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Al Czervik

Federal Excise Tax Refund for Destroyed Product

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Hello everyone, I'm new here. Hoping you can help with a quick question about getting either credit or a refund for federal excise taxes.

We are a licensed DSP. We made a batch of product and transferred it to our distributor...which, naturally, triggered a federal excise tax event as the liquid left our bonded facility. We paid those taxes.

Some months later we decided to have the distributor destroy what was left of that batch of product (we weren't happy with the quality for various reasons). I have an affidavit of destruction from the distributor for the disposal of same.

Can anyone help me understand the procedure for getting credit for the federal excise taxes we've already paid on that now destroyed product? Are we even entitled to credit for those taxes?

Thanks everyone, there is a wealth of information here and I hope I can contribute as our company grows!

 

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My understanding is that the spirits must be returned to bond prior to destruction in order to claim a credit on the federal excise taxes. There are some companies who offer to bring it onto their bonded premises for destruction and pay you a portion of the credit, so you don't necessarily have to destroy it yourself. However, I do not believe you can claim a refund on federal excise taxes for product that was destroyed by the distributor. State tax issues may vary.

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Well, that's disappointing. We may have to eat these taxes unless anyone else knows a workaround.

Thanks again...

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56 minutes ago, Al Czervik said:

unless anyone else knows a workaround

@dhdunbar is who you want to hear from.  Hopefully he will respond.  He is retired from ATF and began consulting for DSP's in 2012.

 

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Thanks Thatch...

This isn't time critical, hopefully @dhdunbar will chime in if he has time at some point.

 

Cheers

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I'm busy but, quickly put, the regulations make no provisions for filing a claim for refund of spiritsz that are not in bond at the time of their destruction.  You might think you had to read through all provisions to find this, but the law makes it clear.

 26 USC  5008(a)(1)(B) provides that no tax shall be collected in respect of distilled spirits lost or destroyed while in bond. "  It goes on to provide that tax shall be collected in the case of voluntary destruction, unless such destruction is carried out as provided in subsection, which provides that you can distill spirits ion bond, but only under such regulations as TTB masy establish.  Note that you can remove spirits from the bonded premises for  destruction, but only if the surety consents to being liable for the tax if you don't destroy them.  The spirits, that is, remain in bond.  Spirits that you have taxpaid are not in bond.  To destroy them without need to pay tax you must return them to bond, file a claim to get a refund of the taxes previously paid, based on returning them for an authorized reason, in this case for destruction, and then destroying them in the manner permitted by part 19.  It is the way the law is written.  It is not a decision TTB has made.  It's got to follow the law too.

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On 7/12/2019 at 2:34 PM, TexCF said:

My understanding is that the spirits must be returned to bond prior to destruction in order to claim a credit on the federal excise taxes. There are some companies who offer to bring it onto their bonded premises for destruction and pay you a portion of the credit, so you don't necessarily have to destroy it yourself. However, I do not believe you can claim a refund on federal excise taxes for product that was destroyed by the distributor. State tax issues may vary.

Okay, this raises a secondary question I could not get a good answer out of CFR or direct query to TTB: how do you get credit for taxes paid when product is returned to bond? Simple case: product sent to a distributor, tax paid, then product returned from distributor?

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2 minutes ago, bluestar said:

Okay, this raises a secondary question I could not get a good answer out of CFR or direct query to TTB: how do you get credit for taxes paid when product is returned to bond? Simple case: product sent to a distributor, tax paid, then product returned from distributor?

You write a brief explanation on Schedule B of your excise tax return form (5000.24), along with the amount of tax you're claiming a credit on.

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6 minutes ago, TexCF said:

You write a brief explanation on Schedule B of your excise tax return form (5000.24), along with the amount of tax you're claiming a credit on.

Wait a second, I thought you meant after you've destroyed them.

You cannot take back taxpaid spirits and return them to normal inventory. They cannot remain on the premises and must be physically separated from untaxpaid spirits. If you bring them back in, keep them segregated and ship them right back out. You're only supposed to return taxpaid spirits to your premises for one of the following activities: destruction, denaturation, redistillation, reconditioning, or rebottling.

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TexCF has it pegged.  The citation for allowable returns is §19.452, which lists the reasons you can return something to bond..  :The reasons  do not include accepting product back with the intent of removing it again to another customer without first redistilling,, reconditioning or rebottling the spirits,

When you make a return for a purpose authorized by §19.452, you may, bjut need not, file a claim for refund of the taxes you had paid 19.452(c).

Once the spirits are returned to bond, you treat them in the same manner as any spirits held on the boned premises, i.e., you must withdraw them on determination of tax unless you withdraw them as authorized without payment of tax or free of tax.   19.452(d).  So if you don't file a claim, you will pay taxes twice.

If you file a claim, you do so under 19.264. You must file that claim within six months of the return to bond.

You may file either for a credit or a refund.  You must wait for the refund, but you may not anticipate a credit.  You may not take it on your tax return until TTB approves the claim (19.266).

You take the credit on the next return you file after TTB approves the claim.  You annotate the adjustment decreasing taxes as required by 19.267.

Note that you can return spirits to the bonded premises for relabelling or reclosing (19.453).   If you do that, you do not make a claim.  You do not return them to bond.  No tax is due on the subsequent removal.  You must relabel or close immediately and promptly remove from the bonded premises.  The rules at 19.363 apply and you must keep the record required by 19.604.  also, you must make a record of the disposition of the spirits after you remove them.  It should not be an invoice out of the sequence you are using as your record of tax determination.  If you do not know what I'm talking about here, see 19.611 and 19.622.  This is already getting too long.  

Also note  that you can find all of this information for yourself by first looking at the rules for returns to bond in the table of contents of part 19,  then following that to where it leads,. The sections are usually linked.  When you move from one section to the next, look at other sections in the immediate vicinity of both.  A word copy of the regulations works wonders when used with "find" functions.

 

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Okay, can I try a short summary? If you are receiving returned spirits from a distributor, the products are NOT returned to bond, should be stored outside of the bonded premises, should be tracked separately from bonded packaged spirits, and then invoice back out when sold again without reporting as removed from bond, since they already have been removed from bond. And, proper invoicing and records must still be maintained.

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