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dhdunbar

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dhdunbar last won the day on March 7

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    Retired from ATF and began consulting for DSP's in 2012. When I'm not working, I like to head outdoors. That can mean simply sitting on the deck reading. Regulation bores me. Helping others deal with it does not.

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  1. I now have it from two, independent, sources that a credible TTB employee has stated, on two different occasions, to private parties, that any processing operation other than the physical bottling of a spirit will make the spirits eligible for the reduced rate - provided, of course, that you have not exceeded the 100,000 pg limit - and that TTB has said that " even adding water will count ... as to being a processor." Again, that is a quote attributed to a responsible TTB employee in whom I place faith. I have asked for, but not received, verification from that employee. The employee has no reason to make these statements unless the employee knows what TTB will do and what statements TTB has made to others, but has not yet to me or to industry at large. Nevertheless, at least one national organization headed by a person who has every reason to be cautious about such information, has published it in a notice to its members. Therefore, unless I am drastically wrong, if you source whiskey or other products, which you then bottle, after reduction in proof, you would be eligible for the reduced rate as if you had distilled those spirits. Presumably, if you bottled at the strength at which you receive them into your bond, you would not be eligible, unless you treat them in some other fashion that is deemed to be a processing operation other than bottling. But if adding water qualifies, so to should filtration. One has to wonder why congress included the other than bottling provision when such minimal and nearly universal acts as reduction in proof trigger eligibility. How many spirits are bottled at cask strength? So what was intended? That is a moot question if TTB takes this broad approach to the meaning of "other than bottle "in the temporary regulations it issues before formal rulemaking takes place. How much must you reduce proof? TTB has not said, but consider this: Under long established rules, to be eligible for a small producers credit on wine that it removes from bond, a winery must have produced some wine during the year. It need not have produced the wine on which it claims the credit. Any production counts. Since wine may be produced by amelioration or sweetening, adding some de minimis amount of water or sugar to any tank, at any time during the year in which the claim is made, such addition qualifies a winery that does not otherwise produce wine during that year to claim the small producer's credit. Warning: I give the wine example to demonstrate how little needs to be done by a winery to qualify for the credit. The reduced rate on spirits is different. The processing other than bottling operation applies to the spirits in the bottle. Adding water to only one spirit batch during the year would not bring all spirits removed during the year under the same umbrella. But the de minimis example seems applicable. Finally, you may want to ask TTB to confirm what I have written here. Doing so might lead to a public statement more quickly. Even if, in all but rare and unlikely instances, the "other than bottling" rule is not going to have any impact on the taxes due, it would be nice if TTB would state publicly what it is saying in private.
  2. dhdunbar

    Retirement

    If anyone needs help, let me know and I'll make referrals as appropriate. I'm not openly endorsing anyone here and I do intend to take on issues that require, or might benefit from, a sense of the institutional history behind the regulations or positions that TTB adopts. One of those issues is the rulemaking around the meaning of the term "other than bottling" in the provisions that establish eligibility for the reduced rate of tax. I'm holding onto that sort of thing because I understand, in ways that few probably do, how changes in the tax code in 1980 resulted in the three accounts (production, storage, and processing) in which you now account for your operations. In brief, there is no reason in law that certain operations, like barrel aging, need to be treated differently from others, say what was known as rectification before the term was stripped out of part 19. A whiskey acquires its identity by storage in oak just as surely as a cordial acquires its identity by the addition of sugar and flavors. That raises the question, why would one be considered a storage operation for purposes of determining the appropriate tax rate and the other be considered a processing operation for the same purpose? If you look, with a critical eye, at the history of the the whiskey standards, you will see that most of those standards were driven by different segments of the industry trying to gain an economic advantage over other segments. It is not a pure tale of protecting the consumer., Far from it. The interests of the consumer have generally been the least considered issue when the government has established standards of identity. Because of the law, consumer protection is the banner under which those with other objectives advance, but consumer interest has not been the driving force. I suspect that is true with the "other than bottling" provision as well. Someone lobbied for that. Who was that someone and what arguments did they make? Why did Congress not make that provision applicable until 2022? What was the lobbying behind that delay? If any of you know that, send me a personal message and I'll follow up on the issue. This is a pro bono effort. Because the law passed as a part of a large package, I find no record of congressional intent. I'll wager dollars to donuts few who voted for it had the least bit of knowledge about what they were passing or the consequences it would have for many small DSPs who seek cash flow to sustain fledgling operations. Was the intent to take an iron bar to the knees of those who source product? Inquiring minds want to know that because it makes arguing in favor of liberalized "processing" operations more effective. And yes, because I have had so many clients who rely on initially sourcing product, that is an argument I want to make.
  3. dhdunbar

    Retirement

    For those of you who may follow what I say here, I've not been active lately. Most simply put, I burned out. I've decided to retire, but will continue to answer questions on the forums as a thank you for the opportunity you guys gave me to have a consulting business. I appreciate that and have tried to return that favor in this forum. I'm referring my business to another person and am providing her with a backstop in the case someone throws her a curve ball. I'm referring to her because I think she will put your best interests first. I've tried to do that. I'm going to help her for a time. If you have issues that you want to discuss directly with me, I will probably continue to do some work on complicated stuff, especially if it requires some sense of institutional or regulatory history to get it framed in a way that we can give TTB a reason to say "yes" instead of the often easier "no." We try to do the heavy lifting necessary to get that done. If I agree to take something on, it will be on ad hoc basis. So if you want help, ask. I can always tell you why you don't need me - people often don't - or why someone else can help you just as well as I can, so I'd prefer to just sit. But if I think you need my knowledge (I've been at this for 50 years and have learned a thing or two) , I'll probably agree to give it a go. That is about as close to advertising as I've ever come in my time on forums. Forgive me if it tramples on some policies of which I'm not aware :-).
  4. You make application to TTB for a federal basic permit as someone who warehouses and bottles, and to register the DSP as a warehouseman and processor who bottles. You do that on a single application using permits online. TTB sorts the data into the permit and registration applications. If you want to obtain spirits from another DSP, you make an application to receive transfers in bond (no tax paid) from each of the DSP's from which you want to receive the spirits. If you know the persons from whom you want to receive the in bond spirits, you may make application for transfers in bond when you submit the application to become a DSP. The business model wasn't complicated until Congress made some changes to the tax laws. There is a reduced rate of tax on spirits that you process other than bottling. Taht is up to 100,000 pg. The changes were a curveball, because bottling was a processing operations and so it used to qualify the spirits for the reduced rate. However, from the plain language of the law, it appears it no longer does. And basrrel aging isn't processing. TTB has not issued its temporary regulations or announced rule making. They have to do that soon. I've been on TTB's case, a bit, about getting the rules out soon, because the rules on taxes take effect 1/1/2022 and people have to be making business plans. That is less than 6 months away. I do not know who put the bee in congresses bonnet about only allowing the credit on spirits you produce or process other than bottling, but I must believe that it came from industry sources, since congresspersons do not understand that level of detail. Somone, that is, wanted to get an economic advantage over blenders, etc. the regulatons are full of that. It's the reason that whiskey standard of identity are such a damned mess If you want to use imported spirits, then you must either become an importer - get a basic permit as an importer - or hire an importer to do it for you. If you would like to discuss this further, send me a personal message. I'm retiring but do not intend to become unavailable to talk with those who need help or advice. And for the record, Mr. Flintstone is right. You can make money bottling other people's spirits. People were doing that well before I started getting involved in alcoholic beverage businesses some - say it ain't so but it is - 50 years ago come September. Blending is an art too.
  5. Except it is kosher for a brewer to concentrate beer. Nevertheless, in essence, you are correct. You find the rules for beer concentrate in part 25, the brewery regulations. § 25.11 defines the term "concentrate," as used in that part, to mean "concentrate produced from beer by the removal of water under the provisions of subpart R of this part. The processes of concentration of beer and reconstitution of beer are considered authorized processes in the production of beer." The current subpart R begins at §25.261. Basically, it and the following sections provide that the concentration must be done on brewery premises; you can only use water and CO2 to reconstituted the beer; the reconstituted beer must possess the characteristics of beer that has not been concentrated; and the reconstituted beer must be restored to the original volume. None of that directly says that you may not remove the concentrate as beer, but other documents make it clear you may not. Rev Ruling 64-233, old but still in effect, was issued when the concentrate provisions were added to the beer regulations. It explains: "Treasury Decision 6673, C.B. 1963-2, 675, effective December 1, 1963, amended the Beer Regulations by adding thereto a new subpart "BB" [now "rfecodified" as R] which provides for "the concentration and reconstitution of beer on qualified brewery premises in the United States as authorized processes in the production of beer. These regulations neither classify the concentrate as beer nor provided that the concentrate produced in a qualified brewery in the United States can be removed from the brewery in concentrated form at the tax rate applicable to beer. Rather, these regulations require full reconstitution of the beer on brewery premises, and specify that the beer so reconstituted from the concentrate is taxable upon removal from the brewery for consumption or sale at the tax rate applicable to beer in section 5051 of the Internal Revenue Code 1954. [My emphasis]. The fermented material used to make the concentrate and the concentrate, if produced in the United States other than on authorized brewery premises as a step in the authorized production of beer, would be subject to the tax imposed on distilled spirits. Note that "ice beer" made under the provisions of ATF Ruling 94-3 is not considered to be a beer concentrate, but there are restrictions on how much water you can extract. The rule, as stated, is "The definition of "beer concentrate" in 27 CFR 25.11 does not include a beer whose volume has been reduced as long as there is not more than a 0.5 percent by volume reduction in the beer, and the resultant product retains its character as beer. You can find both rulings on TTB's website. So, generally, there is no incentive to concentrate beer. I think, based on vague institutional memories, which can mislead me, that the concentration provisions came from a brewer, Schlitz I think, that wanted to transfer beer fermented at a mainland brewery to a brewery in Hawaii for packaging (it then could claim it was bottled in its Hawaiian brewery) and did not want to pay the cost of shipping water across the ocean.
  6. Federally, if you purchase for resale at wholesaler, you need a wholesaler's basic permit. Even if you have a DSP permit, which a wholesaler does not need if it does not distill or process spirits, if you buy bottled product from someone else, you need the wholesale permit.
  7. Federally, you should have no problem qualifying a distillery on a farm if there is some distance between a residence and the building that will house the DSP. That answer is fact-dependent, but I've done it several times in the past. About the rest, I l know nothing. Dave
  8. I recommend calling the specialist who nixed the formula and asking the specialist to explain what TTB wants. What I said above was intended to give enough information that you know the rules and so can recognize reasoned positions from "shooting from the hip" B.S. If you get BS, your rights to appeal the denial are set out in part 13. I generally recommend not going that way unless it is an important product. You will have to expend time and energy going through the hoops of the appeal, but so will TTB.
  9. As Silk City says, I think the issues probably are the same. I see from the internet that the cocktail can contain simple syrup, so TTB may be saying that if you make your simple syrup with IPA, it is not simple syrup to them. The recent rulemaking on labeling and advertising contains some basic information on TTB policy on the labeling of cocktails under §5.35. The Beverage Alcohol Manual , a document I deplore because it greatly complicates matters, lists 30 or so recognized cocktails and provides a brief description of each, which states what TTB has determined, how I do not know, what a cocktail must contain, but does not list optional ingredients (https://www.ttb.gov/images/pdfs/spirits_bam/chapter4.pdf). It lists "Manhattan," but not "gin and tonic." In the case of those that are listed, the requirted class and type designation is the name of the cocktail with a declaration of the distilled spirits component(s) of the product, e.g., “Screwdriver Made With Vodka." In general, the list is one of cocktails your father (or I) might have drank when driving an Oldsmobile. Yea, I and it are that old. TTB address that issue of the limited use of the BAM list in the recent Treasury Decision it issued explaining the changes it did and did not make to labeling regulations after the recent rulemaking process. It said: "TTB notes that in addition to the cocktails that are recognized in the Distilled Spirits BAM, TTB evaluates applications for label approval that include new cocktail names on a case-by-case basis to determine if the cocktails are recognized in bartender’s guides or other publications that reflect a widespread consensus on the composition of a cocktail (such as trade magazines) [the emphasis is mine]. This review will, in turn, determine whether the designation adequately indicates to the consumer the general character of the product. TTB will consider the comments on updating the list of recognized cocktails as suggestions for future action." So the BAM list is not exhaustive. Your recourse to denial would seem to be your own deep dive into publications that let you argue, "Hey, TTB, what we propose is within trade and consumer understanding and here is why." In spite of the support for an updated list of recognized cocktails, I would suggest not going there. From my experience, you want to be careful what you ask for. The more detailed things become, the more complicated the approval process becomes, and you also add, to the complications, the unpredictable complexity of individual TTB employees ideas about the complications. In the Army we had a term that described what I think would ensue. It was "SNAFU." Those who are interested can pursue this further at https://www.govinfo.gov/content/pkg/FR-2020-04-02/pdf/2020-05939.pdf. The discussion begins on page 18713. Here is a summary of the cocktail issue that I made for my own edification: In Notice No. 176, TTB proposed to amend its policies with regard to the use of cocktail names in statements of composition on distilled spirits labels. Under current regulations at 27 CFR 5.35(b)(1), and in guidance issued by TTB’s predecessor agency, the Bureau of Alcohol, Tobacco, and Firearms (see Compliance Matters 94–1, issued in 1994), distilled spirits cocktails with names recognized by consumers may be labeled with the cocktail name and an abbreviated, rather than a full, statement of composition. This abbreviated statement is a declaration of the spirits components of the cocktail, for example, ‘‘Screwdriver made with vodka.’’ In Notice No. 176, TTB proposed to require a full statement of composition in such instances because, over the years, TTB has seen an increase in the number of cocktails recognized in bartenders’ recipe books as the industry continued to innovate. TTB was concerned about whether consumers are fully informed when a label has only a cocktail name and the component spirit(s) because of the vast array of cocktails. Accordingly, TTB proposed to require a full statement of composition on such specialty products, and those products could continue to be designated with the name of a cocktail. The TD then discusses several comments that it received on the proposal, including those of DICUS and ADSA, who opposed the proposal on the the grounds that it would impose costs as a result of labeling and formulation changes without benefiting consumers, who might be confused by statements of composition that differed from what they were used to seeing on cocktail labels. Some of the commenters also addressed TTB’s current policy of including a list of ‘‘recognized cocktails’’ in the Beverage Alcohol Manual for Distilled Spirits (Distilled Spirits BAM; TTB P 5110.7) for purposes of administering this provision. T American Distilled Spirits Association commented that the regulation ‘‘should establish a framework for TTB to periodically publish, after seeking input from the industry and other sources, lists of cocktails it recognizes and the ingredients required for such cocktails.’’ On the other hand, Sazerac commented that TTB should eliminate the list of recognized cocktails in the BAM, as the list is ‘‘outdated and not particularly relevant to consumers.’’ Because of the industry opposition and the nature of the objections to the proposed rule, TTB did not finalizing its proposal. It noted that, “In addition, a number of comments TTB received in response to Notice No. 176 proposed that TTB consider proposing ingredient labeling, which would obviate the need for the types of information TTB proposed to require. TTB agrees that ingredient labeling is worth consideration, and is reviewing such comments to determine next steps to obtain additional comment through further rulemaking.” POINT: This issue is not dead, but rulemaking has the gestation period of elephants at best. Specifically, the final rule stated that TTB is not moving forward with the proposal to require a full statement of composition for cocktails. It agreed that consumers are used to seeing the abbreviated statement of composition on cocktail labels and that a full statement of composition is not necessary in cases where the cocktail name is well recognized and understood by consumers, and so determined that the existing regulations and policies on abbreviated statements of composition for cocktails will continue in effect. It then stated that the BAM was not exhaustive, as I explain above. So I've gone long again. I seem to be incapable of doing otherwise.
  10. I had to think about this for awhile, but I think TTB can site a reason for the conclusion they reach. However, when they tell you something like this, always ask them to tell you the section of law or regulation in which they are relying. It saves a lot of bafflement. The simple statement that something is not allowed points in no useful direction. So, TTB is probably objecting to the use of beer as an ingredient that is marketed with the designation "Manhattan," since I find, on the Interent, which can never mislead, "regardless of all the options, there is only one classic Manhattan: two parts whiskey, one part sweet vermouth and bitters. Mix one (stirred, never shaken), and you’ll see why this storied drink has remained a favorite since its inception." I think TTB probably is not objecting to the use of beer in a canned cocktail, it is probably objecting to the designation "Manhattan,." for which there is no standard of identity in §5.22 and so must be labelled under the provisions for specialties in §5.35. §5.35(b)(1) -Products designated in accordance with trade and consumer understanding. In the case of products designated in accordance with trade and consumer understanding, a statement of the classes and types of distilled spirits used in the manufacture thereof shall be deemed a sufficient statement of composition in the case of highballs, cocktails, and similar prepared specialties when the designation adequately indicates to the consumer the general character of the product. So, TTB has likely concluded that a product labeled with the designation "Manhattan" which either, (1) does not contain vermouth (yours may) , or (2) contains, instead of or in addition to bitters, a hoppy IPA, is not a drink that the consumer would expect when buying a Manhattan. I think those are probably what court would call reasonable grounds for the statement you can't use "finished IPA" in a specialty product designated only as a "Manhattan." [The "finished" part led me down dead-end trails]. But that does not prevent you from making the product with the ingredients you list. I would conclude that you may still market the product, but that under §5.35, you would need to designate the product by a fanciful name (I'm not clever enough to imagine a good one, so let's say "IPaHATTEN," and truthful and adequate statement of composition, i.e., bourbon and IPA simple syrup." You could then add a statement about how a "Manhattan like cocktail made" with IPA based simple sugar was all the rage in your tasting room, etc.
  11. When TTB insists on making "case by case decisions" based on "a number of factors," they create a situation in which there are a lot of balls in the air (multiple factors) at the same time, so when they say yes or no, one is left to guess what factor might be tweeted a bit to get a different outcome. For that reasson, I generally advise people to avoid alternation if at all possible. In the case of a brewery/DSP "collocation," that would mean establishing an area with separate entrances to both from the exterior, and partition to demarcate the two premises. TTB has accepted (remember my case by case admonition) chain link fencing and in some cases - I can't keep track - the fence did not reach from floor to ceiling. Then the brewery can produce the distillers beer and remove it whiteout payment of tax (it is not a transfer in bond because beer is not held in bond, but it is a transfer of the likability for the tax on the beer) to the distillery as distilling material. The bottling line is more of a problem. If the brewery is small and the space allows, they can move the canning line out of the brewery and into the DSP and viz versa. If it is not portable, then you must alternate the area in which it sits. Suddenly the balls start flying. I'm open to discussing any of this, in particular circumstances, as a consultant, keeping in mind the case by case caveat. But I like to share general info because you guys are the ones who assume the risks. As a consultant, I'm like the merchant selling supplies to prospectors. I get mine up front, whether they strike gold or not :-).
  12. I don't known. I have never done it and I know of no TTB rule that addresses the issue. I have received approval for a line around an area with a bottling line that alternates between brewery and DSP premises, but such areas are within a building that is locked when not in use. To comments like that I must add that past performance is no indicator of future results. I do not know if TTB would approve the line on the floor again. They might instead require some minimum barrier, like a portable knee wall. Lines on the floor seem to trigger a sort of visceral, not acceptable, initial reaction from TTB specialists. But I speculate. I have never qualified an outdoor area that was not within a fence. I qualified one still in a chain link cage, but it was a big still and the chain link went something like 20 feet high on the three sides that were not a wall. I also qualified one area for barrel storage that had a roof, three sides of "hard" walls, and one side of chain link. The regulations make no mention of open areas. They refer, in the same breathe, to rooms within buildings and to outside tanks [see, for example, §19.76(a), which addresses the security of the premises], which could be taken to mean that they exclude any area that is not either within a building or a tank whose walls, or other "enclosure" (see §19.192(c) below) provide the security required. §19.192 provides the general security requirements. Here it is in folk text except for the long list of the features approved locks must have: (a) General. The proprietor of a distilled spirits plant must provide adequate security measures at the plant in order to protect the revenue. (b) Buildings. The buildings, rooms, and partitions must be constructed of substantial materials. Doors, windows, or any other openings to the building must be secured or fastened during times when distilled spirits plant operations are not being conducted. (c) Outdoor tanks. Outdoor tanks containing spirits, denatured spirits, or wine must be individually locked or locked within an enclosure when they are not in use. (d) Indoor tanks. Indoor tanks containing spirits, denatured spirits, or wines, or the rooms or buildings in which such tanks are housed, must be equipped so that they may be secured. Again, the only provisions are for buildings and outdoor tanks, both of which must be equipped for locking and kept locked with not in use. Further, the provision that "doors, windows, or any other openings to the building must be secured or fastened when operations are not being conducted" implies a need for a secured barrier around the DSP premises other than outdoor tanks, which must be individually locked or locked within an enclosure when not in use. I think the "individually locked or locked within an enclosure when not in use" provides an opening for a variance under §19.27, if one were to state that all spirits, either in bulk or in packages, would be immediately removed to an inside area of the DSP upon completion of a day's bottling and that in no case would any spirits remain in the outside areas when the bottling line was not being used, or something like that, perhaps more artfully stated. The goal would be to convince TTB that the outside bottling line is not contrary to law, and that it creates no additional danger to revenue or any administrative difficulties. For those who might cite, as precedent, a brewery that has outside areas approved as a part of the brewery premises, I point out that the tax does not attach to beer until it is removed for consumption or sale, whereas tax attaches to spirits at the time they come into existence. So, I wish I could say, with confidence, that TTB would approve the extension of the bonded DSP premises into an open parking lot, I can't offer any assurance of that. If someone has experience in which TTB has specifically addressed this issue in writing, maybe they would be able to share what TTB had to say, with the caveat about past experience. Otherwise, as I said, I'm speculating.
  13. Piggybacking on Silk Cities post - brewers may be using mobile canning lines, so your local brewer (there is one of every corner, right) might be able to give a lead on who has one. Remember that, going by the book, the canning line must be on your bonded premises when you use it to fill containers :-). Maybe someone should start a business as a DSP that contract cans.
  14. I take that as another way of saying they have not reached a decision. I too have a request for information pending. I specifically asked if filtration alone is a processing activity under §5002(a)(5)(A) that establishes eligibility for the reduced rate. I put it in writing and have not yet received a reply. I anticipate that they will say they will tell me when they have decided what the rule will be. I put it in writing just to express concern that, based on what they decide, many of you may have to alter business plans or pricing arrangement.
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