage of sales or profits will be donated to particular charities. Such practices are often referred to as “cause-related marketing.” Here’s an example: ABC Winery wants to support a national nonprofit organization, and decides to launch a marketing campaign saying that 50% of profits will be donated to that cause.
While ABC Winery should be applauded for their efforts, they will also need to comply with state laws and regulations aimed at protecting consumers, promote transparency, and ensuring that charities are indeed receiving the funds that are being promised in the cause-related marketing campaign. These laws vary state by state, but typically include reporting, contracting, disclosure, and/or registration requirements for the commercial entity promising to donate a portion of sales (a “commercial co-venturer”).
In California, a commercial co-venturer must (a) have a written contract with a charity prior to making any cause marketing representation, (b) transfer any funds received as a result of the representations every 90 days, and (c) provide a written accounting to the charitable organization sufficient to determine that any cause-related representations made by the co-venturer have been “adhered to accurately and completely” and said accounting must also be sufficient for the charity to prepare its periodic charitable solicitations reports filed with the California Attorney General. Alternatively, if the co-venturer decides not to follow these steps, it must register annually with the California Attorney General’s office, pay an annual fee, and submit annual reports.
In addition, cause-related marketing claims are considered “sales solicitations for charitable purposes” under California law, and are subject to the disclosure requirements under Cal. Bus & Prof. Code Sec. 17510 et. seq. This law requires disclosure of the following information:
- Name and address of the combined campaign, each organization, or fund on behalf of which all or any part of the money collected will be utilized for charitable purposes;
- If there is no organization or fund, the manner in which the money collected will be utilized for charitable purposes;
- The non-tax-exempt status of the organization or fund, if the organization or fund for which the money or funds are being solicited does not have a charitable tax exemption under both federal and state law; and
- The percentage of the total gift or purchase price which may be deducted as a charitable contribution under both federal and state law.
If sales and marketing efforts are made outside of California, then those state laws and regulations regarding cause-based marketing may also apply.