PATH Act and Lower FET rates

[InsuranceMan]

Good Day ADI Forum Members,

     I wanted to do a post today in regards to the new regulations that have taken effect in regards to the PATH Act and the new lower FET rates that have been implemented and how that may affect your need for a bond.  This seems to be a hot topic currently so I thought I would address a few issues here.

     As you all are aware, the PATH Act and the lower FET rates have kicked into effect for the next two years, and there are many of you that are super excited to cancel or terminate your current DSP bond.  Well, let’s just hold on a second and think about what these new changes really mean.  

     In the PATH Act, it was determined that any distillery that has less than $50,000 worth of taxable withdrawal in a year’s time no longer is subject to a bond requirement.  Then, the new legislation has gone ahead and lowered the FET from $13.50 per proof gallon down to $2.70.  That is wonderful, and a boon for distilleries that will allow for growth, capital investment, the hiring of staff, etc. Both the PATH Act and the reduction of the FET’s are fantastic ………………  HOWEVER …………..

     The only item that was really contemplated in the PATH Act was the "Withdrawal" amount; the act never specifically said anything about the operations side of the bond.  The operations side of the bond is comprised of the "Distiller / Warehouseman / Processor" portion.  This portion of the bond covers for items that you have on hand that is either bottled, in process, being held in totes, or aging/maturing on site.  In fact, ALL distilleries still have this exposure being that everyone has product on site in one fashion or another, and many of you have a considerable amount of product warehoused at your facilities.  

     Think about this, if for some reason your product on hand were to be lost, stolen, or hijacked the government could still charge the full amount of taxation that would have been due.  Yes, the Federal Government reserves the right to still collect the taxation that WOULD have been collected on that product!  Sure, there is a repeal process that you could potentially go through to have the taxation abated or forgiven, but there is no guarantee that the TTB would waive these charges, it is done on a case by case basis.  In some instances, the taxes may be due upfront until the repeal process can go through the proper channels, and that process can take a while.  Although these situations are rare, they can happen.  It is also rare for distilleries to blow up or burn to the ground, but that does not mean that you should not carry insurance.  For this reason alone, it may be beneficial to keep your bond in place.

 
     If a situation such as this were to occur, and you have cancelled your bond, you would have to come up with the cash to pay for the taxation of the lost product.  That could certainly become an issue and cause a lot of heartburn in an already stressful situation.  In most cases your federal TTB bond should not be costing you more than a few hundred dollars a year, and that is fairly cheap for your piece of mind.  As well, the reduced FET’s are only certain for 2018 and 2019, after that, who knows.  It could be determined that the rate will go back to $13.50 or even higher, we don’t know, maybe they will leave it alone forever, God willing.  

     Another potential reason to keep an active bond may be that it is easier to increase an already existing bond than it is to go through the entire bonding process again when you get to a point that you have to have one.  If you have a history with a surety company of having a bond in place, it is a fairly easy process to issue a superseding bond to increase the amount needed.  If you cancel your current bond, and for some reason your financials are not as strong in the future, obtaining a bond for a higher amount (Operation plus your need for over $50,000 in withdrawal) could be difficult.

     I do want to be clear, I am not trying to be a “fear-monger”, whether you keep your bond in place or not is a personal preference and I would never "twist" someones arm to keep a bond in place if they did not see the need to have one.  I just want to make certain that people are educated in this arena prior to making a decision that could potentially have a severe impact on the businesses you all have worked so hard to build.  Also, please keep in mind that having a bond in place is not “free money”.  By that I mean, as owner of the bond you are indemnifying yourself to the surety.  This means that if the surety has to make payment on your behalf, the surety will make every attempt to collect the funds that they paid out to the TTB.  They can seize assets of the distillery, your personal assets, etc.  The bond is simply there to make payment on your behalf if you cannot at that time.  Sooner or later you will have to reconcile with the surety.  If you don’t have a bond in place, you will be reconciling with the government.  Either way, eventually you will be paying someone back!

     The long and the short of it is, just because the taxation rate is less for the next two years, and just because you may not hit $50,000 in withdrawal, you may be money ahead to keep your bond in place, especially in regards to the operations side of things.  Just "booze for thought". 
 

[DC88]

Could I get some contact information for requesting a quote for bonds and insurance for a micro distillery? 

[InsuranceMan]

DC88,

Absolutely!!!!!!  You can feel free to email me at aaron.linden@hubinternational.com or give me a call on my cell at 307-752-5961.  I would love to work with you!  I work with nearly half of all the operating distilleries in the country and would love to add you to the family!

[daveflintstone]

Well now I just got an auto email reply that Aaaron Linden is no longer an employee of HUB International.  What's up AAron?

[InsuranceMan]

@daveflintstone, I am back and better than ever!  I am now known as InsuranceMan 2.0 and I would love to catch up with you and hear how things are going for you. 

I can be reached at 307-752-5961.  And to everyone else here, if you have any insurance or bonding needs, I have worked with hundreds of distilleries across all 50 states and no one has more background or experience than me!

 

[kansftb]

This is very helpful!  I do have one question - when calculating my penalty amount (filing now October 2018) should I calculate based on anticipated amounts at the $2.70 rate or the previous $13.50 rate?  Seems like all the TTB and CFR documenation is set to $13.50 still?

**Net new distillery**

[InsuranceMan]

@kansftb, you would calculate your rate at the $2.70 for calendar years 2018 and 2019.  After those year ranges, it is anyone's guess.  I hope this is helpful for you and give me a shout here soon about the rest of your insurance needs!

Here is a link to the TTB site where you can read about this for yourself if you like: https://www.ttb.gov/alcohol/craft-beverage-modernization-and-tax-reform.shtml 

Best,

 

Aaron