Similarly, the law states that for the purpose of applying the reduced tax rate, “two or more entities (whether or not under common control) that produce distilled spirits marketed under a similar brand, license, franchise, or other arrangement shall be treated as a single taxpayer….” (26 USC 5001(c)(2)(D), as added by Public Law 115-97). An compelling bit of language—does it imply that two DSP’s of different ownership, bottling the same product under contract, each would share the same 100,000 proof gallon reduced rate allotment? How TTB explains and implements this provision of the law will be interesting. Working with the transfer in bond rule, the DSP may find it better, in some situations, to have contract bottled product shipped to their plant in bond for shipment to distributors rather than having the contract packager ship to distributors. Neither party would be desiring a “sharing” of the 100,000 ceiling on the $2.70 per proof gallon rate, if either plant’s volume will be near to or over that threshold. The rate jumps to $13.34 per proof gallon for any spirits shipped above 100,000 proof gallons. The reduced tax rates benefit all distillers, not just the smaller companies. Further, the rate applies to imported products, as well. A large group may allocate their 100,000 proof gallons to the varied producers and importers in their group. This creates a complexity for TTB in their auditing and administration of the law,
which requires a group to document their allocations. Another effect of the reduced rate is that the wine credit under 26 USC 5010 reducing taxes on products containing wine will likely be negated for the lowest tax rung, as computation of the wine credit generally leaves the rate above $2.70. The flavors credit computation may be of some benefit, at least a few cents per proof gallon. Again, TTB instruction should help understand how the specifics of the law impact those credits.
LAST WORDS To summarize, the distiller, brewer and winery obviously benefit from the two-year (and possibly longer term) reduction in tax rates, but they should be sure to watch for the layer of rules attendant to the rate reduction which can impact their businesses. How the agency implements the rules is yet to be seen, as TTB folks analyze the changes and issue guidance and regulatory adjustments. Getting things right and staying compliant will require industry members to stay tuned to what the government provides in the way of instruction for incorporating these changes into their records and operations.
Jim McCoy operates J. McCoy Alcohol & Tobacco Compliance Consultants LLC, and since 2010 has assisted alcohol and tobacco businesses in their efforts to meet Federal regulatory and tax requirements. For more info email Jim at email@example.com
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