Distilling beer from local brewery

[sandytoes]

We have done a number of small experiments on distilling beers from the local breweries and they have turned out well. We now have a brewery that would like to distill a large amount of beer (50 barrels+). I know some of you have done this before and I am wondering how you handled the transfer for tax purposes? Is this a transfer in bond or does the brewery prepay the tax? This is beer that would be otherwise dumped because it is out of code.

 

[glisade]

You transfer the beer in as a raw material on your production report. Not a TIB and you pay tax when you transfer out of bond. The brewery should should not have to pay any tax but in the end they need to best understand how to deal with the TTB to fulfill any potential tax liabilities.

[sandytoes]

1 minute ago, glisade said:

You transfer the beer in as a raw material on your production report. Not a TIB and you pay tax when you transfer out of bond. The brewery should should not have to pay any tax but in the end they need to best understand how to deal with the TTB to fulfill any potential tax liabilities.

Thank you, glisade!

[AnthonyM]

The specific legal section that covers this is:

26 U.S. Code § 5053.Exemptions

(f)Removal for use as distilling material

Subject to such regulations as the Secretary may prescribe, beer may be removed from a brewery without payment of tax to any distilled spirits plant for use as distilling material.

We have done it several times just like glisade mentioned. It's always good to have a BOL that tracks the transfer so if there are ever any questions you have a paper trail. 

[dhdunbar]

3 hours ago, AnthonyM said:

It's always good to have a BOL that tracks the transfer so if there are ever any questions you have a paper trail. 

If you want the brewery to ferment a whiskey wash for, which is probably ot thge case, but if so, then you must have information that shows that the fermenting materials the brewer used meet the standard of identity of the product you bottle.  You must always be able to support label claims with records. For example,  if the beer was fermented only from grain and the mash bill wasn't 51% or more corn, you can't call it bourbon, so you need a record from the brewer that shows the mashed bill used.  If the beer is a malt beverage, you also need to deal with the hopped issue.  See the citations below. 

A statement of general application - quoting the law is not always the best approach.  TTB interprets the law in its regulations.  Rely on them.  If you think that the regulations don't comport to the law, remember that courts are loath to rule on that unless the regulations are clearly outside of congressional intent and the agency does not have some reasonable basis for its rule.   It's called administrative deference.

In most cases, a section of the law will make reference, as this §5050 does,l to "under such regulations as the Secret may prescribe.  But in this case, AnthonyM is spot on  citing the law,m at least from the brewers side,  because the beer regulation has not been amended to reflect the 1998, or thereabouts, change in §5053, which let a DSP receive beer from any brewery, not just from  an "adjacent brewery," as the regulations still provides after all these years  

As an aside, why isn't this a transfer in bond?  The reason is simple enough, but not usually understood.  The tax does not attach to beer when it is produced.  It is never, as wine and beer are, held in bond.  Tax attaches when it is removed for consumption or sale. What is not in bond may not be transferred in bond.     The term "removed for consumption or sale is defined in part 25.  It means, "Removed for consumption or sale. Except when used with respect to beer removed without payment of tax as authorized by law, (a) the sale and transfer of possession of beer for consumption at the brewery, or (b) any removal of beer from the brewery.'   So under §5053, the removal of beer to a DSP for use as DM is a removal without payment of tax, therefore by syllogistic logic it is not a removal for consumption or sale, therefore the tax has not attached, therefore it is not in bond, therefore it is not transferred in bond.  . 

From a  practical, less wonky angle, here are the principal rules that apply when a DSP receives beer from a brewery. 

See §19.297   Use of materials in production of spirits - A proprietor may produce spirits from any suitable material in accordance with the proprietor's statements of production procedure in the notice of registration.  T

§19.584(d)   Materials for the production of distilled spirits . A proprietor must maintain daily records of materials produced or received for, or used in, the production of distilled spirits. This includes records coveringr eceipt of beer from brewery premises without payment of tax, and receipt of beer removed from brewery premises upon determination of tax as authorized by 26 U.S.C. 5222(b);

§19.585(a)(3)    Production and withdrawal records.  A proprietor must maintain production account records in a manner that will ensure the tracing of spirits through the distilling system to the mash or other material from which the spirits were produced and that will clearly establish the identity of the spirits.

There's probably something more.  There always seems to be.

 

 

[sandytoes]

14 hours ago, dhdunbar said:

"you also need to deal with the hopped issue."

Thank you for the explanation.

Can you expand a little on this regarding the hopped issue?

[dhdunbar]

It's on a couple of  threads..  Just search "hops" and you will find it.   

Basically, you can use, as an ingredient  in spirits, any ingredient that is GRAS, that is, that the FDA recognizes as safe in food products (alcoholic beverages are food for the purpose of FDA standards and FDA has the authority to regulate them, but TTB and the FDA have a memorandum of understanding that TTB will regulate the labeling g, etc., as long as it enforces the GRAS standards.  Hops are allowed in foods..  There is no problem with that your you'd never have Budweiser or IPA.  The issue is  what do you have?  Under 5.35 you must label products with the standard of identity if they comport to one, or as a specialty item if there is no standard.  I think bluestar summed it up best - i'll paraphrase -  it isn't whiskey because it does not meet the whiskey standard, so unless it has enough other flavorings to meet some other standard.  He didn't elaborate,  but I'd guess you conceivably could make a gin (predominantly juniper flavor) or a liqueur.  But it would not be a flavored product, for example, flavored whiskey, because you didn't have whiskey to start with.  So generally, it's a specialty item and TTB has approved a variety of different labels.  As one person, who had submitted labels for hopped products put it, , he was amazed by seeing some of the labels TTB had approved.  As in investing, "Past returns are not necessarily indicative of future results."  If they were, we'd all be rich!  And there would be no WTF label rejections either.