Industry Circulars 18-5

September 14, 2018
Number: 2018 – 5

Single Taxpayer Rules for Credits and Reduced Rates on Beer, Wine, and Distilled Spirits Produced in the United States

1.  Purpose

The Alcohol and Tobacco Tax and Trade Bureau (TTB) is issuing this Industry Circular to respond to questions it has received regarding the application of the “single taxpayer” rules of the Tax Cuts and Jobs Act (Public Law 115-97) (“the Act”).  Specifically, this Industry Circular addresses certain scenarios where two or more domestic industry members would be treated as a “single taxpayer” and how this affects their eligibility to claim the credits or reduced rates available under the Act on the beer, wine, or distilled spirits they produce and remove subject to tax. 

2.  Background

On December 22, 2017, the President signed into law the Act, which amended provisions of the Internal Revenue Code (IRC) related to excise taxes on beer, wine, and distilled spirits.  These provisions include tax credits and reduced tax rates on certain limited quantities of these products removed from breweries, bonded wine cellars (including bonded wineries), and distilled spirits plants in the United States during calendar years 2018 and 2019.

The credits and reduced rates apply generally to the first products removed subject to tax from these facilities in the calendar year.  However, the applicability of the credits and reduced rates is subject to various limitations, including the “single taxpayer” rules that apply to domestic producers.  The tax credits, reduced rates, and single taxpayer rules are as follows: 

Beer:  The Act provides for a tax rate of $16 per barrel on the first 6 million barrels of beer brewed by the brewer and removed during the calendar year.  The Act provides for a rate of $18 per barrel on the remaining barrels not subject to the $16 rate.  See 26 U.S.C. 5051(a)(1)(C).  For brewers in the United States who produce no more than 2 million barrels of beer during the calendar year, the Act provides for a rate of $3.50 per barrel on the first 60,000 barrels removed during such calendar year which have been brewed or produced by such brewer.  See 26 U.S.C. 5051(a)(2)(A). 

The single taxpayer rule for beer states that, “two or more entities (whether or not under common control) that produce beer marketed under a similar brand, license, franchise, or other arrangement shall be treated as a single taxpayer for purposes of the application of this subsection.”  See 26 U.S.C. 5051(a)(5)(C).  The reference to “this subsection” means that the single taxpayer rule applies to the reduced tax rates for beer outlined above, as specified in section 5051(a).

Wine:  The Act allows three different credits on wine produced by the producer and removed during the calendar year.  The credits are equal to $1 per wine gallon on the first 30,000 wine gallons of wine removed, 90 cents on the next 100,000 wine gallons removed, and 53.5 cents on the next 620,000 wine gallons removed.  The tax credits apply to all wine tax rates, except that the Act provides adjusted credits for the hard cider tax rate under section 5041(b)(6) of the IRC (6.2 cents, 5.6 cents, and 3.3 cents, respectively).  These credits are available during calendar years 2018 and 2019, and during that time the credits otherwise available under section 5041(c)(1) and (2) of the IRC do not apply.  See 26 U.S.C. 5041(c)(8).

The single taxpayer rule for wine states that, “[r]ules similar to rules of section 5051(a)(5) shall apply for purposes of this subsection.”  See 26 U.S.C. 5041(c)(4).  By referring to the section containing the single taxpayer rule for beer, this section provides that a rule similar to the single taxpayer rule described above for beer applies to the tax credits for wine specified in section 5041(c)(8). 

Distilled Spirits:  The Act provides for reduced tax rates on distilled spirits that are distilled or processed and removed during the calendar year.  These rates are equal to $2.70 per proof gallon on the first 100,000 proof gallons removed, and $13.34 per proof gallon on the next 22.13 million proof gallons removed.  The tax rate for distilled spirits not subject to the reduced rates is $13.50 per proof gallon.  See 26 U.S.C. 5001(c)(1). 

The single taxpayer rule for distilled spirits states that, “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 for purposes of the application of this subsection.”  See 26 U.S.C. 5001(c)(2)(D).  The reference to “this subsection” means that the single taxpayer rule applies to the reduced tax rates for distilled outlined above, as specified in section 5001(c).

3. Application of the Single Taxpayer Rules

Under the single taxpayer rules described above, “two or more entities” are “treated as a single taxpayer” when they “produce [beer, wine, or distilled spirits] marketed under a similar brand, license, franchise, or other arrangement,” even if those entities are not under common control.  Thus, similar to controlled group rules (see, e.g., 26 U.S.C. 5051(a)(5)(A)), which aggregate the production of commonly controlled entities for the purpose of determining eligibility for credits or reduced rates among the commonly controlled entities, the single taxpayer rule aggregates the production of multiple entities under various arrangements for determining eligibility for credits and reduced rates under the Act.¹ Recognizing that the Act provides that each producer is eligible for a credit or reduced rate on only a fixed quantity of products, the single taxpayer rules prevent producers from obtaining the credits or reduced rates on products beyond that quantity by contracting out the production of their products to other producers. 

To illustrate the basic application of the single taxpayer rule, assume that Distilled Spirits Plant A (DSP-A) produces and removes for sale in the United States 100,000 proof gallons of distilled spirits marketed under the name “Spirit A” in the calendar year.  Under the Act, all 100,000 proof gallons would generally be eligible for the reduced tax rate of $2.70 per proof gallon.  If, later in the same calendar year, DSP-A hires DSP-B to produce and remove an additional 25,000 proof gallons of Spirit A, DSP-A and DSP-B will be treated as a single taxpayer with respect to the production and removal of Spirit A.  As a result, DSP-A and DSP-B will at most be able to claim the reduced tax rate of $2.70 per proof gallon on only 100,000 of the 125,000 proof gallons of Spirit A.  The remaining 25,000 proof gallons would generally be eligible for the reduced tax rate of $13.34 per proof gallon. 

TTB has received questions about the types of arrangements that would be subject to the single taxpayer rule, the extent to which production pursuant to these arrangements would limit a producer’s ability to claim credits or reduced rates, and the type of records or other documentation needed to substantiate eligibility for credits or reduced rates on beer, wine, or distilled spirits produced pursuant to an arrangement subject to the single taxpayer rule.  

Although any determination of the extent to which the single taxpayer rule limits eligibility for credits or reduced rates would necessarily be highly fact-specific, the following sections provide general guidance intended to illustrate how the single taxpayer rule would apply to certain production arrangements.

• When Does the Single Taxpayer Rule Apply?

Products marketed under a similar brand, license, franchise, or other arrangement include products offered for sale in the United States and produced by multiple producers pursuant to a contract manufacturing agreement, private label agreement, or any other arrangement where the producers make such products in concert with each other or for a common entity.² Multiple producers acting pursuant to such agreements or arrangements are treated as a single taxpayer with respect to the products produced under the agreement or arrangement.³  In the examples below, the entities are not part of a controlled group with the other entities in the examples. 

Example 1: Arrangements Subject to the Single Taxpayer Rule

During the calendar year, Brewery A produces a beer marketed under the name “Beer 1” pursuant to a contract with Entity Q. During the same calendar year, Brewery B produces a different beer, marketed under the name “Beer 2,” pursuant to a contract with Entity Q. Both beers are produced, removed, and offered for sale in the United States during the calendar year at the levels reflected in Table 1. 

During the same calendar year, Brewery A and Brewery C form an arrangement where they each produce a beer marketed under the name “Beer 3.” The Beer 3 beer produced by each brewery is removed and offered for sale during the calendar year at the levels reflected in Table 1. 

Brewery A, Brewery B, and Brewery C do not produce or remove any beer during the calendar year other than that reflected in Table 1.

Application of Single Taxpayer Rules for Example 1: For the calendar year, Brewery A and Brewery B are treated as a single taxpayer because they both produce beer for Entity Q. The products treated as produced by the single taxpayer are Beer 1 and Beer 2. Although the two products are different, they are each nonetheless considered to be produced by the single taxpayer because they are each produced for Entity Q. 

Brewery A and Brewery C are also separately treated as a single taxpayer because they produce Beer 3 pursuant to an arrangement with each other. 

• How Does the Single Taxpayer Rule Limit Eligibility for Credits and Reduced Rates?

As noted above, the single taxpayer rules may affect a producer’s eligibility for the credits and reduced rates available under the Act.  Those credits and reduced rates are each available to a limited quantity of beer, wine, or distilled spirits. For instance, the $16 per barrel tax rate on beer can be applied to a maximum of 6 million barrels of beer brewed by a brewer and removed during the calendar year.

For purposes of applying the quantity limitations and any other eligibility criteria of the reduced rates, the products produced and removed by a single taxpayer are considered to have been produced and removed by a single entity.  As a result, using the example of beer, a single taxpayer may not remove more than 6 million barrels of the single taxpayer’s products at the $16 per barrel rate, even if each of the individual producers in the group being treated as a single taxpayer (for purposes of this guidance, the “single taxpayer group”) removes fewer than 6 million barrels of the single taxpayer’s beer.

As illustrated in the example below, the products produced and removed by a single taxpayer are also still attributable to each individual producer in the single taxpayer group for purposes of determining each producer’s own eligibility for the reduced rates. In other words, an individual producer is not eligible under any circumstances to take a credit or reduced rate on more barrels, wine gallons, or proof gallons than the Act allows.  The single taxpayer rules do not create additional, separate opportunities for credits or reduced rates.

It is incumbent on each individual producer to ensure that their removals of beer, wine, or distilled spirits at a reduced tax rate (or with a claimed credit, in the case of wine) do not cause any quantity limitation on such credit or reduced rate to be exceeded. 

Example 2: Application of Credits and Reduced Rates to Single Taxpayers

During the calendar year, Brewery XY produces 3 million barrels each of two beers marketed under the names “Beer X” and “Beer Y.” Brewery XY also hires Brewery Z to produce an additional 1 million barrels of Beer X. No other breweries produce Beer X or Beer Y. Beer X and Beer Y are each removed and offered for sale in the United States during the calendar year at the levels reflected in Table 2.

During the same calendar year, Brewery Z also produces a beer marketed under the name “Beer Z.” Beer Z is produced solely by Brewery Z, and is removed and offered for sale in the United States during the calendar year at the level reflected in Table 2. 

Brewery XY and Brewery Z do not produce or remove any beer during the calendar year other than that reflected in Table 2.

Application of Single Taxpayer Rules for Example 2:  Beer X and Beer Y are each produced for a common entity, namely Brewery XY.  As a result, Brewery XY and Brewery Z—the producers of Beer X and Beer Y—are treated as a single taxpayer.  The products produced by the single taxpayer are Beer X and Beer Y.  The quantity limitations and other eligibility criteria of the reduced rates apply collectively to the products produced and removed by the single taxpayer. 

In total, the single taxpayer produces and removes 7 million barrels of beer during the calendar year: 4 million barrels of Beer X and 3 million barrels of Beer Y.  Because the total production of the single taxpayer exceeds 2 million barrels, none of the product produced by the single taxpayer is eligible for the $3.50 per barrel rate.  However, up to 6 million barrels of the single taxpayer’s products are eligible to be removed at the $16 per barrel rate.  Both Brewery XY and Brewery Z are responsible for ensuring that their removals of the single taxpayer’s products (i.e. Beer X and/or Beer Y) at the $16 per barrel rate do not cause the 6 million barrel limitation to be exceeded. 

Beer Z, on the other hand, is not produced by or otherwise attributable to the single taxpayer.  As a result, Brewery Z will not need to factor in any other producer’s activity in determining whether its removals of Beer Z are eligible for the reduced rates.  However, Brewery Z must still account for all of its own production and removals, even if some portion of that activity is done as a single taxpayer with one or more other entities.    

Brewery Z’s total annual production is 1.5 million barrels: 1 million barrels of the single taxpayer’s product (Beer X) and 500,000 barrels of Beer Z.  Brewery Z’s total annual production is under 2 million barrels and Brewery Z is generally eligible for the $3.50 per barrel rate.  However, for reasons described above, Beer X, the single taxpayer’s product, is not eligible for the $3.50 rate.  Since Beer Z is not attributable to the single taxpayer, Brewery Z may remove 60,000 barrels of Beer Z at the $3.50 per barrel rate.  Brewery Z may also remove the remaining 440,000 barrels of Beer Z at the $16 per barrel rate: because Brewery Z does not produce and remove more than 6 million barrels in total, it will not exceed the quantity limitation on the $16 per barrel rate even if that rate becomes unavailable to the single taxpayer’s product that it removes (Beer X) due to the single taxpayer’s combined removals of Beer X and Beer Y.

4. Documentation and Review of Eligibility for Credits or Reduced Rates

In general, each taxpayer must determine whether they are eligible for the tax credits or reduced tax rates under the Act and, when claiming such credits or reduced rates, be able to demonstrate their eligibility for them.  Because the single taxpayer rules limit the application of the credits and reduced rates, each producer claiming a credit or reduced rate must determine whether they should be treated as a single taxpayer with any other entities.  If a producer should be treated as a single taxpayer with other entities, TTB strongly recommends that the producer retain documentation regarding the production and removals of the single taxpayer group sufficient to demonstrate the producer’s eligibility for the claimed credits or reduced rates. 

When a producer belonging to a single taxpayer group claims a credit or pays tax at a reduced rate, TTB expects that, at a minimum, the following information will be necessary to demonstrate the producer’s eligibility: 

• A copy of the contract or equivalent record of the arrangement pursuant to which the single taxpayer’s products are made.  This documentation should indicate the quantity of the single taxpayer’s products that the producer is expected to produce and the extent to which the producer is expected to claim credits or pay reduced rates on the products;
• Daily records of the producer’s production and removal of any single taxpayer’s products, capable of distinguishing the single taxpayer’s products from other products; and
• If claiming the $3.50 per barrel rate on beer, a certification (in the contract or arrangement, or otherwise) that the single taxpayer will not produce more than 2 million barrels of the single taxpayer’s products annually.

As previously explained, the credits and reduced rates under the Act are each available to a limited quantity of beer, wine, or distilled spirits.  There may be circumstances in which a member or members of a single taxpayer group mistakenly claim a credit or reduced rate after the quantity limitation on the credit or reduced rate has been exhausted. 

In the event that a quantity limitation is exceeded, the Act requires that TTB look to the timing of the removals to determine which removals were and were not eligible for the credit or reduced rate.  For example, the Act provides a credit of $1 per wine gallon on the first 30,000 wine gallons produced by the producer and removed during the calendar year.  As a result, a single taxpayer may only claim the $1 per wine gallon credit on the first 30,000 wine gallons produced and removed by the single taxpayer.  If the single taxpayer collectively claims the $1 per wine gallon credit on 40,000 wine gallons of the single taxpayer’s product, TTB would examine the timing of the removals upon which the $1 credit was claimed in order to determine which particular removals accounted for the first 30,000 wine gallons and, as such, were eligible for the $1 per wine gallon credit.

Questions. If you have any questions concerning this industry circular, please contact the Regulations and Rulings Division at 202-453-2265 or use the contact us form.

John J. Manfreda
Administrator
Alcohol and Tobacco Tax and Trade Bureau

¹ Controlled group rules and the single taxpayer rule serve similar functions relating to aggregating production of multiple entities for purposes of determining eligibility for tax credits and/or reduced rates.  Where such entities are under common control, controlled group rules will be applied.  Where multiple domestic entities produce beer, wine, or distilled spirits marketed under a similar brand, license, franchise, or other arrangement, single taxpayer rules will be applied, in addition to any applicable controlled group provisions.

² As used in this paragraph, the term “entity” is not limited to producers.  Additionally, when used in reference to a member of a controlled group, the term “entity” includes the entire controlled group as a single entity.

³ Note that if one entity produces a product of only one type of alcohol commodity (beer, wine, or distilled spirits) and a second entity produces a product only of a different type of alcohol commodity than the type produced by the first entity, the entities are not treated as a single taxpayer.