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.
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.