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DEPARTMENT OF THE TREASURY |
Industry CircularNumber: 2008-4Date: August 18, 2008 |
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Alternating Proprietors at Bonded Wine Premises To: Wine Premises Proprietors and Other Concerned Parties This Industry Circular supersedes TTB Industry Circular 2003–7. This circular:
REASON FOR ISSUANCE We are issuing this circular to remind alternating proprietors of the regulatory requirements covering qualification and operation of alternating proprietors on winery premises. We want to ensure that alternating proprietors on winery premises fully understand TTB's requirements for appropriate independence and segregation of operations regarding alternating proprietors. Failure to abide by these requirements creates delays in the examination of applications at the National Revenue Center (NRC) and in the field and, in ongoing wine operations, may result in adverse findings by the NRC or the field. Most often these failures relate to certain aspects of alternating winery operations. Examples of such problems include the use of permits by persons who are not engaged in the business of producing wine, underpayment of tax due to misuse of the small domestic wine producer tax credit, and mislabeling of wine. In this circular, we provide guidance regarding the standards TTB applies for the establishment and continuing operation of alternating winery proprietors. BACKGROUND Section 7805 and Chapter 51 of the Internal Revenue Code of 1986 (26 U.S.C.) (the IRC) authorize the Secretary of the Treasury (the Secretary) to promulgate regulations and administer the tax and qualification requirements for producing wine, including the qualification requirements for the small domestic wine producer tax credit. Sections 103 through 106 and section 117 of the Federal Alcohol Administration Act (the FAA Act), 27 U.S.C. 203 – 206 and 211, authorize the Secretary to carry out the provisions of the FAA Act with respect to qualification of wine producers, blenders, and wholesalers, and to labeling of wine. The Secretary has delegated to TTB the authority to administer these rules. TTB regulations in 27 CFR parts 1 and 4 cover the wine permit and labeling requirements under the FAA Act, and TTB regulations in 27 CFR part 24 cover the registry, bonding, production, removal, tax payment and tax credit requirements for wine under the IRC. In these regulations, TTB sets out qualification requirements, including those for qualifying alternating proprietors. In this circular, “we” and “us” refer to TTB. 1. ALTERNATING PROPRIETOR ARRANGEMENTS An alternating proprietor arrangement consists of two or more persons or entities taking turns using the same space and equipment to produce wine. In almost all situations, an existing proprietor-owner of a bonded wine premises agrees to rent space and equipment to a new proprietor. Such an agreement allows existing wineries to use excess capacity and gives new entrants to the wine business an opportunity to begin on a small scale without investing in equipment. The existing and new proprietors are sometimes informally referred to as “hosts” and “tenants,” respectively. In other situations, two or more persons make plans to establish independently operated bonded wine premises, mutually agreeing to alternate the use of space and equipment. In these latter arrangements, no proprietor functions as a “host” to the others because each has agreed to share responsibility more or less equally. The designation of one alternating proprietor as a “host” to the other(s) is not a TTB requirement and carries no responsibilities or privileges that differ from those of the other alternating proprietors. These arrangements must be formally approved by TTB through an application and approval process. Anyone making wine for sale must qualify with us as proprietor of a bonded winery and register the premises with TTB. Winery premises may not be used by or shared with any other party unless the necessary alternation applications have been approved by TTB. Regulations governing alternating proprietor arrangements are contained in 27 CFR 24.136. 2. “CUSTOM CRUSH” ARRANGEMENTS A “custom crush” arrangement involves an agreement or formal contract under which a customer pays a wine producer to produce wine to order, after which the customer markets the wine. It is not an alternating proprietor arrangement. In a custom crush arrangement, the wine producer is authorized by TTB to make wine and is entirely responsible for producing the wine and for all related processing steps and regulatory requirements, which may include tax payment (unless the wine is transferred in bond to other bonded wine premises for these activities). The customer has none of these responsibilities, even when the custom crush customer may be involved in business decisions made about the wine, such as its production style, the appearance of its label, etc. TTB holds the producer/bottler accountable, not the custom crush customer. Even if the customer owns the grapes used to produce the wine, TTB still treats the transfer of the finished wine from the producer to the customer as a sale of wine for compliance purposes. 3. DISTINCTIONS BETWEEN AN ALTERNATING PROPRIETOR ARRANGEMENT AND A CUSTOM CRUSH ARRANGEMENT a. Qualification, permit, and registry status. A winery proprietor cannot transfer or lend its qualification or premises to another person. Each alternating proprietor must qualify independently as a bonded winery under part 24 and obtain a Federal basic permit under part 1 as a wine producer to conduct operations at a specific location. In a custom crush arrangement, only the wine producer must register as a bonded winery under part 24 and obtain a Federal basic permit under part 1 as a wine producer. A customer who intends to market wine to other dealers must qualify as a wholesaler under part 1. b. Records and reports. In an alternating proprietor arrangement, each proprietor must comply with requirements in 27 CFR part 24, subpart O, by keeping records of its operations and by providing operational reports to TTB. In a custom crush arrangement, the wine producer and bottler are responsible for keeping required records of winery operations and providing operational reports of the winery activities. The customer must maintain records of receipt and disposition as a wholesaler under 27 CFR part 31. c. Certificate of Label Approval. In all instances, the wine bottler must obtain from TTB approval of an application for a Certificate of Label Approval (COLA) before bottling the wine. Thus, when an alternating proprietor arrangement includes alternating the use of bottling equipment, each alternating proprietor using the bottling equipment must obtain its own COLA(s) for the wine it will bottle. In a custom crush arrangement, the wine bottler obtains any necessary COLA from TTB. The customer never obtains the COLA from TTB, because the customer is not the bottler of the wine. d. Tax payment. The Federal wine excise tax is paid at the appropriate rate by the proprietor that removes the wine from bond for consumption or sale. The rate of tax is determined by the tax class of the wine removed. The tax may be reduced if the taxpayer is eligible for the small domestic wine producer tax credit. Each alternating proprietor must individually pay excise tax for wine removed from its premises, at the applicable rate for each proprietor, unless the wine is transferred in bond. On the other hand, in a custom crush arrangement, the customer for whom the wine is produced will receive the wine after the Federal tax has been paid. The customer may have arranged to compensate the taxpayer for tax and other expenses as part of the price paid for services pursuant to the custom crush agreement. e. Small domestic wine producer tax credit. This credit applies to proprietors who produce wine, but do not produce more than 250,000 gallons of wine per year. The full credit of 90 cents per gallon on the first 100,000 gallons removed is available to a proprietor who produces not more than 150,000 gallons of wine per year. For proprietors with production of more than 150,000 and not more than 250,000 gallons, the credit is gradually phased out. A group of wineries under common control (referred to as a "controlled group") are treated as a single winery for purposes of determining eligibility for the credit. In an alternating proprietor arrangement, each proprietor's tax credit is based on the volume of wine produced and removed in that calendar year by the proprietor. If an alternating proprietor is eligible for the small domestic wine producer tax credit, the credit can, in certain instances, be transferred to another bonded wine premises proprietor to use when the excise tax is paid on qualifying batches of wine. See 26 U.S.C. 5041(c)(6). In a custom crush arrangement, TTB takes into consideration the wine producer's entire production and removals, including wine produced for a customer. Wine that was produced and removed for a custom crush customer counts toward the wine producer's own production and removals when determining whether the small domestic wine producer tax credit can be used.
4. RELEVANT TERMS UNDER THIS INDUSTRY CIRCULAR Alternating Proprietor Agreement — The written agreement between alternating proprietors. Bonded Wine Premises — A facility registered under the IRC for the production, blending, cellar treatment, storage, bottling, or packing of untaxpaid wine. These include: Bonded Winery (Registry designation BW or BWN) — A bonded wine premises where wine is produced. The proprietor of these premises must also have a permit under the FAA Act to produce wine; and Bonded Wine Cellar (Registry designation BWC) — A bonded wine premises where untaxpaid wine operations other than production are conducted. Often, but not always, this is a storage warehouse for bulk and/or bottled wine. Bonded wine cellars are operated pursuant to approved IRC registry, but some bonded wine cellar proprietors obtain a permit under the FAA Act to blend, but not produce, wine, or a wholesale permit if the operations on the premises are limited to purchase and resale of wine without production or blending operations. 5. CONCERNS OF TTB While some applications from prospective alternating proprietors at bonded wine premises are filed by individuals with plans to make wine, we are concerned that other applications are filed for reasons unrelated to making wine. Filers of those other applications may seek to qualify as alternating proprietors in order to obtain benefits afforded to wine producers, such as Federal tax credits, or the ability to operate a tasting room under State rules. 6. POLICY We evaluate each application for bonded wine premises registry under an alternating proprietor arrangement. We also review the ongoing operations of previously approved alternating proprietors. We take these steps to ensure that the physical layout of the wine premises to be shared, the compliance and business history of each party, and the day to day operations do not, or will not, create difficulty in administration, jeopardy to the revenue, or deception of the consumer. If we find any of these problems, TTB will:
The TTB official authorized to approve applications for registry of wine premises, including those for alternating proprietor arrangements, is the Director, National Revenue Center (NRC). The Director, NRC, applies the requirements of 27 CFR 24.136 in evaluating applications to operate as alternating proprietors. For both proposed and existing operations, TTB uses the following guidelines to measure compliance with 27 CFR 24.136: a. Alternating proprietor agreements and the need for qualification. TTB reviews the need for a permit when we examine applications for and operations under winery qualifications. Such examination includes whether the arrangement is truly an alternating proprietorship or whether it is really a custom crush arrangement. Under 27 CFR 1.24(b), we may consider the applicant's business history and likelihood to commence operations in a reasonable period and maintain operations in conformity with Federal law as part of the qualification process; under 27 CFR 1.50, we are authorized to revoke a permit if the permittee has not engaged in operations for 2 years. The Director, NRC, may require a copy of the agreement or contract between the alternating proprietors, a business plan, or other information in support of each application for registry to operate as an alternating proprietor. TTB considers the business history of each applicant, his or her plans for development of future winery assets, and the level of commitment to the business as evidenced by investment in vineyards or other permanent assets. We examine each agreement or contract to assess the involvement of both parties in the wine operations, as well as the independence of each party. When we look at business history, we find in some cases that an applicant for registry as an alternating proprietor has been a custom crush customer of a winery. Other applicants may have purchased finished wine with custom labels from the winery. When a person with such a business history seeks to qualify as an alternating proprietor at the same premises where wine was being produced for that person on a custom crush or private label basis, TTB looks for actual or substantive changes in the arrangements between the wine producer and its former wholesale customer. If it is evident from our reading of the agreement or contract submitted that an alternating proprietor applicant plans to have most or all of its wine operations conducted by its former wine supplier, we may find that the applicant has no intention of conducting winery operations and is therefore not qualified for a permit under § 1.24(b). Other indications that one party to an alternation is not, in fact, involved in wine operations and may not qualify for a wine producer's permit include:
Although applicants making the arrangements described above may not qualify as wine producers, they may qualify for wholesale permits to market wine purchased from a producer or blender. b. Suitability of the premises for sharing; the importance of keeping the wines of each alternating proprietor segregated and identified. When two or more proprietors share premises, there is a potential for difficulty in separating and identifying one proprietor’s wine from that of another. TTB must be able to locate and identify cased goods, barrels, and tanks assigned to each alternating proprietor. The regulations covering alternating proprietors provide that "[a]ll operations in any area, building, floor, or room to be alternated will be completely finished and all wine, spirits, and other accountable materials will be removed from the alternated wine premises or transferred to the incoming proprietor. However, wine, spirits, and other accountable materials may be retained in locked tanks at wine premises to be alternated and remain in the custody of the outgoing proprietor" (27 CFR 24.136(b)). Further, TTB regulations for all wine premises authorize the appropriate TTB officer to require a proprietor to segregate operations "to the extent deemed necessary to prevent jeopardy to the revenue, to prevent confusion between operations," and for several other purposes (27 CFR 24.27). TTB will not approve plans which suggest that the floor space occupied by an alternating proprietor’s barrels or cased goods constitutes that proprietor’s premises. In some premises, signage or other marks may be considered sufficient separation of one proprietor’s wine from another’s, but in other premises TTB may determine that physical segregation such as fencing is necessary to protect the revenue. TTB will continue to make this determination on a case-by-case basis. Additionally, TTB may require more identification or separation of alternating areas in previously approved operations if we find that the daily practices do not provide adequate control and protection of the revenue. Untaxpaid wine of an alternating proprietor which cannot be stored in space specifically designated for that alternating proprietor must be taxpaid or transferred in bond to the bonded premises of another proprietor with sufficient storage space. The proprietor of the receiving premises is responsible for the recordkeeping and reporting of that wine while it is maintained on his/her premises. Proprietors should be aware of the potential label consequences of transferring wine in bond to another proprietor. For example, even if the wine remains in the same physical location, if the wine is transferred in bond to the custody of another proprietor, the producer would lose eligibility to label that wine with an "estate bottled" claim. See 27 CFR 4.26 for the rules on labeling an estate bottled wine. c. Employing the services of another proprietor’s staff: The agreement or contract between the alternating proprietors may include the option to hire the services of another proprietor's production and office employees. We will look to factors of authority and control to make a determination whether the proprietor is running an independent bonded wine premises operation. The proprietor employing the services of another proprietor’s workers must direct and be fully responsible for those things that are usual and customary for the production, bottling, and storage of wine (as applicable) and the managing of the business. The producing alternating proprietor must provide its contract employees with written direction in the form of work orders or similar documentation. Recordkeeping and reporting requirements under our regulations apply to the person who has physical custody of the wine, and are not based on who has title or legal ownership. We expect all proprietors to be able to access their winery records and to knowledgeably discuss those records with TTB officers. Relinquishing authority for the official records to a contract employee will be considered inadequate control. Alternating proprietors are reminded that when compliance violations or additional liability are determined, the proprietor employing the staff, and not the individual staff members, will be cited for violations or assessed for underpayment of tax. If a proprietor maintains its records solely in the computer system of another proprietor or is required to allow another proprietor to access its records, TTB would consider those practices to be indications that the proprietor is not operating as an independent alternating proprietor. d. Access to premises. The agreement must allow all proprietors to have reasonable access to their respective permanent premises and to their wine. For practical purposes, requiring an alternating proprietor to give notice when trucks will be on the premises, for example, is acceptable, but such requirements must not unduly hinder the operations of another proprietor or of TTB officers conducting investigations or audits. e. Changing the terms of an approved alternating proprietor arrangement. In addition to the qualification and tax issues discussed above, we wish to remind proprietors that alternating proprietor arrangements are conducted under an approved alternation plan that describes the areas to be used by each proprietor when that proprietor is active. The proprietors may not change the terms of the alternation plan before obtaining TTB approval of an amended application for each proprietor. f. Eligibility of alternating proprietors for small domestic wine producer tax credit. If alternating proprietors are independent small producers, they may be eligible for the small domestic wine producer tax credit. TTB will examine alternating proprietor arrangements to see if the proprietors are independent or if they should be considered members of a controlled group. In the latter case, all proprietors' production and removal amounts will be combined for the purpose of determining whether credit may be used by the group. If applicable, a single small domestic wine producer tax credit will be apportioned among all participants. Indications that alternating proprietors are not independent may include:
TTB will deny the credit if it benefits a large producer and will ensure proper reduction of the credit for persons producing more than 150,000 gallons of wine during a calendar year. g. Need for permanent premises. TTB will consider approving a plan in which an alternating proprietor suspends and then resumes operations. A proprietor who does not anticipate conducting wine operations for an extended period and wishes to make the entire bonded premises available for use by another proprietor may request such a suspension of operations. In this event, before suspending its bonded wine premises operations, the outgoing proprietor is required to transfer in bond to another qualified bonded wine premises, or taxably remove, all wine on the premises. Under 27 CFR 24.35, each alternating proprietor must maintain its own winery records and make them available for TTB examination at the bonded wine premises. However, under 27 CFR 24.22, a proprietor may request permission to maintain the records at a separate and permanent business office address (but not at another proprietor's premises), where TTB may contact the proprietor and review records during business hours. When an applicant expresses a need to use bonded wine premises only on a very infrequent basis, however, TTB will thoroughly examine his or her need for qualification as a producer, rather than as a wholesaler/custom crush customer of the proprietor producing the wine. h. Alternation for less than a day. The regulations covering alternating proprietors provide that “[o]peration of a bonded winery engaged in the production of wine by an alternate proprietor will be at least one calendar day in length” (27 CFR 24.136(a)). A winery engages in the production of wine by fermenting juice, ameliorating wine, adding wine spirits to wine, sweetening wine, producing effervescent wine, or producing formula wine. Receiving and crushing grapes are not production for purposes of winery qualification. Specific extensions and curtailments of premises, such as use of a bottling line by an alternating proprietor, may be for less than a calendar day, as long as the extensions and curtailments are part of the approved alternation plan. 7. CONCLUSION TTB recognizes that alternating proprietor arrangements may be undertaken for one or more valid reasons. We will continue to review proposed and existing alternating proprietor arrangements to ensure that the proprietors conduct independent operations and that those who take the small domestic wine producer tax credit are entitled to it. If we determine that a company is conducting alternating proprietor operations in a manner that is not independent, or in a manner that jeopardizes the revenue, or in a manner that results in mislabeling of wine, we will initiate corrective action, which could include, among other corrective action, revoking the alternation approval, revoking the basic permit, directing the proprietors to modify the premises, adjusting the taxes, or directing a proprietor to relabel wine. QUESTIONS: If you have questions concerning this circular, contact the Regulations and Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, 1310 G Street, NW, Washington, DC 20220.
John J. Manfreda
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