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Monthly TTB Reports - "Withdrawn Tax Determined"


Ted_Green

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Hey ya'll

Just taking over the filing of our distillery's TTB forms, and wanted to know what Line 33 of the TTB Monthly Processing Operations means? Withdrawn Tax Determined has numbers for all our previous months, but I'm not sure where our previous distiller was ascertaining this information. Any help would be appreciated. Below is a copy to the TTB form (F5110.28). http://ttb.gov/forms/5000.shtml

-Ted

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None taken, made perfect sense when explained. TTB reports were not an area that was covered when we had a department for our product. Unfortuantely, when I'm the singular operator, blender, material sourcing, and regulatory person - it requires learning new tricks. I'll surely take your advise, and would greatly appreciate any supplemental readings you could offer as their website and phone system are of little practical help.

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I am sitting here thinking how best to respond to this. You are asking a "Records and Reports 101" question, which is a very valid question to ask. We do not learn calculus until we have learned algebra.

As that implies, I've found that it is always best to establish a foundation on which to build.

I want to do that here because it provides you with a way to identify the questions you need to ask about any entry you must make. My answer will not be of immediate practical value, but hopefully it will be of strategic value as you face what can seem like the daunting task of getting your operating reports right.

I think it may best be addressed this by looking at the general goals of an audit (oh god no, I am neither an auditor nor accountant. I've just had to become familiar with the basics as a matter of necessity, not predilection).

First, an audit attempts to verify that all transactions are included. That is also your first task. You must capture in your records any operations or transactions that affect a quantity required to be recorded.

Even if you record every last change in quantity or components of the spirits in your DSP, you can't make proper reports unless you know how TTB classifies the operations and transactions. Checking for proper classification is the second audit goal. Your question is really, "What does TTB mean by "withdrawn tax determined."

The meaning of the terms "withdrawn" and "tax determined"is not intuitively obvious. There is no way that anyone walking down any town's main street should have any idea of the correct answer to that question. But as the proprietor of a distillery, you damned well better know the answer. Here is my rule -any term TTB uses means what they say it means and what they say it means is sufficient to establish what it means. Unless we are gong to coufrt, or it is really important, don't argue.

That means you must learn what TTB means by the way it uses terms. Your question is an effort to do that.

TTB has an online glossary (http://www.ttb.gov/forms_tutorials/glossary/glossary.html.), but the problem is it is not complete. For example, it does not define "withdrawn," in any form of the word.

However, the site does contain the following:

  • Tax determination - The point at which a proprietor establishes the amount of tax due.
  • Tax-determined spirits - When used with respect to the tax on any distilled spirits to be withdrawn from bond on determination of tax, shall mean that the taxable quantity of spirits has been established.

The "withdrawn from bond" reference implies the meaning of the term "withdrawn." So you are forced to go through this sort of a learning process for all of the entries on the operating report forms.

The third goal of an audit is to ensure that the operations and transaction are recorded in the proper period, that is, that you know "the point at which you must establish the amount of tax due." The answer is that you establish that at the time of withdrawal from bond. This means, quite literally, the time at which you take spirits in any container (Container. A receptacle, vessel, or form of bottle, can, package, tank or pipeline - where specifically included - used or capable of being used to contain, store, transfer, convey, remove, or withdraw spirits and denatured spirits. Container is a defined term. I am quoting 19.1) across the line that defines the boundary of your bonded premises (The premises of a distilled spirits plant, or part thereof, as described in the application for registration, on which the conduct of distilled spirits operations defined in 26 U.S.C. 5002 is authorized," quoting Sec. 19.1 again). Okay, those are confusing sentences. I admit that. But you can find definitions for most terms.

The next goal of an audit is to determine if you are properly measuring the values, i.e., in DSP terms, if you are making the proper gauges in the proper way. For taxable withdrawals of cased goods, that means that you are determining the tax due based on the size of the bottle, the proof shown on the label, the number of bottles in the case and the number of cases removed. You do this from a record, usually an invoice, showing the removal (if invoices are not dated as of the date the spirits cross the bond line, then a bill of lading or similar document, as long as it contains the information necessary for a TTB employee to determine the tax due on the spirits you moved out of the area of the bonded premises. You then compute the liability at the rate of $13.50 a proof gallon, which for 80 proof 750ml/12 case is about $25.68, but TTB has rounding rules you must follow so you need to know them too. It also means that the auditor should check, and you should ensure, that you are recording the mandatory proof and fill checks and making corrections as necessary to correct proof and fill so that they fall within the accepted tolerances. That means that you must know how to conduct the test, when to conduct it (after all filtration, etc) and the tolerances allowed.

Next, the auditor wants to know if you have presented the operations and transactions fairly in your operating reports (they are the equivalent of the income statement mixed with the balance sheet in terms of financial records). This is, again, a question of proper classification, accurate summation, etc... The question is, "Does the report, when read by someone who knows what the terms mean and where things should be shown, accurately reflect the nature, quantity, and timing of the operations and transactions you conducted.

To recap - (1) you must know what the terms mean, (2) you must make sure the quantities are determined accurately, (3) you must enter the quantities determined accurately in the records,(4) you must accurately summarize, for the reporting period, the quantity shown in the records; (5) you must enter the quantity accurately on the proper report; and (6) you must include the transaction on the report for the proper period. that the entry is made on the report for the proper period.

Proper is in each case is a function solely of TTB's rules. If you are signing reports and tax returns, learning those rules is your responsibility. I don't know any shortcuts to gaining that understanding.

However, I will add, as an encouraging word, that most small distillers engaged in a very limited number of types of operations and transactions, so that they could make a template that would black out 90% or more of the cells found on the three operating reports and still record everything required. That makes the task they face seem far less daunting. Really, if you take the entries appropo to your operations, and only those entries, "one bird at a time," asking whether you know or have a way of determining if what you are entering is correct, it is not that hard. As I said, I am not by disposition an accountant, but I can grasp it. So can you.

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The next goal of an audit is to determine if you are properly measuring the values, i.e., in DSP terms, if you are making the proper gauges in the proper way. For taxable withdrawals of cased goods, that means that you are determining the tax due based on the size of the bottle, the proof shown on the label, the number of bottles in the case and the number of cases removed. You do this from a record, usually an invoice, showing the removal (if invoices are not dated as of the date the spirits cross the bond line, then a bill of lading or similar document, as long as it contains the information necessary for a TTB employee to determine the tax due on the spirits you moved out of the area of the bonded premises. You then compute the liability at the rate of $13.50 a proof gallon, which for 80 proof 750ml/12 case is about $25.68, but TTB has rounding rules you must follow so you need to know them too. It also means that the auditor should check, and you should ensure, that you are recording the mandatory proof and fill checks and making corrections as necessary to correct proof and fill so that they fall within the accepted tolerances. That means that you must know how to conduct the test, when to conduct it (after all filtration, etc) and the tolerances allowed.

As a result of our only field inspection to date, we learned that invoicing will be the only method acceptable by TTB AUDITORS to create a record for removing the spirits out of bond. This is NOT in CFR27, but it is required by other recent federal accounting standards. That includes when you move product from your bonded area into your own tasting room at "no cost". You must generate an invoice of record. Most states also use the invoice number as the method to track movement of product to an in-state distributor or out of state.

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"Other recent federal accounting standards?" What does that mean?

Make them ante up and show you that standard, then show you where in the law or regulation it provides that the standard they show you applies to the requirement, under the IRC and part 19, that you make a record of tax determination.

Let me go out on a limb and start sawing. They will not be able to do it.

I'll keep on sawing. There is absolutely no requirement that the record of tax determination be an invoice. TTB auditors cannot insist that an invoice is required by part 19 when it clearly is not. I will cite the specific regulation:

Section 19.572 - (in pertinent part)The required records may [my emphasis] consist of documents created in the ordinary course of business, rather than documents created expressly to meet the requirements of this part, provided that those documents:

(a) Contain all of the relevant information required under this part;
(B) Are consistent with the general standards of clarity and accuracy; and

© Can be readily understood by TTB personnel.

However, Sec. 19.611 is more specific. It provides, (in pertinent part) - Form of record. A serially numbered invoice or shipping document [my empahsis again] , signed or initialed by an agent or employee of the proprietor, will constitute the record of tax determination. Although neither the proof gallons nor the effective tax rate must be shown on the record of tax determination, each invoice or shipping document [me again] must contain information sufficient to enable TTB officers to determine the total proof gallons and, if applicable, each effective tax rate and the proof gallons removed at each effective tax rate. For purposes of this part, the total proof gallons calculated from each invoice or shipping document constitutes a single withdrawal.

They key here is that you must use an invoice OR shipping document; the document you use must be serially numbered; the document must contain the information that lets the auditor "determine" the proof gallons removed on the document (it does not need to state the proof gallons removed); and an employee must sign and initial it. Nothing requires that you date an invoice on the date of removal, but if you do not, and you use the invoice as the record of tax determination, the invoice will have to show the date that you made the removal. That means the date the case crossed the bond line, not the day the truck left the loading dock.

I think I can climb safely back down the tree now. I do not think I've sawed off the limb and taken a great fall.

It is always fair game to ask a TTB employee to show you where a requirement occurs. I invited such questions. They cannot change regulation by fiat or whim. They have to go through a process defined by the law, the Administrative Procedure Act, with opportunity for public comment. That is why it takes so long to get changes. What the auditor told you would seem to run counter, as you note, to the expressed rules in the regulation. That said, invoices are a great shortcut to proper records of tax determination. But serial numbered shipping documents that contain the required information (i.e., label proof, bottle size, number of bottles per case, and number of cases, as line item entries, suffice). If the auditor wants to see the invoice associated with the shipping document, that is fine, but if you want to use shipping documents, let them ask.

I'll crawl back out on the limb again - There is no reason that you should have to create an invoice for a removal to a tasting room you own. "Invoice" A nonnegotiable commercial instrument issued by a seller to a buyer. It identifies both the trading parties and lists, describes, and quantifies the items sold, shows the date of shipment and mode of transport, prices and discounts (if any), and delivery and payment terms.

I do not make that argument frivolously. You do not make sales to yourself. You need a serially numbered record of removals to either a tasting room, retail space, or a taxpaid storeroom on, or in the immediate vicinity of, general plant premises, or a taxpaid storage premises at another location from which distilled spirits are not sold at wholesale. Consider removals to state operated bailment warehouses, for example (say North Carolina, which requires that a DSP have a federal wholesale permit at the address of the states warehouse, but sales are made to county ABC's, not the state). Ask the auditor how he can require an invoice in those instances, since an invoice would indicate a sale had taken place when none had?

Do you tell them to pound sand if they ask to see the invoice? Certainly not. But the imposition of ad hoc requirements is maddening.

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