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Bond requirements - HELP


Chris Martin

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I know the topic of bonds has come-up here at times, and I did search the forum before posting, BUT...

I have a few questions that I can't seem to answer... I'm in the planning process and need some clarity on what bonds and bond amounts will be required.

1.) Ok, so there is the Operations Bond, and there is the Unit Bond. Now, first off, wouldn't every DSP need a Unit Bond, since it covers operations and withdrawals -- I mean, what's the point of operating if you can't sell (withdraw?) what you produce? :) So what is the purpose of the TTB separately defining an Operations Bond?

2.) I think I understand how to determine the required amount of an Operations Bond -- 15 days PG production capacity x $13.50 tax PLUS tax equivalent of PG's in storage (barrels, etc.). Right? But what about the amount of a Unit Bond? According to the TTB, that would be the Operations Bond PLUS "The amount of tax which, at any time, is chargable against such bond but has not been paid." What does that mean???

3.) So, what kind of bond would be needed? Operational? Unit? Simple setup -- distill, barrel, bottle... no contract distilling or rectifying...

4.) Suppose I have a still capable of producing a max of 5,000 PG's over a 15-day period, but I will be operating it at a rate to produce 1,500 PG's per 15-day period. Does the TTB take a look at the still and say "We require you to have a bond for 5,000 PG production" or is the amount of the bond determined by me based on what I plan to produce, regardless of the maximum operational capability of the plant?

5.) CALIFORNIA DSP's: do you need a State bond as well (it doesn't seem so, since the tax is apparently paid by the wholesaler)? If so, how do you calculate what you need?

Thank you all for your help...

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If I recall, an operations bond is a special case of a dsp with a winery.

You'll need a unit bond, and in (2) the amount of tax due on bottled product removed from bond is also part of that, but that's part of the "withdrawal" section of the unit bond. You'll have a component for stuff in production, storage, and processing (operations), and another part for stuff that's tax due.

Your operations coverage will be for whatever peak amount you'll have at any instant in time, and it's about the amount you intend to produce, not the amount of product your plant can produce.

You can start as small as $10k ops, and $1k withdrawal. The withdrawal part can be tricky. If you file only quarterly, then the withdrawal coverage must cover the tax load for that full reporting period. So $1k only covers 74PG (about 38 cases at 80pf). So every 38 cases you have to send-in your ~$1000 in tax, even if the quarter is not over.

CA DSPs may be required to post a bond, but not usually.

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Thank you Will! Ahh... now I understand the "withdrawal" concept. Until you pay the tax, they want to make sure you're covered for that amount that will be, or is currently, due.

Now, as for the Operations side of it... you mention quantity in production. Does this mean that aside from the amount in processing (still output), I also need to add the average PG equivalent of the contents of the fermentation tanks?

If so...

Suppose I have five 1000 gal. tanks, on a 5-day cycle -- one of the five is beginning the fermentation process now, one is finished today, and the other three are at various stages of fermentation. I finish at 9% wash, so 1000 gallons @ 9% is 180 PG, or 180 x $13.50 = $2,430 tax equivalent. If I average this over the five 1000 gal. tanks (5000 gal. in fermentation at any given time), ranging from 0% ABV to 9% ABV, I get:

- Tank 1 @ 0% ABV = 0 PG

- Tank 2 @ 2.25% ABV = 45 PG

- Tank 3 @ 4.5% ABV = 90 PG

- Tank 4 @ 6.75% ABV = 135 PG

- Tank 5 @ 9% ABV = 180 PG

Total PG in fermentation at any given time: 450 PG = 450 x $13.50 = $6,075 tax equivalent.

Is this correct???

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Will, a TTB agent confirmed what I had found when asking same question.

He said the minimums are 5k, 5k, and 5k, for a total of $15k. The 10k for production and warehouse, the other 5k for withdrawal. He seemed very solid on those figures as minimums.

Further checking here and elswhere came up with the fact that it really wasn't worth the trouble to go for the minimum bond if you think you're going to need to raise it within a couple of years. The additional paper filing costs wasn't worth the trouble.

Just info we've found.....for what it's worth.

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Here's the "no crap" answer, I've redone my bond already, so I'm pretty familiar with this:

minimum $5K - production

minimum $5K - storage (if you intend on storing, ie aging in barrels)

minimum $5K - processing (bottling)

$1K - withdrawal (if you choose to have withdrawal coverage, but you are not required to do so. However, if you DON'T have it, you are required to pay your tax bill immediately after the product leaves your bonded area. I would recommend you get it)

IMHO, I would do at least $5K withdrawal from the beginning, but that's just me. Now, here's something that also blurs things, but this is straight from the TTB. The 15K total for the prod, storage, and processing does not break down as 5 for each when doing your math. In other words, that total 15K covers whatever your total tax liability will be at any given time during a filing period on your bonded premises. Example, if you have 1K production, 10 K in barrels, and 4 K in processing, you're covered because your total is 15K. However, withdrawal is basically like a separate bond within your bond and has nothing to do with your prod, storage, and processing. Clear as mud? I know, this is confusing until you understand the whole thing, but once you get it, you got it.

Will, a TTB agent confirmed what I had found when asking same question.

He said the minimums are 5k, 5k, and 5k, for a total of $15k. The 10k for production and warehouse, the other 5k for withdrawal. He seemed very solid on those figures as minimums.

Further checking here and elswhere came up with the fact that it really wasn't worth the trouble to go for the minimum bond if you think you're going to need to raise it within a couple of years. The additional paper filing costs wasn't worth the trouble.

Just info we've found.....for what it's worth.

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Thank you Paul!

I guess the question still in my mind is whether "production" includes what is in the fermentation stage... not just still output... and "processing" means bottling. Clearly, "storage" is understood.

Best,

Chris

Here's the "no crap" answer, I've redone my bond already, so I'm pretty familiar with this:

minimum $5K - production

minimum $5K - storage (if you intend on storing, ie aging in barrels)

minimum $5K - processing (bottling)

$1K - withdrawal (if you choose to have withdrawal coverage, but you are not required to do so. However, if you DON'T have it, you are required to pay your tax bill immediately after the product leaves your bonded area. I would recommend you get it)

IMHO, I would do at least $5K withdrawal from the beginning, but that's just me. Now, here's something that also blurs things, but this is straight from the TTB. The 15K total for the prod, storage, and processing does not break down as 5 for each when doing your math. In other words, that total 15K covers whatever your total tax liability will be at any given time during a filing period on your bonded premises. Example, if you have 1K production, 10 K in barrels, and 4 K in processing, you're covered because your total is 15K. However, withdrawal is basically like a separate bond within your bond and has nothing to do with your prod, storage, and processing. Clear as mud? I know, this is confusing until you understand the whole thing, but once you get it, you got it.

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I am fairly certain that fermentation amounts never count and you do not have to keep alcohol records on this. Until it is distilled you have no proof to measure. I start taking all my records once it comes off the still. That is the point where the TTB has the first lien right. I start my production records on each mash run I do as you are required to keep and file each month how much grain you use. coop

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Chris,

I don't know what your plans are, but if you have any intention of growing, it's worth starting out with a larger bond than you think you might need. It takes so much time and effort to get a bond and to make sure they are correct, along with the fact that they are so cheap, that it's worth it to get one larger than needed.

My $65,000 bond was about $600/annually if I remember correctly.

EDIT: I have a unit bond which covers operations and withdrawals. On page two of the bond form, you do have to break down how much you want for each part along with bringing the total down to the bottom (which I didn't do and delayed my bond).

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I don't know what your plans are, but if you have any intention of growing, it's worth starting out with a larger bond than you think you might need. It takes so much time and effort to get a bond and to make sure they are correct, along with the fact that they are so cheap, that it's worth it to get one larger than needed.

My $65,000 bond was about $600/annually if I remember correctly.

Everyone on this forum seems to say the same thing about the bonds. My experience was quite different, in that I found the TTB bond process quite simple (with the guidance of my TTB rep) and had no problem getting a superseding and then a strengthening bond. A couple small corrections, one of which the TTB made over the phone and one I had to fax in another page, no problem.

The bond is, of course, needed to get the DSP license; my advice is to not sweat it, get whatever you think you might need, and raise it later if necessary. I got the minimum bond in cash, and then raised it twice when switching to a surety. The surety deducted the amount I had already paid them from the new bond cost. Easy.

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Thank you both for your valuable input...

I don't want any surprises. One of the things I'm a little concerned with is whether or not I will have to pay cash. I think it's going to be around $65,000-$70,000 total. My credit is not the greatest right now, so does anyone have a particular surety to recommend that can work with less-than-perfect-credit on the guarantor? Paying a little more is ok. There are just so many companies on the TTB approved list... I can see why it may be very time consuming to go surety-shopping. :)

EDIT:

For others who may be following this thread, here is another recent thread that has some good insight...

http://adiforums.com/index.php?showtopic=1064

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Not to keep beating a dead horse or anything, but my take is (from the insurance company), $20K bond and below is fairly simple. Once you start going too much bigger than that, they start asking a whole bunch of questions with regards to it and start wanting to get a bit more serious on the matter. As far as it being a big deal or not, put this in your pipe and smoke it. The bond is, technically, the only thing the TTB cannot alter when processing your application (or so I was told by them). So, if there's an iota of anything amiss about it, you (and the surety) have to correct it and you get to send it back through the federal anthrax-detection snail mail system. If anything contained within your application is going to be 100% accurate, I would suggest it be the bond. For example, my surety did not put in their name block the exact name the TTB had in their records. Therefore, I had to go back to the company and explain that they had to put the EXACT, legal company name that was on record with the Treasury Dept. Just some food for thought.

Thank you both for your valuable input...

I don't want any surprises. One of the things I'm a little concerned with is whether or not I will have to pay cash. I think it's going to be around $65,000-$70,000 total. My credit is not the greatest right now, so does anyone have a particular surety to recommend that can work with less-than-perfect-credit on the guarantor? Paying a little more is ok. There are just so many companies on the TTB approved list... I can see why it may be very time consuming to go surety-shopping. :)

EDIT:

For others who may be following this thread, here is another recent thread that has some good insight...

http://adiforums.com/index.php?showtopic=1064

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  • 5 months later...

I'm new to this process, so forgive me ahead of time for asking elementary questions. Regarding bonding, would I be correct is assuming the bond on storage also applies to aging product? If I had 100 barrels of aging corn whiskey, is that 55 PGs (per barrel) x 100 x $13.50 = $74,250 bond for those 100 barrels?

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Check the TTB application: not only in storage, but also production capacity as well as spirits in transit to your facility (in case you buy GNS or found whiskey and use a transfer in bond).

But storage will often be most of it.

Your math assumes you're barrelling that corn whiskey at proof. If you barrel at the legal maximum of 125 proof, you have to convert your wine gallons to proof gallons, i.e., multiply by 1.25, so $92,812.50.

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