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Importation of contract distilled spirits for blending and bottling - DSP License & FE Tax


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Hello everyone, I'm just getting started with this, so please bear with me.  Any assistance you can give is greatly appreciated.  My plan is to import contract distilled spirits from overseas into the US to an existing DSP who will allow me to blend the spirits on their premises.  I would then contract with the existing DSP to bottle and label the spirits and assist with COLA submission  4 questions:

1) Do I need a DSP license to do that?;

2) If so, do I use the contract bottler's premises for the application and note that I am warehousing, blending and bottling?;

3) even if I am not required to get the DSP, should I do it anyway so that I have the DSP if I open my own facility down the road?;

4) Under the new rules, if I do get a DSP and I am importing the bulk spirits for blending (as well as bottling), can I qualify for the reduced FE rate (because I am doing more than bottling) if I apply for the importer assignment under Section 5001(c)(3)(B)?

Thanks again for your help.  Any other things I need to be aware of?

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My plan is to import contract distilled spirits from overseas into the US to an existing DSP.

The importer must have a TTB importer's permit.  It cannot take possession of the spirits.  It must arrange to have the spirits shipped to a distilled spirits plant. Do not pay taxes on the bulk spirits at the time of importation.  The spirits are shipped from customs' custody to the DSP in bond.  (See part 28).

Taxpayment has happened when a customs broker knew no better.  It creates a  disastrous situation, because a DSP may not receive taxpaid spirits onto DSP premises.  "May not" is different than "cannot."  so a DSP, not knowing any better, may receive the taxpaid spirits.  Now what?  Ignoring that it is illegal, the DSP will have to treat the spirits as if the tax had not been paid, so when they are removed, they are double taxed.  And there is no provision for making a claim with TTB for taxes paid to customs.   

The DSP, you say, will allow you to blend the spirits on their premises.  You would then contract with the existing DSP to bottle and label the spirits and assist with COLA submission. 

Basically, no.  You may contract with the DSP to blend for you and bottle for you, but the DSP may not let you use the premises.   The DSP must control when it does what it does and how it does it, but you can specify standards.  If you want to do the blending, then you need to have a basic permit and need to register as an alternating proprietor on the portion of the DSP that you are using.  I think you do not want to go there, but that is the only legal way for you to conduct the operations.  See TTB's Industry Circulars on contract wine and beer product. 

The DSP would not "assist" you with COLA.  The DSP would get the COLA in its name and you would need authorize them to use your intellectual property when they contract bottle for your account.  

Okay, so moving on to your questions.

1) Do I need a DSP license to do that?  

The person who makes the importation must have an importer permit.  That could be you, the DSP, or a third party. 

If you conduct storage or processing operations, you need a DSP permit and registration.  Further, you may not take title to  bulk spirits unless you qualify as a DSP or are among others who are authorized to receive and possess bulk spirits (§1.80 and following).  That is a rule of general applicability.  There is no exception. 

If you have the DSP contract store and bottle, and you then take possession of the spirits, if you sell them to a wholesaler or retailer, you will need a permit as a wholesaler.  The way around that is royalty arrangement with the DSP or someone who holds a wholesaler permit who conducts the sales.  see the above mentioned industry circulars

2) If so, do I use the contract bottler's premises for the application and note that I am warehousing, blending and bottling?

Only if you formally alternate under part 19 - see §19.141 and following.

3) even if I am not required to get the DSP, should I do it anyway so that I have the DSP if I open my own facility down the road?

The "entity" application is good for any business at any location, but you would need to qualify the new location ass a DSP.  This would take a while to explain because entity and commodity applications that you file on permits online do not track strictly to permits and registrations.  So, you could get a wholesaler permit, use the existing entity application, and submit a DSP application to establish the new location.  My question is why?  

4) Under the new rules, if I do get a DSP and I am importing the bulk spirits for blending (as well as bottling), can I qualify for the reduced FE rate (because I am doing more than bottling) if I apply for the importer assignment under Section 5001(c)(3)(B)?

Unless you are the DSP who removes the spirits, you do not pay the taxes.  The DSP does and includes that in the contract price it charges you.  Since the spirits were removed in bond, the DSP pays at the rate that applies to it at the time of removal, i.e. $2.70 on the first 100K pg. if it is still elligible and 100K is a lot of cases at 1.92 pg a 12/750 80 proof case.  

However, it is not clear to me that blending is always a processing operation other than bottling.  TTB is going to have define what operations it considers to be processing other than bottling for purposes of the reduced rate provisions.

I'm answering this in general terms because it is a general question.  If you want to get specific - and you should - propose a business plan and figure out how your plan fits into this.  I can comment and make recommendations on specifics,  for a fee, as a consultant.  But this gives you a place to start.

 

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You can send me a personal message on this forum and I'll respond to it.  

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 I can see how Costco or Trader Joe's can get away with doing what you're talking about, branding their own sourced spirits, because they already have a massive distribution chain in place in pre existing stores, and get the full retail cost. How an independent company can pay someone to produce, age, import, package, get lable approval, and possibly distribute your product, that is likely very similar to a product that already exists, and still make a profit is beyond me. I know most bourbon all comes from the same place though, so it must be possible. I'd rather do the grunt work, and make a decent margin.

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  • 2 weeks later...
On 2/18/2021 at 7:52 PM, adamOVD said:

 I can see how Costco or Trader Joe's can get away with doing what you're talking about, branding their own sourced spirits, because they already have a massive distribution chain in place in pre existing stores, and get the full retail cost. How an independent company can pay someone to produce, age, import, package, get lable approval, and possibly distribute your product, that is likely very similar to a product that already exists, and still make a profit is beyond me. I know most bourbon all comes from the same place though, so it must be possible. I'd rather do the grunt work, and make a decent margin.

I guess the short answer is that I'm not trying to be trader joes or costco.  I'm not trying to be the baron of [name your spirit].  Independent bottlers have been buying aged spirits from distilleries for years and making small batch releases that have pretty good margins.  Also, my only capital outlay is spirits and logistics.  I don't need a huge capital outlay for equipment, employees and rent and years of waiting before I can see an ROI.  Don't get me wrong, if you can do the capital outlay and wait for years to get a return - then you get to have the control and reap the rewards for that.  I have enormous respect for distillers, I just don't want to be one.  Also, what I am doing is helping smaller distillers get a return earlier by contracting with them - win/win.

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