Industry Circular: 08-03

DEPARTMENT OF THE TREASURY
Alcohol and Tobacco Tax and Trade Bureau

Industry Circular

Number: 2008-3

Date: July 23, 2008

To download a PDF file, you must have Adobe Acrobat Reader software installed on your system. To download a free copy of Adobe Reader, click here.

Non-Compliant Flavored Malt Beverages

To: Brewers, Importers, and Others Concerned.

PURPOSE

This circular reminds brewers, importers, and others of the strict limitations that apply to the use of flavors and other nonbeverage ingredients containing alcohol in the manufacture of flavored malt beverages (FMBs). The Alcohol and Tobacco Tax and Trade Bureau (TTB) also wishes to advise industry members of TTB's position regarding non-compliant FMBs and the serious consequences that will result from failure to comply with the regulations that govern the manufacture of FMBs.

BACKGROUND

On March 24, 2003, TTB published a notice of proposed rulemaking in the Federal Register, TTB Notice No. 4, concerning beer and malt beverages (see 68 FR 14292). Among other things, TTB Notice No. 4 addressed the issue of whether certain products marketed as FMBs should be classified as distilled spirits and taxed accordingly. Notice No. 4 proposed regulations to permit the addition of flavorings and other ingredients containing alcohol to beer and malt beverage products within specific limitations.

On January 3, 2005, TTB published a final rule, TTB T.D.–21, which amended the regulations governing the production, taxation, composition, labeling, and advertising of beer and malt beverages (see 70 FR 194). The new regulations allow for the addition of flavors and other nonbeverage ingredients containing alcohol to products classified and taxed as beers and malt beverages but, in general, limit the alcohol contribution from such flavors and other nonbeverage ingredients to not more than 49% of the alcohol content of the product. In addition, if a beer or malt beverage contains more than 6% alcohol by volume, not more than 1.5% of the volume of the finished product may consist of alcohol derived from flavors and other nonbeverage ingredients that contain alcohol. These standards were incorporated into the regulations in 27 CFR parts 7 (Labeling and Advertising of Malt Beverages) and 25 (Beer), and became effective on January 3, 2006.

Since the new regulations went into effect, TTB has determined that some brewers have manufactured products that exceed the 49% or the 1.5% limitation on the addition of flavors and other nonbeverage ingredients containing alcohol. Accordingly, TTB wishes to remind brewers of the strict limitations that apply to the addition of flavors and other nonbeverage ingredients to beers and malt beverages. We also wish to advise brewers of the serious consequences that may result from non-compliance with these manufacturing standards for FMBs and of TTB’s policy regarding the treatment of non-compliant products.

FLAVOR LIMITATIONS FOR FMBs

The regulations at 27 CFR 7.11 and 25.15 provide that a brewer may add flavors and other nonbeverage ingredients containing alcohol to malt beverages and beer within certain limitations. For practical purposes, the regulations provide two distinct standards for FMBs:

• 6% or Less ABV. If the alcohol content of the finished product is 6% or less by volume, it is subject to the general rule whereby not more than 49% of the alcohol content of the finished product may consist of alcohol derived from flavors and other nonbeverage ingredients that contain alcohol.

• Over 6% ABV. If the alcohol content of the finished product is more than 6% by volume, not more than 1.5% of the volume of the finished product may consist of alcohol derived from flavors and other nonbeverage ingredients that contain alcohol.

TTB will review the brewer's batch records to determine whether products are in compliance with the above rules. The following are examples of batch records for FMB products that illustrate how the above rules apply to FMB products.

Example A – Batch Record for 6% or Less Alcohol by Volume FMB Product

1. In this example, the calculated alcohol by volume of the finished product is 5.00%. (4,650.00 gallons of alcohol divided by 93,000.00 total gallons of finished product = 5.00%.)

2. Because the alcohol by volume of the finished product is in the "6% or less" category, the alcohol contribution from flavors and other nonbeverage ingredients containing alcohol may not be more than 49% of the overall alcohol content of the finished product. In other words, a maximum of 49% of 4,650.00 gallons (2,278.5 total gallons of alcohol) would be allowed.

3. In this example, the alcohol contribution from flavors is 1,078.80 gallons. This represents 23.2% of the overall alcohol content of the finished product and the product is in compliance with the 49% limitation. (1,078.80 gallons of alcohol from flavors divided by 4,650.00 total gallons of alcohol in the finished product = 23.2%.)

Example B – Batch Record for Over 6% Alcohol by Volume FMB Product

1. In this example, the calculated alcohol by volume of the finished product is 8.00%. (7,443.72 gallons of alcohol divided by 93,000.00 total gallons of finished product = 8.00%.)

2. Because the alcohol by volume of the finished product is in the "over 6%" category, no more than 1.5% of the volume of the finished product may consist of alcohol derived from added flavors and other nonbeverage ingredients containing alcohol. In other words, a maximum of 1.5% of 93,000 gallons of finished product (1,395 total gallons of alcohol) is allowed.

3. In this example, the alcohol contributed by added flavors is 1,297.97 gallons. This represents 1.40% of the volume of the finished product and the product is in compliance with the 1.5% limitation. (1,297.97 gallons of alcohol divided by 93,000.00 gallons of finished product = 1.40%.)

TTB POLICIES REGARDING NON-COMPLIANT PRODUCTS

The regulations at 27 CFR 7.11 and 25.15 provide specific limitations on the use of flavorings and other nonbeverage ingredients containing alcohol in the manufacture of beer and malt beverage products. There are no tolerances that allow a producer to exceed those limitations. Products that exceed those limitations are classified as distilled spirits products and the following provisions of law will apply.

Unauthorized Production and Bottling

Distilled spirits may only be produced, bottled, and removed from a registered and permitted distilled spirits plant (26 U.S.C. 5171). Therefore, the production of distilled spirits at a brewery is not authorized and is a violation of the Internal Revenue Code of 1986 (IRC) and may result in penalty or other appropriate enforcement action.

Rate of Tax

Distilled spirits are taxed at the rate of $13.50 per proof gallon (26 U.S.C. 5001). Therefore, products that exceed the limits in §§ 7.11 and 25.15 are distilled spirits and will be taxed at the distilled spirits rate.

Date Taxes Are Due

The IRC provides that the tax on any distilled spirits produced in the United States at any place other than a qualified distilled spirits plant shall be due and payable immediately upon production (26 U.S.C. 5006(c)(2)). Therefore, the distilled spirits tax will be due on the date that the finished non-compliant product batch is produced, and all taxes, penalties, and interest will be calculated and assessed by TTB based upon that date.

Mislabeling

The TTB regulations issued under the labeling provisions of the Federal Alcohol Administration Act (FAA Act, 27 U.S.C. 205(e)) require that alcohol beverage labels provide the consumer with adequate information about the identity of a product and prohibit deceptive information on the label. Distilled spirits products that are labeled as beer or malt beverages are mislabeled under the FAA Act and therefore may not be introduced into interstate or foreign commerce.

QUESTIONS

If you have questions about the information contained in this circular, please contact TTB's Regulations and Rulings Division at:

By Mail: Regulations and Rulings Division
Alcohol and Tobacco Tax and Trade Bureau
1310 G Street NW, Suite 200 East
Washington, DC 20220

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