DIVERSION OF DISTILLED SPIRITS FOR PURPOSES OF
Proprietors of Distilled Spirits Plants (DSPs), Importers,
Wholesalers And Ocher Persons Who Purchase Distilled Spirits Products
PURPOSE. This circular reminds proprietors
of distilled spirits plants (DSPs), importers, wholesalers and other
persons who purchase distilled spirits products from DSPs of their
responsibility to comply with all applicable Federal and state laws
with respect to such sales.
The sale of distilled spirits to people to whom such
sales cannot legally be made and the diversion of such distilled
spirits from their destination of record to other destinations in
the United States or Canada can violate laws set forth in the Internal
Revenue Code (IRC), the Federal Alcohol Administration (FAA) Act,
the 21st Amendment, the Webb-Kenyon Act, the Federal Criminal Code,
Federal Indian laws, and/ or applicable state laws.
BACKGROUND. Recently, ATF has encountered a
number of situations in which DSPs have submitted evidence of exportation
and/ or names of consignees which were materially incorrect or,
in some cases, fraudulent. In some situations, distilled spirits
were withdrawn from bond for exportation with paperwork indicating
overseas shipment. They were, in fact, smuggled into Canada. In
other cases, non-taxpaid spirits were discovered remaining illegally
in the United States. This circular reminds all parties involved
in the sale and purchase of distilled spirits to use good commercial
judgment when engaging in transactions in distilled spirits in interstate
and foreign commerce. It reminds parties to such transactions of
their potential tax, civil and criminal penalties in situations
where the documentation on such removals list false consignees and/
or the spirits are diverted from legitimate export channels prior
to actual exportation. This circular finally addresses the sale
of distilled spirits shipped into states in violation of state laws
and the implications of sales to purchasers on Indian reservations.
INTERNAL REVENUE CODE (IRC)
Section 5001 of the Internal Revenue Code (IRC) imposes a tax on
all distilled spirits produced in or imported into the United States.
Pursuant to section 5005, the importer of distilled spirits is liable
for the tax on such imported spirits. Similarly, the proprietor
of a DSP is liable for the tax on the distilled spirits produced
or stored on the bonded premises of the DSP. Section 5214( a)( 4)
provides that distilled spirits on which the internal revenue tax
has not been paid or determined may be withdrawn from the bonded
premises of any distilled spirits plant without payment of tax for
exportation, after filing such bonds as are required by section
5175 and complying with such other requirements as may be prescribed
by regulation. Section 5214( a)( 9) provides that distilled spirits
on which the internal revenue tax has not been paid or determined
may be withdrawn from the bonded premises of any distilled spirits
plant without payment of tax for transfer (for the purpose of storage
pending exportation) to any Customs bonded warehouse from which
distilled spirits may be exported, provided that such spirits are
stored, and accounted for pursuant to regulatory and bond requirements
promulgated by ATF.
Persons wishing to export distilled spirits without payment of
tax must file a bond with ATF and apply for permission to withdraw
the spirits by filing ATF Form 5100.11, Withdrawal of Spirits, Specially
Denatured Spirits, or Wines for Exportation.
Pursuant to section 5005( e)( l), any p erson who withdraws distilled
spirits from the bonded premises of a DSP without payment of tax
as provided, in pertinent part, in section 5214( a)( 4) and (9),
shall be liable for the internal. revenue tax on such distilled
spirits from the time of such withdrawal. Pursuant to section 5005(
e)( 2), all persons liable for the tax on distilled spirits under
section 5005( e)( l) shall be relieved of any liability at the time,
in pertinent part, the distilled spirits are exported from the United
States, deposited in a foreign-trade zone, or deposited in Customs
The regulations concerning the records required to document the
direct exportation of distilled spirits without payment of tax are
set forth at 27 C. F. R. §§ 252.40 and 252.250 -269. These
regulations state that the exportation of any shipment of distilled
spirits may be evidenced by a copy of the export bill of lading,
or in lieu thereof, a copy of the railway express receipt, a copy
of the air express receipt, a copy of the through bill of lading
where exportation is to a contiguous foreign country, or a certificate
by the export carrier.
These bills of lading, or other records, must correctly contain
the name of the exporter, the name and address of the foreign consignee,
the number of packages or cases, the serial number of the ATF Form
5100.11, and the total quantity of spirits in wine gallons or liters.
Proprietors are further reminded that the regulations specify that
they must maintain records of disposition which contain, among other
things, the name and address of the consignee and the quantity of
distilled spirits involved in each transaction. & 27 C. F. R.
§§ 19.731 -792.
Regulations regarding foreign-trade zones are set forth in 27 C.
F. R. 5 252.30. Regulations regarding Customs bonded warehouses
are set forth in 27 C. F. R. §S 252.26 -28. Persons utilizing
foreign-trade zones and Customs bonded warehouses must also comply
with the requirements of 19 C. F. R. Chapter I.
The procedures for the withdrawal of spirits by a proprietor or
other person for export are more fully set forth in Industry Circular
No. 94-1, titled, "Documenting The Exportation of Liquors,"
dated April 14, 1994.
Proprietors, importers, wholesalers and other interested parties
should familiarize themselves with the provisions of 27 C. F. R.
252 and not merely rely on the general summary of such provisions
set forth in this Industry Circular and Industry
Circular No. 94-l.
The resale in the United States of distilled spirits purchased
from a DSP will render the seller liable for special tax either
as a wholesale liquor dealer under section 5111 of the IRC or as
a retail liquor dealer under section 5121 of the IRC. A wholesaler
dealer in liquors is defined in section 5112( b) as any dealer,
other than a wholesale dealer in beer, who sells, or offers for
sale, distilled spirits, wine, or beer, to another dealer. If any
entity is making sales to entities which qualify as "dealers"
under the IRC, then it is liable for special tax as a wholesale
liquor dealer. Importers engaged in such sales are in fact wholesale
If an entity is only making sales to individuals or foreign trade
buyers who do not qualify as "dealers" under the IRC,
then it is merely liable for special tax as a retail liquor dealer
pursuant to section 5121. A retail dealer in liquors is defined
in section 5122( a) as any dealer, other than a retail dealer in
beer, who sells, or offers for sale, any distilled spirits, wine
or beer, to any person other than a dealer. Pursuant to section
5691( b), a person selling more than 20 wine gallons of distilled
spirits at one time is presumed to be a wholesale liquor dealer.
Section 5691( b) further provides that this presumption may be overcome
by evidence satisfactorily showing that such sale was made to a
person other than a dealer.
Wholesale and retail liquor dealers are also reminded of the recordkeeping
requirements imposed by the IRC with respect to the receipt and/
or disposition of distilled spirits. The recordkeeping requirements
made applicable to wholesale dealers in distilled spirits (including
importers) are set forth in 27 C. F. R. $9 194.225 -226. Section
194.225( a) requires wholesale dealers in distilled . . spurns to
mantain a daily record of the physical receipt of each individual
lot of distilled spirits, which record shall, among other things,
show the name and address of consignor and the quantity of distilled
spirits actually received. Section 194.226( a) requires wholesale
dealers in distilled spirits to prepare daily records of the physical
disposition of each individual lot of distilled spirits showing,
among other things, the name and address of the consignee and the
number of packages and cases by size of bottle.
The recordkeeping requirements made applicable to retail dealers
in distilled spirits are set forth in 27 C. F. R. S 194.234. Section
194.234( ) a requires retail dealers in distilled spirits to maintain
a daily record of the receipt of the quantity of distilled spirits
received and from whom such spirits are received. Section 194.226(
b) requires retail dealers in distilled spirits who make sales of
spirits in quantities of 20 wine gallons or more to the same person
at the same time to prepare daily records of the physical disposition
of each individual lot of distilled spirits showing, among other
things, the name and address of the purchaser and the kind and quantity
of each kind of spirits sold.
If ATF determines that evidence of exportation is materially incorrect
or fraudulent, and that the spirits were not exported as reported,
ATF will immediately take steps to assess all applicable taxes,
interest, and penalties. Other civil and criminal penalties may
also be imposed for unlawfully removing or concealing shipments
of distilled spirits, defrauding the United States of the tax on
spirits, or committing fraudulent noncompliance relating to any
required record, return, report, summary, transcript, or other document.
Persons undertaking this conduct could be subject to the criminal
penalties set forth in 26 U. S. C. §§ 5601, 5602, 5603,
5687, and 5691. Violations of sections 5601, 5602, 5603, 5687, and
5691 are punishable by imprisonment and/ or monetary fines. Proprietors,
importers, and wholesalers should also note that the knowing falsification
or fraudulent execution of these records is punishable by imprisonment
and/ or fines pursuant to 18 U. S. C. $ 1001.
Proprietors, importers, and wholesalers are cautioned that it is
also illegal to aid and abet violations of the IRC. Pursuant to
the provisions of 18 U. S. C. $ 2, any person who aids and abets
the commission of an offense against the United States is punishable
as a principal.
FEDERAL ALCOHOL ADMINISTRATION ACT (FAA ACT)
Proprietors, importers, and wholesalers are reminded that their
basic permits are conditioned upon compliance with all Federal laws
relating to distilled spirits, including taxes with respect thereto.
The willful failure to comply with all IRC payment and recordkeeping
requirements may be grounds for suspension or revocation of a proprietor's,
importer's and/ or wholesaler's basic permit.
Section 203( c) of the FAA Act, provides that persons who engage
in the business of purchasing for resale at wholesale distilled
spirits, wine, or malt beverages must obtain a wholesaler's basic
permit. The regulations define the term "resale at wholesale"
as a sale to a trade buyer. The term "trade buyer" is
defined, in pertinent part, as any person who is a wholesaler or
retailer of distilled spirits. 27 C. F. R. § 1.5. Therefore,
an entity which purchases domestic distilled spirits for resale
at wholesale to either foreign or domestic trade buyers would be
required to obtain a wholesaler's basic permit pursuant to Section
VIOLATIONS OF STATE LAWS
Proprietors, importers, and wholesalers are also reminded that
their basic permits are conditioned upon compliance with the 21st
Amendment and laws relating to the enforcement thereof. The 21st
Amendment prohibits the transportation or importation into any state,
Territory, or possession of the United States for delivery or use
therein of intoxicating liquors, in violation of the laws thereof.
Section 202( b) of the Liquor Law Repeal and Enforcement Act, 27
U. S. C. § 122, (popularly known as the Webb-Kenyon Act), was
enacted relative to the adoption of the 21st Amendment and is, in
effect, a statutory declaration of the constitutional prohibition.
Section 122 provides, in pertinent part, that:
The shipment or transportation, in any manner or by any means
whatsoever, of any spirituous, vinous, malted, fermented, or other
intoxicating liquor of any kind, from one State . . . into any
other State . . . which said spirituous, vinous, malted, fermented,
or other intoxicating liquor is intended, by any person interested
therein, to be received, possessed, sold, or in any manner used,
either in the original package or otherwise, in violation of any
law of such State . . . is hereby prohibited.
Although there are no criminal or civil penalties associated with
either the 21st Amendment or the Webb-Kenyon Act, compliance with
these provisions is a condition of the basic permit. Thus, violations
of these provisions arising from violations of state law, either
directly or as an aider or abettor, could result in suspension or
revocation of a proprietor's, importer's and/ or wholesaler's basic
permit. ATF recommends that proprietors, importers, and wholesalers
contact the relevant state taxation and alcoholic beverage authorities
with any questions regarding the legality of sales of spirits within
SALES TO INDLAN RESERVATIONS
Proprietors, importers, and wholesalers are also directed to the
provisions of Title 18, Chapter 53, United States Code, which restrict
the transportation of alcoholic beverages into Indian country. Section
1151 defines Indian country as all land within the limits of any
Indian reservation under the jurisdiction of the United States Government
and all dependent Indian communities within the borders of the United
States. Section 1154 prohibits the sale or other disposition of
alcoholic beverages in Indian country (except for scientific, sacramental,
medicinal, or mechanical purposes) and section 1156 prohibits the
possession (except for scientific, sacramental, medicinal, or mechanical
purposes) of alcoholic beverages in Indian country. Section 1161
provides, in pertinent part, that sections 1154 and 1156, shall
not apply to any act or transaction within the Indian country provided
that such act or transaction is in conformity with both the laws
of the state in question and with an ordinance duly adopted by the
tribe having jurisdiction over such area of Indian country, certified
by the Secretary of the Interior, and published in the Federal Register.
Proprietors, importers, and wholesalers are cautioned that the adoption
of a Tribal Ordinance, even if certified by the Secretary of the
Interior and published in the Federal Register, does not obviate
the requirement that sales of distilled spirits be in accordance
with state law and the Ordinance itself.
These provisions are Federal laws relating to distilled spirits,
wine, and malt beverages. Thus, violations of these provisions,
either directly or as an aider or abettor, could result in suspension
or revocation of a proprietor's, importer's, and/ or wholesaler's
basic permit pursuant to section 204( e). In addition, the criminal
penalty for violations of sections 1154 and/ or 1156, either directly
or as an aider or abettor, could result in imprisonment and/ or
a monetary fine.
ATF recommends that proprietors, importers, and wholesalers contact
the Bureau of Indian Affairs, Department of the Interior, with any
questions regarding the applicability of the above-cited Title 18
provisions and any other provisions relative to the sale of spirits
within Indian country.
ATF finally urges all proprietors, importers, and wholesalers to
exercise caution when faced with transactions which lend themselves
to any of the violations described above. We reiterate the need
that all industry members ensure that spirits which are withdrawn
from bonded premises are legitimately exported. Likewise, all industry
members are strongly urged to create and maintain all required records
relative to the disposition and exportation of distilled spirits.
INQUIRIES. Inquiries concerning this circular should refer
to its number and be addressed to the Chief, Alcohol and Tobacco
Programs Division, Bureau of Alcohol, Tobacco and Firearms, 650
Massachusetts Avenue, N. W., Washington, D. C. 20226.
John W. Magaw