As your business continues to grow, you may find that your brewery has excess brewing capacity and begin to ask yourself how you can best fill those openings on your brew schedule and get more beer into the tanks. Or you may be seeking to increase your production on a seasonal basis by asking another local brewer to brew beer for you.
The Federal Tax and Trade Bureau (TTB) has two similar, but different, options available to brewery owners to help offset excess capacity and provide additional barrelage to other brewers or industry members that may not be ready to invest further in their own facilities.
The TTB classifies brewing for someone else into two categories: A “contract brewing arrangement” and an “alternating brewery proprietorship.” The TTB has distinguished between these two situations in in TTB Industry Circular 2005-2 excerpted below:
- A contract brewing arrangement is a business relationship in which one person, such as a wholesale or retail dealer or a brewer, pays a brewing company, the “contract brewer,” to produce beer for him or her. The contract brewer is entirely responsible for producing the beer, keeping appropriate brewery records, labeling the beer with its name and address, obtaining necessary certificates of label approval (COLAs), and paying tax at the appropriate rate upon removal of the beer from the brewery. The contract brewer retains title to the beer at least until the beer is taxpaid or removed from the brewery. TTB considers contract brewing arrangements to be ordinary commercial arrangements.
- An “alternating proprietorship” is a term [the TTB uses] to describe an arrangement in which two or more people take turns using the physical premises of a brewery. Generally, the proprietor of an existing brewery, the “host brewer,” agrees to rent space and equipment to a new “tenant brewer.” The tenant qualifies as a brewer under part 25 by filing the appropriate documents with TTB. The tenant produces beer, keeps appropriate brewery records, labels the beer with its own name and address, obtains the necessary COLAs, and pays tax at the appropriate rate upon removal of its beer from the brewery. The tenant brewer has title to the beer at all stages of the brewing process.
Both options have a number of tax, licensing, labeling and contractual implications that should be thought through before deciding which option is best for your situation. For example, under a contract brewing arrangement, the amount of beer produced at your brewery goes towards the 60,000 barrels taxed at the current $3.50 per barrel. If your brewery is worried about crossing that threshold, it might be wise to look closer at an alternating proprietorship.
In addition to the Federal regulations, many states have their own set of laws surrounding alternating proprietorships and contract brewing arrangements. In Maine, for example, a host brewer is only allowed to have up to nine (9) tenant brewers at their facility and the tenant brewer cannot sell their product in the host brewer’s tasting room.
Regardless of which option you choose, any agreement should be in writing to ensure that you are protected to the greatest extent possible.
The Perkins Thompson Craft Beverage practice specialty is comprised of attorneys who have significant experience in drafting and negotiating both of these types of agreements and have a deep understanding of the pros and cons of each. If you would like more information about Contract Brewing Arrangements or Alternating Brewery Proprietorships, please email Brandon Mazer or call him at 207-774-2635.