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Happy 11/11 everyone!!!

     It has been a little while since I have posted anything new here on the forums and I thank you all for that based on the fact that ADI members have been keeping me VERY busy with insurance and bonding needs.  Speaking of bonds, what a segue into the hot topic of the day.  On 11/7/17 the TTB released new information in regards to the "Information for Alcohol Excise Taxpayers and Applicants for Permits and Brewers’ Notices Regarding Internal Revenue Code Amendments Affecting Excise Tax Due Dates and Bond Requirements".  Specifically they cite the "Protecting Americans from Tax Hikes Act of 2015 (“the PATH Act”) (Public Law 114-113). Section 332 of the PATH Act amends the Internal Revenue Code of 1986 (IRC) to change excise tax due dates and remove bond requirements for certain eligible taxpayers (see 26 U.S.C. 5061 and 5551)."  Are you sleeping yet?  Still with me?????  OK ............

     This bulletin they released specifies new "Excise Tax Due Dates" that basically say that if you were not liable for more than $50,000 of taxable liability for the calendar year prior, and you don't think you will be above that amount this year, then you can pay your taxes on a quarterly basis beginning 1/1/17.  That's cool.  It also says that if you reasonably (can someone define what that may mean?? "reasonably" according to who???) expect to not be liable for more than $1,000 in taxes this year as well as in the prior year, you can now pay those taxes annually rather than quarterly.  No offense here, but if you have less than $1,000 in taxable liability as a distiller, you have to be quite small as that is only about 463 bottles a year, or in other words, just under 40 bottles a month.

     Ok, on to the "beefier" subject of this information and what you are really wanting to know; who is exempt and no longer needs this pesky bond stuff anyway!??!!?!?  Well, staring as of 1/1/17 it says, " ..... taxpayers who pay taxes annually (so anyone paying less than $1,000 a year, my words here, not theirs) or quarterly (so those folks doing less than an $50,000 a year in taxable liability) will be exempt from the requirements to file bonds covering operations or withdrawals of distilled spirits or wines for nonindustrial use, or beer."  Based on the fact that taxable liability only comes into play when spirits are withdrawn (yes, in some cases destroyed, but lets not focus on the negative here people) for distribution/sale (not a transfer in bond, I know my stuff), then as long as you will have less than $50,000 in taxable liability you are good to go without a bond.  So is this as clear as mud yet!?!?!?!

     Basically what is being said here is that if you are going to have less than $50,000 in taxable liability this year (and you had less than that last year) you do not have to have a bond any longer.  "BONDS!??! WE DON'T NEED NO STINKING BONDS!!!!!!!!!!"  WooHoo, right!?!?!?  Well ................... not so fast there speedy.  There are a few things to consider before making the call to your agent and telling them to cancel that money sucking bond (actually, my bonds are the lowest in the country so they are not "money sucking" at all).

    First off, are you close to that bond limit of $50,000?  If you are close, or expect to be "reasonably" (hahahaha) close, you may want to leave it in place, just in case.  You do not want to cancel the bond only to have to turn around a few months or a few quarters later because you have increased your sales/distribution which equates to withdrawal, and now need to be bonded again.  Another aspect to consider is this, when does your bond term come due?  I have a lot of folks who will fit the requirements to cancel their bond, however their bond terms renew in November or December.  According to the stipulations, they need to renew and keep their bond up until 1/1/17, so they MUST renew it.  Here is another caveat to that, depending on the surety carrier that issues the bond, the premium may be pro-rated (you can get money back for the unused portion of the term once you cancel) but they may keep a minimum of $100 service fee ............ or ............. if the premium is 100% full earned, you may not get anything back.  Well, why cancel the bond at that point?!?!?!  

     The other issue is that the TTB will not allow you to cancel the bond until all unpaid taxes are rectified from 2016.  Once they are you can file for a bond exemption with the TTB through the PONL system but they never specify how long that process will take.  So here again is something to watch out for.  What if your bond term is after the 1/1/17 date and you file for the exemption but it takes them 6 months (for whatever reason) to process it.  Do you need to renew your bond while this is in process?  At this point in time I would suggest that you do renew it since you do not want to be out of compliance during the processing time.  See, this is not as simplistic as it is made to sound.  Obviously, these scenarios are all in regards to existing DSP proprietors.

     So what about new applicants.  Well, for new applicants, since the current processing time for a permit is over 200 days, you should be able to apply for your permit and ask for the exemption during the permitting process.  That part actually does sound simplistic and appears to be pretty straightforward.  There is a first time for everything!!!

     So what does this all mean, in real facts and figures and how do you know if you will be below the magical $50,000 mark?  Well here is a quick mathematical computation for you (keep in mind these numbers are rounded for simplistic purposes):

Current excise tax liability = $13.50 per proof gallon (proof gallon defined as 50% ABV or 100 proof)
Taxes are only due when spirits leave the plant, so anything in holding/process does not count against this amount
Most spirits go out the door at 80 proof, so the tax rate then would be $13.50 x .8 = $10.80 per gallon (since it is proofed down)
Therefore, $50,000 / $10.80 = 4,629 gallons a year or roughly 23,000 bottles of booze, or nearly 2,000 bottles a month

     Here are pretty much the same numbers but done in actual proof gallons (not rounded):

$50,000/$13.50 = 3,703.7 p.g.
One case of 12-750’s at 80 proof = 1.902 p.g. per case
3703.7 p.g./1.902 p.g = 1,947 cases or 23,364 bottles per year  (cases rounded down to full case)
1947/12 = 162.25 cases per month
23,364/12 = 1947 bottles per month

     So there you have it folks.  A long run for a short slide as it were.  The just of all of this is that some of you may not need a bond if you are just getting going and some of you may not need a bond even if you are operating, however make sure you understand where you stand and when the bond term comes due before cancelling you bond.  As always, if you have any questions please feel free to reach out to me with any questions.  I can be reached here on the forums, via email at aaron.linden@hubinternational.com , or give me a call or shoot me a text at 307-752-5961.  I am always more than happy to assist you with your bonding questions and do keep in mind ***** I OFFER A FULL LINE OF ALL DISTILLERY INSURANCE NEEDS, AS WELL, I HAVE THE BEST RATES IN THE COUNTRY. *****  Just sayin'.

 

Best,

Aaron
 

 

     

 

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Thank you SeanC.  I try to put things into plain English and take the mystery out of all of this.  I have had a lot of calls and emails in regards to this and as of posting this reply I still have not been able to get an estimated time of approval of exemption from the TTB.  

 

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On 1/4/2017 TTB published the regulations, along with a lengthy explanation of what they mean, which really helps if you know how TTB uses words, etc.  The English is pretty plain, but I'd like to call your attention to a couple of points.

First, I'd be derelict in my duties as a consultant if I didn't underline the fact that you can't just drop your bond.  You have to apply for a waiver and when TTB approves the waiver, you get to drop the bond.   Given TTB's published statistics, I'd estimate that 20,000 or so persons who hold permits (wineries, breweries, and DSP's) are going to be eligible for the bond exemption.  TTB was already short handed and the administration has put a freeze on hiring, so, someone has to wade through all of those applications, to determine if you are eligible, which includes, TTB says, determining if you are "current" with your reports and returns.  

TTB has not said, as far as I know, what it means by"current."  Does it mean you filed when last required, or that you have filed all of them for the past year, or two years, or ...  

Do not expect miracles to happen.  Budget limits severely restrain what any agency can do to take the actions that congress mandates.  States complain about congress' federally unfunded mandates, but the federal government is bursting with them too.   Federal agencies cannot complain about congress, or in the case of hiring freezes, the administration, but that is where the fault lies.  Okay, end of politics.

Next, if you engage in operations in industrial alcohol, or plan to do so, you are going to have to have both withdrawal and operating bonds in place to engage in those operations.     The exemption applies only to beverage alcohol.  The principal will be determined by the quantities of industrial alcohol, for which you must account.  Further, you have to designate the alcohol as beverage (TTB uses the term nonindustrial) or industrial at the time you make your production gauge.  Apparently, you can't just decide that 43 cases of organic vodka you hold in the processing account is going to convert to industrial alcohol for use by the business down the street in making vanilla extract.

Next, the exemption applies only to those who have taxable removals.  I repeat, you are not eligible for the exemption from the operational bond unless you pay some tax on removals during the calendar year.

This may catch a few of you who have established warehouses for barrel storage, if you did so under a separate DSP registration and permit. If you do not pay some tax, however small, for withdrawals from the storage warehouse location, you do not qualify for the exemption at that location.  I know this reads like a Catch-22, but it follows directly from the way in which congress worded the exemption in the law.  Unfortunately, the catch seems to have eluded those who built the permits on line database, since to claim eligibility for the withdrawal, you simple state that you are "not required to furnish a bond because my tax liability will not exceed $50,00 this calendar year and/or I will not be removing spirits for industrial use."  That statement is misleading because:

1. The "I don't need a bond" option does not include the conditon," This year I will pay some excise tax on distilled spirits withdrawn taxdetermined."

2. The "and/or" construction seems to say that you are not required to have a bond for tax liabilities over $50,000 if you are not removing spirits for industrial purposes.  

3. The statement links the bond to your tax liability.  The law does not mention tax liability.  You are not required to have a bond if the taxes you "pay" during the year exceed $50,000.

4.  And to be very picky about the sloppiness of the statement, you are actual liable for the tax on all of the spirits that you have in your possession on which someone has not paid taxes.  See Sec. 19.222, "Under 26 U.S.C. 5005, the distiller of spirits is liable for the tax and each proprietor or possessor of, and person in any manner interested in the use of, any still, distilling apparatus, or distillery, shall be jointly and severally liable for the tax on  distilled spirits produced.

Moving along, you do not lose the exemption if you have no removals for a quarter; you do lose it if you have no removals for the year.  How TTB will handle this in practice remains to be seen.  The obvious instance in which this could become a problem is when someone who qualifies as a DSP, does not get a bond, but does not begin operations right away, or elects to produce whiskey, which the person then ages for two years without making a removal.  The solution, in theory, is simple - withdraw, on determination of tax, as little as one proof gallon from the DSP.  You could, for example, bottle one case of spirits from a barrel that has aged less then two years and withdraw that single case tax determined.  But you have to know how to play the game before you find you have lost the exemption.  I know from experience with wineries that neglected to produce any wine during the year, thereby losing the right to claim the small producers' credit, that backdating has not been allowed.  

I've not seen changes to the records requirements, but I will assume that eventually someone is going to say you have to track the industrial and beverage alcohol separately.

I plan to write TTB to confirm what I have said.  I consistently advise that you take with a grain of salt any advice that does not provide a source where you can verify what is said.  The source for my statements here is the Treasury Decision announcing the change to the regulations, which you can read for yourselves at https://www.gpo.gov/fdsys/pkg/FR-2017-01-04/pdf/2016-31417.pdf.

 

 

 

 

 

 

 

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