The Tax Cuts and Jobs Act (the “Act”) had significant impacts for the alcohol industry, including changes to tax credits and new taxpayer definitions. Because the Act became effective so quickly after passing, the TTB is still issuing guidance on the impact of the Act on alcohol industry members and related excise taxes. One recent piece of guidance, discussed in more detail in this advisory, is that as of January 1, 2018, excise tax credits may only be taken by the producer and no longer on transferred wine.
Changes to Wine Tax Rates. The Act created temporary, larger excise tax credits for wine effective January 1, 2018 to December 31, 2019, and suspends until January 1, 2020 the previous TTB small producer tax credit for wine. The new tax credits are $1 per wine gallon on the first 30,000 wine gallons removed or imported, 90 cents per gallon on the next 100,000 wine gallons removed or imported, and 53.5 cents on the next 620,000 wine gallons removed or imported. The tax credits apply to all wine tax rates, including sparkling wine, and also changes the definition of table wine for tax purposes, increasing the upper limit from 14 percent ABV to 16 percent ABV. The Act also adjusted the hard cider tax rate. View the new TTB alcohol excise tax rate table here.
No Tax Credits on Transferred Wine. On March 2, 2018, the TTB announced that for calendar years 2018 and 2019 TTB excise tax credits are not allowed on transferred wine that is removed from bond by any bonded premises other than the producing winery. There is no provision in the Act that provides for a transfer of the new tax credits to domestic wine removed from bond in 2018 and 2019. As a result, any wine that is removed by a wine premises that did not produce the wine is not eligible for the new tax credits on that wine during these two years. So if a winery purchases bulk wine in bond from another producing winery, and does not undertake any production activities (discussed below), it must either pay full excise tax on that wine upon removal, or may transfer the wine in bond back to the producer for removal at the new tax rate. Taxpaid bulk wine can only be bottled at a TTB permitted Taxpaid Wine Bottling House. Likewise, any wine sitting in bond at a bonded wine cellar (“BWC”) on behalf of a producing winery cannot be removed and taxpaid at the BWC with the producing winery’s tax credits. The wine must be transferred back and removed by the producing winery in order to take advantage of the new credits.
Other Winemaking Acts as “Production.” TTB has also made it clear that for the purpose of taking the tax credit allowed by the Act, the activities considered to be “production” that are set forth at 27 CFR 24.278(e) will apply and permit the producer to use the tax credits on any wine removed. In addition to the entire volume of wine produced itself by fermentation, a winery may be considered the producer of wine if the winery does any of the following activities to already fermented wine, if “undertaken in good faith in the ordinary course of production, and not solely for the purpose of obtaining a tax credit”:
- Sweetening – Sweetening material is added after fermentation for the purpose of sweetening the wine.
- Addition of wine spirits – Certain brandy or wine spirits authorized to be used in wine production are added.
- Amelioration – Water, sugar, or a combination of both is added to wine to adjust the wine’s acid content.
- Production of formula wine – Formula wine includes wine that may contain added flavoring or wine treating materials.
The entire volume of wine that has undergone any one of these production activities would be considered “produced” for purposes of applying the new tax credit. Blending that does not involve one of the operations listed above is not considered production.
Temporary Grace Period for BWC; Alternate Procedure: Because TTB interpretation of the Act was just issued on March 2, 2018, TTB has created a 6 month grace period, until June 30, 2018, for wine that has already been transferred to a BWC. Under a temporary alternate procedure, a producing winery and BWC can do a “transfer through documentation” of the wine in bond without having to physically transfer the wine at the BWC back to the producing winery. Once documented as “received” by the producing winery the wine can be removed taxpaid with the tax credits and then virtually transferred back to the BWC. For full details on these temporary transfers through documentation, please see the TTB circular of March 2, 2018 here.
Single Taxpayer and Controlled Groups. The eligibility for the new tax credit is also subject to controlled group and single taxpayer rules, which may further limit the wine eligible for the new tax credit. See 26 U.S.C. 5041(b)(4). Controlled groups of entities (e.g., parent-subsidiary companies) are considered to be one entity by TTB when calculating total gallons removed for purposes of determining eligibility for TTB wine excise tax credits. This means an importer electing to receive a tax credit from a foreign manufacturer is deemed a member of the controlled group of the foreign manufacturer. Further, the Act provides that two or more entities (whether or not under common control) that produce products marketed under a similar brand, license, franchise, or other arrangement shall be treated as a single taxpayer for purposes of the credits and reduced rates.