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Good Morning Dear Readers, In today’s installment of the “Tidbit”, I wanted to touch upon bonding since it has been something that many folks have asked me about recently. I know, I know, bonding for the most part for many of you has been a non-factor in the recent years … OR HAS IT!??!?!! Dun-duh-daaaaah!!!!!!!!!! I wrote a little posting here a while back about bonding and the fact that the Fed’s never really, clearly defined the new Federal Excise Tax’s (FET’s for those of us in “the know”) reduction, and whether or not you should carry a bond. At the time that they passed the “Tax Reform” bill, Congress only spoke about the removal (or withdrawal) of tax paid spirits. They did not address the potential need for a bond to be held on the stock that is aging, in process, bottled, or bulk spirits (we will just refer to all of these as “stored spirits” from this point forward). There was a bit of debate between forum-goers as to if the “stored spirits” could ever have a need for taxes to be paid in the case of theft, destruction, etc. Addressed in the Code of Federal Regulations (CFR’s); Title 27; Subchapter A; Part 19 – Distilled Spirits Plants; §19.262 General requirements for filing claims - §19.268 the reasoning, ability, and what may happen is discussed in case you feel like reading it … or if you need a nap. Anyway, there is a possibility that “stored sprits” could have the taxes called for by the Fed’s, in which case a bond would or could come in very handy. I will leave that up to you to decide. Really though, the heart of the matter and a question I get asked a lot is, “What is a surety bond for FET’s, do I need it, how does it work, and what about state bonding???!!?!” Well, InsuranceMan 2.0 is here to tell you. What is a surety bond? Well, basically a bond is a legal agreement between entities (in this case the distillery and the governing body) that guarantees that in the case of taxes needing to be paid, that they will be paid, either by the distillery (Indemnitee), or in the case that they cannot make the payment, the surety company (Indemnitor) is obligated to make the payment on behalf of the distillery. In short, if you don’t have the money to pay the taxes, the surety company will make the payment for you to get the government off your back. Sounds like a sweet deal, right? Not so quick! In the case that the indemnitor was to make a payment for you, yes, it satisfies the government by making them whole, but your obligation does not stop there. If the indemnitor has laid out money on your behalf, they are going to want to make up that loss somehow, and that now once again becomes your problem. A guy named “Guido” may show up to your door demanding payment, and “take your knees” if you can’t come up with the money. Actually, that probably isn’t going to happen … Probably. More likely, the surety company would ask you nicely for the money at first, but after that things could get icky. They may sue you over the lost funds, slap an injunction on you and your business (because you do sign the agreement as an individual and on behalf of your entity, if you have one) and make you liquidate assets until the loss is paid in full. Sounds kind of scary, huh? In reality, not really. If you think about this, when are most taxes due? When the product is withdrawn from you bonded premise. Generally that would mean, if you are removing product, chances are the reason is because they were sold, in which case that means that you have the money to pay the taxes on said withdrawn spirits. So really, the surety bond is just a formal agreement, a placeholder, to make the governmental body feel all warm and fuzzy and sleep better at night knowing that they are going to be paid no matter what. I personally have never seen a bond called on anyone that I work with, but I have heard of it in the case of loss/destroyed product (at which there may be a reduced rate on taxes due), or in the case that a distillery has become insolvent (again, thank goodness I have not had anyone with that issue). In any case, even though there is debate as to if you should carry a bond or not, a bond could be very nice to have should the unforeseen ever happen. Just an FYI, a Federal TTB DSP bond is broken into two parts, and this is what was never really addressed. There is the “Operations” side of the bond, and the “Withdrawal”. The operations side contemplates spirits that are “bulk, bottled, or in process”, so again, the “stored spirits”. This is the section that the Fed’s never spoke about or addressed in the tax reform. Then there is the “withdrawal” side that contemplates the taxes needing to be paid when the spirits are removed from you premises. This is the ONLY part that they concerned themselves with. Again, you can see how with this being the case, there may still be need for a bond at this time and place. Based on this recent tax reform, however, as illustrated, the Fed’s really are only concerned with the withdrawal side of things, and they lowered the taxes due from the historic $13.50 rate per proof gallon (100 proof, or 50% ABV) down to $2.70 per the same. A little aside here, the REAL tax rate for many was actually $10.80 since most product for many going out the door was 80 proof (or 40% ABV), which then made the tax rate $10.80 per proof gallon. Just wanted to share that little nerdy bit of knowledge with you. So, what the heck does this all mean?!?!?!? Well, it is too soon to say what Congress will do in the future, but the current FET reduction is due to sunset on December 31st, 2019. In the tax reform document, it states the following: PART IX—OTHER PROVISIONS Subpart A—Craft Beverage Modernization and Tax Reform SEC. 13801. PRODUCTION PERIOD FOR BEER, WINE, AND DISTILLED SPIRITS. (a) IN GENERAL.—Section 263A(f) is amended— (4) EXEMPTION FOR AGING PROCESS OF BEER, WINE, AND DISTILLED SPIRITS.— ‘(B) TERMINATION.—This paragraph shall not apply to interest costs paid or accrued after December 31, 2019. H. R. 1—123 SEC. 13807. REDUCED RATE OF EXCISE TAX ON CERTAIN DISTILLED SPIRITS. ‘(1) IN GENERAL.—In the case of a distilled spirits operation, the otherwise applicable tax rate under subsection (a)(1) shall be— (A) $2.70 per proof gallon on the first 100,000 proof gallons of distilled spirits, and (B) $13.34 per proof gallon on the first 22,130,000 of proof gallons of distilled spirits to which subparagraph (A) does not apply, which have been distilled or processed by such operation and removed during the calendar year for consumption or sale, or which have been imported by the importer into the United States during the calendar year. So again, what does this all mean?!?!?!! It means that currently we are enjoying a bit of a reprieve in regards to the amount of taxes that are to be paid on withdrawn spirits, which is super nice! It leaves more money in your pockets and that is always a good thing. It also means that come the end of this year it could all go away. Maybe it will be voted to remain the same, that would be awesome! Or, it could potentially even go up to or above the historic levels that it was at. Truth be told, we have no idea what is going to happen. One thing is for sure though, many, if not all states, require some type of surety bonding at a state level. Whether it is a “sales and use tax” bond, an “alcoholic beverage manufacturer” bond, or something else, there is probably still a bonding need for your distillery. I, InsuranceMan 2.0 am here to assist you. I can and have provided hundreds of bonds for distilleries across this great land, and I actually have the lowest bonding premiums of anyone in the country. So, if you have a bond and feel as though you are paying too much, or if you have a question about if you should get a bond or not, or if you are a new distillery and found out you do have a state bonding need, I am here to assist you. Maybe you are nearing that 100,000 gallons of withdrawn product and getting nervous as to when the right time to get a bond may be. Again, I am here to help. Give me a call, shoot me an email, text me, hit me up on a PM here on the forums, come see me at booth 434 in Denver in a few weeks, or send a smoke signal. Whatever you need, I am here to answer all of your deepest, darkest insurance and bonding questions. Until next time my friends … Stay Vigilant, Aaron Linden a.k.a. InsuranceMan 2.0 307-752-5961 Insuranceman2.0@yahoo.com

So this may sound like an odd question, but we received our federal permit, and have not received our State yet (Ohio). The state has been submitted, but still in process. So this the question: Can we make small batches for Research purposes without the intent to sell? If so, just pay the federal tax on it? Please let me know your thoughts if you have any ideas. Many thanks, Curt

I am in the (very) early stages of trying to setup a DSP in Maryland. However, I cannot seem to find an answer as to what can and cannot be a distillery. I found the federal law stating that the distillery cannot be attached to a residence. I have called everyone from the liquor board in Maryland to the zoning commission. All seem to point me to the other. Does anyone know of a resource to search commercial properties by manufacturing zoning (specifically in Maryland)? Thanks in advance for your time and help! I am really excited to be a part of this forum!

After much ado, we're in the process of getting our business going. LLC established, EIN, local zoning, building lease, still on order, bonding squared away... but now as I'm getting ready to start the big stuff - TTB paperwork, I'm not sure what order everything needs to be filed. It seems like a lot of the overviews completely gloss over building permitting and state liquor board registrations, and go straight to talking about Federal. In my mind it makes sense to go building permit, state application (I'm in Pennyslvania), and then TTB. But it doesn't look like TTB is looking for building permit documentation and if I can just send in a building diagram of our proposed layout, is that enough to get the federal work going while I get it submitted to the State? Or does the state need the Federal permitting information? I know there can be some overlap on things, but I can't seem to find any examples of how far you can push it. I don't want to trip myself up getting out of sequence. Anyone have some light to shed? Thanks!

Greetings ADI! Thanks for all your support and feedback with respect to our Marketing Myth Countdown series! This week, we're starting something new ... Some of you may recall that Fuel NW published a nationwide survey of distilled spirits drinkers earlier this year. We've compiled the results from all over the US and now we want to share some of the results with you! This week we talk about a definite theme that grew out of the survey responses -- i.e., how much "local" matters. Take a look at the blog here: http://www.fuelevents.net/#!fuel-blog/c22sz If you haven't seen the survey, it is still posted on our homepage -- feel free to take a look so you can get a feel for the questions -- www.fuelevents.net. We are happy to share detailed responses with our clients and will also summarize some of the most poignant findings in our blog over the next few weeks. Also, please check out this week's featured distilleries from 2 of the Final Four towns: Old Sugar Distillery from Madison, Wisconsin (Go Badgers!) and Barrel House Distilling Company from Lexington, Kentucky (Go Wildcats!) As always, feel free to contact us with any questions of if we can help you out in any way. Cheers, Jen & Erika Fuel NW jennifer@fuelevents.net www.fuelevents.net

Hi folks, Our newly-formalized Minnesota Distillers' Guild is headed back to the statehouse, trying again to get laws passed to allow bottle sales from distilleries and hospitality rooms/cocktail sales. We're trying to put together a compelling case about the economic and social impact of such legislation. Given the successful campaigns in other states, I'm guessing folks have put together such information for fact sheets and the like - overall impact of bottle sales from distilleries, how sales from craft distilleries affect liquor retailers, how cocktail service at craft distilleries affects restaurants and bars, etc. Does anyone have such information? If no, does anyone have any data on impact in their own individual state? Thanks much! Joel Vikre Vikre Distillery, Duluth, MN

Ok, I'm confused and seek wisdom. Where specifically does it say that I cannot have my manufacturing in one space and my tasting room and retail sales in another space across town? I am asking because I have seen this same set-up in two other distilleries and several wineries. I was under the impression that sales of bottles was only permitted in the same building where the product is made. Can anyone shed some light on this?