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ALCOHOL LAW ADVISOR
Regulatory and Distribution Law Updates for the Alcohol Industry
ALCOHOL LAW ADVISOR
Regulatory and Distribution Law Updates for the Alcohol Industry
Alcohol Excise Taxes
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The TTB Proposes New Definition of Hard Cider

by | Feb 10, 2017 | , ,

On January 23, 2017 the Alcohol & Tobacco Tax & Trade Bureau (TTB) published a Temporary Rule and a Notice of Proposed Rulemaking (NPRM) related to the new definition of hard cider. Congressional action required a new definition when Congress amended the Internal Revenue Code in December 2015 by enacting the Protecting Americans from Tax Hikes (PATH) Act. The Temporary Rule lays out TTB’s current thinking on regulations to implement the revised definition, while the NPRM requests comments on the regulations spelled out in the Temporary Rule.

We view the following provisions as most significant:

1. Requiring a new mandatory tax classification statement on all products eligible for the hard cider tax rate, effective January 1, 2018.

2. Requiring the words “sparking” or “carbonated” on all hard cider with carbonation in excess of 0.392 grams per 100 ml.

3. Codifying in the regulations (although this reflects longstanding TTB policy) that materials like honey, hops, spices and pumpkin may be added to hard cider without jeopardizing the hard cider tax rate.

4. Establishing a .009 gram per 100 ml tolerance for carbonation in cider.

5. Suggesting in the pre-amble that treating materials, regardless of source, could render a product ineligible for the hard cider rate if those materials imparts a fruit flavor other than apple (under the new regulations apple or pear).

6. Codifying in the regulations for the first time (although this reflects longstanding TTB policy) that the hard cider definition and most rules also apply to imported hard cider.

The current deadline for comments on the proposed regulations is March 24, 2017, but TTB generally grants reasonable extensions (typically 60 or 90 additional days) upon request.



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TTB Modified Tax Filing Timeframe for Some Taxpayers

by and | Jan 12, 2017 |

On January 4, 2017 TTB published in the Federal Register a temporary rule, T.D. TTB–146, modifying the tax filing timeframe for taxpayers who fall below a certain monetary threshold and removing the bond requirements for certain eligible taxpayers who pay taxes below certain maximum amounts on distilled spirits, wine and beer. See 82 Fed. Reg. 1108 (Jan. 4, 2017). Congress mandated these changes when it enacted the PATH Act in December 2015, and the changes became effective on January 1, 2017. The temporary rule involves two primary changes:

  1. Taxpayers who do not reasonably expect to be liable for more than $1,000 in alcohol excise taxes (for distilled spirits, wine and beer) in the calendar year and were not liable for more than $1,000 in the prior year can pay their taxes annually rather than quarterly or semi-monthly. If a taxpayer has multiple locations, the $1,000 threshold applies to the combined total. A taxpayer must select the return period on its return.
  2. Taxpayers who do not reasonably expect to be liable for more than $50,000 in alcohol excise taxes (for distilled spirits, wine and beer) in the calendar year and were not liable for more than $50,000 in the prior year are exempt from filing bonds to cover operations or withdrawals. In order to take advantage of this exemption, the taxpayer must notify TTB of its eligibility and receive TTB approval. New applicants will do this during the initial application process and existing taxpayers can do so through an amendment to their registration or brewer’s notice. Ironically, the bond exemption does not apply to taxpayers that conduct operations or withdrawals of wine or spirits for industrial (as opposed to beverage) use.

TTB has issued additional guidance on the PATH Act’s impact in Industry Circular 2016–2 (Dec. 30, 2016).



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The BA’s Growing Influence on Capitol Hill

by and | Sep 29, 2016 | , , ,

How is it that the Brewers Association—an organization that has no political action committee, has employed a staff lobbyist for only 18 months, and has only had a strong presence in Washington since 2009—has gained significant traction among policymakers in the nation’s capital?

The BA is now a serious player in Washington. That is not by accident; it’s a carefully conceived strategy implemented by the BA board and senior staff—including president and CEO Bob Pease—over the last seven years that seeks to leverage the inherent strengths of America’s small craft brewers.

Read the full article, originally published in the September/October 2016 issue of The New Brewer.



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Another Taxpayer Victory in Illinois False Claims Act Litigation, Affirming a Taxpayer’s Right to Rely On Qualified Third Parties For Tax Return Preparation

by | Sep 15, 2016 |

On August 30, 2016, following a one day bench trial, Cook County Circuit Judge Thomas Mulroy ruled in favor of Treasury Wine Estates (TWE) in Illinois False Claims Act (Act) litigation filed by the law firm of Stephen B. Diamond, PC (“Relator”). Relator alleged that TWE had violated the FCA by knowingly failing to collect and remit Illinois use tax on the shipping and handling charges associated with its internet sales of wine shipped to Illinois customers. State of Ill. ex rel. Stephen B. Diamond, P.C. v. Treasury Wine Estates Americas Company, d/b/a Treasury Wine Estates, No. 14 L 7563 (Cir. Ct. of Cook County, Ill. Aug. 30, 2016) (Order). The Court held that Relator failed to prove that TWE knowingly violated the FCA or that it acted in reckless disregard of any Illinois tax collection obligation.

Read the full article here.

 



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Recent Revisions to Internal Revenue Code Affecting Alcohol Beverages

by | Feb 11, 2016 |

In December 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act).  The PATH Act amends several provisions of the Internal Revenue Code of 1986 (IRC) administered by the Alcohol and Tobacco Tax and Trade Bureau (TTB).  Those amendments relate to alcohol excise tax due dates and bond requirements, the definition of wine eligible for treatment as “hard cider” for tax purposes, and cover over of rum excise taxes imported from Puerto Rico and the US Virgin Islands.  In January 2016, TTB issued an announcement concerning the IRC amendments.

Starting with the first calendar quarter of 2017, taxpayers who anticipate being liable for no more than $1,000 in alcohol excise taxes (for sales of distilled spirits, beer and wine) for the calendar year, and who were not liable for more than $1,000 in such excise taxes the prior year, may make excise tax payments annually (rather than the current quarterly payment requirement).  Further, beginning the first calendar quarter of 2017, taxpayers eligible to pay taxes annually under the new provisions, as well as taxpayers currently eligible for quarterly payments of alcohol excise taxes (i.e., taxpayers anticipating being liable for no more than $50,000 in alcohol excise taxes, and who were not liable for more than $50,000 in such excise taxes the prior year), need not file a bond.

The PATH Act also modifies the definition of wine eligible for the tax rate applicable to “hard cider” by (1) increasing the allowable alcohol content from 0.5 percent to less than 7 percent alcohol by volume (ABV) to 0.5 percent to less than 8.5 percent ABV; (2) increasing the allowable carbonation level from 0.392 grams of carbon dioxide per 100 milliliters of wine to 0.64 grams; and (3) expanding the definition by allowing the use of pears, pear juice concentrate and pear products and flavorings in hard cider.  These changes apply to hard cider removed after December 31, 2016.  The hard cider definition changes do not affect other requirements applicable to ciders above 7 percent ABV under the Federal Alcohol Administration Act, including requirements relating to labeling, advertising and permits.

Another section of the PATH Act extends the temporary increase in the limit on cover over of rum excise taxes to Puerto Rico and the US Virgin Islands from January 1, 2015 to January 1, 2017.  This amendment applies to distilled spirits brought into the US after December 31, 2014.



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Buying and Selling a Craft Brewery

by | Feb 27, 2015 | , , ,

Few craft brew entrepreneurs contemplate selling their business when they first get started.  Unlike, for example, the typical entrepreneur in the software industry, the craft brewers we know were inspired by the love of great beer, a spirit of adventure, and the romance of creating a small manufacturing business.  But the life cycle of most businesses eventually requires at least the consideration of a sale or other transaction designed to both recoup the entrepreneur’s lifelong investment and transition the company to the next generation.

From the buy side, the craft beer business has never been hotter, with market share now approaching 8 percent by volume in the U.S. and margins that have gotten the attention of both big brewers and non-U.S. brewers alike.  This article, published in the January/February 2015 issue of The New Brewer, will explore at a high level some of the issues involved with buying and selling a craft brewery.

Read the full article.



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TTB Publishes Semi-Annual Regulatory Agenda with Plans and Goals for the Coming Year

by | Feb 9, 2015 | , , , ,

Late last year, the Alcohol & Tobacco Tax & Trade Bureau (TTB) published its semi-annual regulatory agenda in the Federal Register.  The agenda provides useful insights into TTB’s regulatory plans and goals for the coming year.  As in prior years, however, observers should recognize that TTB often announces ambitious regulatory plans and deadlines that it does not meet.

TTB identified five priority projects for 2015.  First, TTB wishes to update and modernize its regulations on the labeling and advertising of wine (Pt. 4), distilled spirits (Pt. 5) and beer (Pt. 7).  In describing the initiative, TTB seems most interested in simplification and streamlining, not in the imposition of significant new labeling and advertising requirements.  Second, TTB seeks to further de-regulate and streamline its oversight of denatured alcohol and rum, a move that could help the competitiveness of U.S. industrial operations that employ alcohol.  Third, TTB wishes to amend its export and import regulations to harmonize them with the International Trade Data System (ITDS), thereby transitioning to an all-electronic import and export environment.  Fourth, TTB hopes to implement self-certification of the formulas for flavors, extracts and other non-beverage products made with alcohol.  Fifth, TTB plans to review its distilled spirits plant regulations (Pt. 19) in order to replace the current four monthly report forms required for reporting with two forms.

Leaving priorities aside, the semi-annual agenda reports on a number of rulemaking initiatives that should attract the interest of regulated industry members.  This note will group the most significant based on the affected industry:

Multiple Alcohol Beverage Categories

  1. TTB pledges to publish a Notice of Proposed Rulemaking (NPRM) to modernize its wine, spirits, and beer labeling and advertising regulations.  As noted above, this is a 2015 priority item for the Agency.
  2. TTB plans to issue an NPRM late in 2015 to explore whether to retain, revise or repeal the current standards of fill requirements for both wine and distilled spirits.
  3. TTB plans to issue a Final Rule requiring the electronic submission of many applications, including those for original and amended basic permits.
  4. TTB expects to issue an NPRM in April 2015 to amend its import and export regulations to make them compatible with ITDS.  This is a 2015 priority item.

Wine Projects

  1. TTB hopes to issue an NPRM on certain wine terms that were first raised to the industry in an Advanced Notice of Proposed Rulemaking published by TTB in 2010.
  2. TTB plans an NPRM in July 2015 to propose authorizing additional treatments for use in winemaking.
  3. TTB expects to publish an NPRM late in 2015 to clarify the labeling of certain flavored wines.

Distilled Spirits Project

  1. TTB hopes to issue a supplemental NPRM late in 2015 to propose replacing the current four monthly forms filed by distilled spirits plant operators with two forms, thereby streamlining distillers’ reporting burdens.  TTB views this project as a 2015 priority.

Non-Beverage and Industrial Alcohol Projects

  1. TTB plans to issue an NPRM on the self-certification of non-beverage product [...]

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Supreme Court to Decide Important Administrative Law Issue

by | Nov 13, 2014 | , , ,

On December 1, 2014, the United States Supreme Court will hear oral argument in a case that will have significant implications for federal regulatory agencies like the U.S. Food and Drug Administration (FDA) and the Alcohol and Tobacco Tax and Trade Bureau (TTB).

The case is Mortgage Bankers Ass’n v. Harris, 720 F.3d 966 (D.C. Cir. 2013).  In that decision, the United States Court of Appeals for the D.C. Circuit refined a line of cases involving the Administrative Procedures Act (APA).  The APA governs the activities of federal agencies and, among other things, generally requires notice-and-comment rulemaking procedures, including publication in the Federal Register and a period of time for industry and the public to comment on proposed regulations, in order for a federal agency to adopt a new “rule.”  These procedural requirements aim to ensure transparency in governmental operations and a public “vetting” process before an agency adopts new regulatory requirements.

Beginning in the 1990s, the D.C. Circuit – which hears a large percentage of the cases involving challenges to federal agency actions – has held that the notice-and-comment rulemaking requirement extends to agency attempts to change a settled agency interpretation of a regulation.  In other words, once an agency establishes a position on a particular issue, the D.C. Circuit has required that an agency proceed through notice-and-comment procedures to change its earlier position.

In Mortgage Bankers, the D.C. Circuit held that a person challenging an agency change in policy need not show any reliance on that policy in order to claim that an agency had violated that requirement.  The court held that nothing in its prior cases required a showing of reliance.

The Supreme Court has agreed to review the case, see Perez v. Mortgage Bankers Ass’n, No. 13-1041, cert. granted 6/16/14, but on a broader issue than whether a person claiming that an agency changing its interpretation of a regulation must show reliance.  Instead, the court agreed to examine whether a federal agency must engage in notice-and-comment rulemaking before it can significantly alter an interpretive rule that articulates an interpretation of an agency regulation.  The court will hear oral argument on December 1, 2014.  Thus, the court may be poised to overrule the entire line of D.C. Circuit cases holding that an agency must engage in notice-and-comment rulemaking before changing definitive but un-codified interpretations of regulations.

A reversal of current D.C. Circuit precedent has troubling implications for the alcohol beverage industry.  Many policies of the federal agencies that regulate the industry become established through informal decisions never reduced to formal regulations.  To take one example, TTB’s policies towards the documentation of exports without payment of tax depart significantly from TTB’s published regulations, and instead rely on well-recognized and followed policies published only in informal Industry Circulars and private letter “variances” from regulations.  Consider, too, the dozens of unpublished “policies” TTB applies in the review of alcohol beverage labels, some of which go back decades and have formed the basis of entire brand propositions by the industry.  Should [...]

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Supreme Court’s 2014-15 Term: Case Will Test an Important Limitation on the Ability to Challenge State Tax Laws

by | Oct 30, 2014 | ,

On December 8, 2014, the United States Supreme Court will hear oral argument in a case that could have significant implications for the ability to use the federal courts to challenge state attempts to tax remote sellers of goods.

In Direct Marketing Association v. Brohl, 735 F.3d 904 (10th Cir. 2013), the Tenth Circuit Court of Appeals found that the Direct Marketing Association’s (DMA) challenge to a Colorado revenue statute was barred by the federal Tax Injunction Act (TIA).  Current Commerce Clause precedent bans a state from requiring a retailer with no in-state presence from collecting sales or use taxes, see Quill Corp. v. North Dakota, 504 U.S. 298 (1992), an important shield against state taxation of remote online and catalogue sellers of goods.  This precedent, however, allows states to collect sales and use tax from the buyers of the goods (i.e., citizens) located within the state.

Seeking to reach this significant source of potential tax revenues, in 2010 the Colorado legislature enacted legislation requiring major out-of-state sellers to provide a series of notices and reports related to sales taxes.  First, the selling retailers must notify Colorado purchasers that tax is due on their purchases.  Second, these retailers must send annual notices to Colorado customers who purchased more than $500 in goods in the preceding year, “reminding” these purchasers of their obligation to pay sales tax to the state.  Third, the law requires these out-of-state retailers to report information on Colorado purchasers to the state’s tax authorities.  Not surprisingly, the law gives retailers the ability to avoid these obligations by simply collecting sales tax from Colorado consumers and providing those collections to the state.

The DMA filed suit, challenging the Colorado law on several Commerce Clause grounds.  The District Court granted summary judgment in favor of DMA, relying on Quill to hold that the law placed an impermissible burden on interstate commerce.

On appeal, the Tenth Circuit did not reach the merits of the Commerce Clause issue.  Instead, the Court held that the TIA barred DMA’s lawsuit and required dismissal.  The Tax Injunction Act prohibits federal courts from interfering with the collection of state taxes.  DMA argued that because it was not a taxpayer subject to the new reporting requirements, the TIA should not apply.  Moreover, TIA reasoned that the Colorado law in question only imposed notice and reporting obligations, and therefore was merely a tax collection method, not an actual tax.  The Tenth Circuit rejected both arguments, concluding that any suit that would hamper a state’s ability to collect a tax falls within the TIA’s jurisdictional bar.

The Supreme Court has agreed to review the Tenth Circuit’s decision.  Its ultimate decision about the reach of the TIA could have implications to operations involved in the direct shipping of wine.

Current state licensing systems for direct alcohol shippers already require the payment of state taxes as a condition of licensure.  Nevertheless, statutes like Colorado’s law, if left unchallenged due to operation of the TIA, could allow states to gain more [...]

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New IRS Regulations Affect Brewers

by and | Aug 14, 2014 | ,

The Internal Revenue Service (IRS) recently issued final regulations (the Repair Regulations) that determine when taxpayers may deduct costs to acquire, produce or maintain tangible property, including all equipment and buildings.  The Repair Regulations apply to all taxpayers, including brewers of all sizes.  Taxpayers must follow these new rules in 2014, which generally will require them to change their method of accounting with the IRS.

 This article was originally published in the July/August 2014 issue of The New Brewer.



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