In a previous blog post, I have discussed the differences between a contract brewing agreement and an alternating proprietorship and how they may work for your brewery. Another related issue to contract brewing and alternating proprietorships is that of collaborations. A collaboration is where two breweries under different ownership work together to create a new product.
When the President signed into law the Tax Cuts and Jobs Act at the end of 2017, many in the brewing industry rejoiced at the reduced tax rate that was included. However, there was also a provision within the law that did not get as much attention which made it easier for brewers to transfer beer between breweries of different ownership, or so we thought.
On July 17, 2018 the Federal Tax and Trade Bureau (TTB) released TTB Procedure 2018-1 describing the process to transfer beer between breweries that are not under the same ownership. Prior to the law being enacted, a brewer could only transfer beer without the payment of tax (also known as transferring in bond) between commonly owned breweries (See 26 U.S. Code §5414).
Under the new law, brewers can transfer beer in bond between breweries that are not under the same ownership structure. The shipping brewer will need to prepare an invoice and both the shipping brewer and receiving brewer must keep a copy of the invoice in their respective brewery records. The receiving brewer will be responsible for the payment of taxes on the product.
Since these new transfer provisions are only temporary and set to expire on December 31, 2019, the TTB is not releasing new Brewery Report of Operation forms. Instead, the breweries will use the same lines on the form that are used to report transfers between breweries of the same ownership.
Although this new procedure will make it easier to transfer products between breweries, it is not without its downside. Under most circumstances, any beer transferred between the two breweries would not qualify for the reduced excise tax rate ($3.50 per barrel on the first 60,000 barrels for breweries that do not produce more than 2,000,000 barrels per calendar year) and would have to pay the full $18.00 per barrel. This additional cost could outweigh the benefit of being able to transfer products.
Finally, all products transferred, whether in bulk or packaged, will still need to meet all of the labeling requirements set forth under the regulations.
It is still unclear at this point how individual states will enforce such transfers.
The Perkins Thompson Craft Beverage practice specialty is comprised of attorneys who have significant experience in the craft beverage industry and have a deep understanding of the legal issues faced by breweries, wineries and distilleries. If you would like more information about transferring product between breweries or assistance with labeling, please email Brandon Mazer or call him at 207-774-2635.