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Industry Circulars 2022-3

 

December 29, 2022
Number: 2022 – 3

Calculating Tax Rates for Distilled Spirits Eligible for Both Craft Beverage Modernization Act Reduced Tax Rates and Tax Credits for Wine and Flavors Content

To: Distilled Spirits Plants, Importers, and Others Concerned.

1. Purpose.

In this industry circular, the Alcohol and Tobacco Tax and Trade Bureau (TTB) provides guidance for distilled spirits plants (DSPs) on how to calculate effective tax rates for distilled spirits products eligible for the Craft Beverage Modernization Act (CBMA) reduced tax rates.

This industry circular also provides guidance for importers on how to calculate and use effective tax rates1 or “standard effective tax rates” (SETRs),2  for imported products that are eligible for CBMA tax benefits.

For purposes of this industry circular, the term "effective tax rate" refers to the tax rate applicable to a distilled spirits product after subtracting the credits allowed under 26 U.S.C. 5010 for the wine content and flavors content of the product, and the term “CBMA reduced tax rates” refers to the tax rates on distilled spirits set forth in 26 U.S.C. 5001(c)(1), which are discussed further below.

This industry circular supersedes Industry Circular 2018-4.  It generally restates the procedures provided by Industry Circular 2018-4 for DSPs on how to calculate effective tax rates for distilled spirits products that are subject to CBMA reduced tax rates, but provides updated guidance for importers on how to calculate and use effective tax rates or SETRs for imported distilled spirits products that are eligible for CBMA tax benefits in light of the passage of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“the 2020 Act”) and associated changes to TTB’s import regulations. 

2. Background.

In general, the Internal Revenue Code of 1986 (IRC) imposes a tax of $13.50 per proof gallon on distilled spirits produced in or imported into the United States. See 26 U.S.C. 5001(a)(1). The IRC also provides for reduced tax rates of $2.70 and $13.34 per proof gallon under certain circumstances. See 26 U.S.C. 5001(c).3  The applicability of the reduced tax rates depends on circumstances including when the distilled spirits were removed from the DSP or imported into the United States.

Section 5010 of the IRC allows certain credits against the tax imposed by section 5001 on each proof gallon of alcohol in a distilled spirits product derived from eligible wine or from eligible flavors to the extent the eligible flavors do not exceed 2.5 percent of the finished product on a proof gallon basis (also referred to as “5010 credits”). The terms "eligible wine" and "eligible flavor" are defined in 27 CFR 19.1 and 27.11. These 5010 credits may apply to distilled spirits that are subject to the CBMA reduced tax rates of $2.70 and $13.34 per proof gallon.

The 5010 credits are determined at the same time the tax is determined on the distilled spirits containing the wine or flavors, and the credits are allowable at the time the tax is payable as if the credit constituted a reduction in the rate of tax. See 26 U.S.C. 5010(a), (b)(1)(A), and (b)(1)(B). Under section 5010(b)(1)(A), taxes against which the credits are allowable are the taxes due on the distilled spirits product containing the wine or flavors that is removed from the bonded premises of a DSP, imported into the United States, or otherwise brought into the United States. Therefore, the credits associated with the distilled spirits product containing the wine or flavors are allowable only against taxes due for the distilled spirits product containing that wine or those flavors.

In addition, by equating allowance of the credits with a reduction in the rate of tax, section 5010(b)(1)(B) provides that credits associated with that distilled spirits product are allowable only to the extent they do not exceed the taxes due for that product. For example, if a DSP proprietor removes a distilled spirits product that is subject to a tax rate of $2.70 per proof gallon under 26 U.S.C. 5001(c)(1)(A) and the product contains wine and flavors for which the total 5010 credits allowable are $3.00 per proof gallon, the total allowable 5010 credits for that product would be limited to $2.70 per proof gallon and the DSP proprietor would be required to take the credits at the time the taxes are paid for the product.

The 2020 Act transferred responsibility for administering the CBMA tax benefits for imported alcohol from U.S. Customs and Border Protection (CBP) to the U.S. Department of the Treasury (Treasury) beginning with products entered for consumption in the United States on or after January 1, 2023. Treasury has delegated this authority to TTB. The 2020 Act also changed the way in which importers will take advantage of the CBMA tax benefits assigned to them. Starting January 1, 2023, importers who want to take advantage of the CBMA tax benefits must pay the full tax rate ($13.50 per proof gallon minus any allowable 5010 credits) to CBP and then subsequently submit a claim to TTB for a refund of applicable CBMA tax benefits.4

3. Guidance for DSPs on Calculating Effective Tax Rates for Distilled Spirits Products Subject to CBMA Reduced Tax Rates

DSPs should use the procedure described in this section for calculating effective tax rates for distilled spirits products subject to CBMA reduced tax rates. By contrast, importers should use the procedure described in section 4 for calculating and obtaining TTB approval of effective tax rates or SETRs for imported distilled spirits products that are eligible for CBMA tax benefits.

Section 19.246 of the TTB regulations (27 CFR 19.246) prescribes how DSPs must compute effective tax rates for distilled spirits products. The equation outlined in § 19.246(a) for calculating effective tax rates applies in cases where the taxes are determined on the product at a rate of $13.50 per proof gallon, but this equation does not apply in cases where the taxes are determined at rates of $2.70 or $13.34 per proof gallon. Therefore, DSPs should use the procedure described below for calculating effective tax rates for products subject to these reduced rates.

  1. a. Calculation Procedure

    1. Calculate the initial effective tax rate for the distilled spirits product in accordance with § 19.246(a), assuming for purposes of the initial calculation that the product is subject to a tax rate of $13.50 per proof gallon.
    2. Subtract the initial effective tax rate from $13.50 to determine the credit per proof gallon for the distilled spirits product.
    3. Subtract the credit per proof gallon from the actual reduced tax rate applicable to the distilled spirits product. If the resulting number is greater than or equal to zero, this number represents the actual effective tax rate for the product on a proof gallon basis. Alternatively, if the resulting number is less than zero, then the actual effective tax rate for the product on a proof gallon basis is equal to zero.
  2. b. Example 1
    1. The initial effective tax rate for a distilled spirits product is calculated as $13.16 per proof gallon under § 19.246(a), assuming for purposes of the initial calculation that the product is subject to a tax rate of $13.50 per proof gallon.
    2. The credit per proof gallon for the distilled spirits product is $0.34 ($13.50 – $13.16 = $0.34).
    3. If the distilled spirits product is subject to a reduced tax rate of $2.70 per proof gallon, the actual effective tax rate is $2.36 per proof gallon ($2.70 – $0.34 = $2.36). If the distilled spirits product is subject to a tax rate of $13.34 per proof gallon, the actual effective tax rate is $13.00 per proof gallon ($13.34 – $0.34 = $13.00).

  4. c. Example 2
     

    1. The initial effective tax rate for a distilled spirits product is calculated as $10.27 per proof gallon under § 19.246(a), assuming for purposes of the initial calculation that the product is subject to a tax rate of $13.50 per proof gallon.
    2. The credit per proof gallon for the distilled spirits product is $3.23 ($13.50 – $10.27 = $3.23).
    3. If the distilled spirits product is subject to a tax rate of $2.70 per proof gallon, the actual effective tax rate is $0.00 per proof gallon ($3.23 subtracted from $2.70 is less than zero, so the actual effective tax rate is zero). If the distilled spirits product is subject to a tax rate of $13.34 per proof gallon, the actual effective tax rate is $10.11 per proof gallon ($13.34 – $3.23 = $10.11).

4. Guidance for Importers on How to Calculate and Use Effective Tax Rates and SETRs for Imported Distilled Spirits Products Eligible for CBMA Tax Benefits

  1. Overview

An effective tax rate for an imported distilled spirits product is the tax rate applicable to the product after subtracting the allowable 5010 credits. An importer may obtain TTB approval of an effective tax rate each time a distilled spirits product containing eligible wine or eligible flavors is imported into the United States, by following the procedure in 27 CFR 27.76.

An SETR for an imported distilled spirits product is an effective tax rate established under 27 CFR 27.77 based on the least quantity and lowest alcohol content of eligible wine or eligible flavors used in the manufacture of the distilled spirits product. To establish an SETR for a distilled spirits product, the importer of the product must obtain approval from TTB as set forth in § 27.77. Among other things, § 27.77(b) requires the importer to submit to TTB a computation of the standard effective tax rate for the product in accordance with § 27.41 as part of an application to obtain SETR approval. Section 27.77(c) also allows an importer to use an SETR that TTB previously approved for a different importer under certain circumstances. Under § 27.77(d), SETRs may not be employed until approved by the appropriate TTB officer, and a copy of the approval must be maintained in accordance with applicable record retention requirements and made available upon request of the appropriate TTB officer or CBP officer. See also 27 CFR 27.137.

      b. Procedure for Calculating and Using Effective Tax Rates and SETRs for Imported Products Eligible for CBMA Tax Benefits
 

Through this industry circular, TTB is providing guidance on how importers should calculate and use effective tax rates and SETRs for imported products eligible for CBMA tax benefits.

Effective January 1, 2023, importers seeking to establish effective tax rates or SETRs for distilled spirits products eligible for CBMA tax benefits should follow the procedures set forth in the TTB regulations at §§ 27.76 and 27.77, respectively. Importers should calculate effective tax rates and SETRs in accordance with § 27.41, based on the full tax rate of $13.50 per proof gallon. Importers with SETRs approved by TTB based on the $13.50 tax rate (including all such SETRs approved prior to January 1, 2023), may pay this rate to CBP for distilled spirits products entered for consumption in the United States on or after January 1, 2023. For all other imported distilled spirits products entered for consumption in the United States on or after January 1, 2023, importers must pay the full tax rate to CBP.

After paying the tax to CBP as described above, importers who want to take advantage of CBMA tax benefits may submit a claim to TTB electronically for a refund using the myTTB importer claims module (myTTB) and in accordance with TTB regulations at Part 27, Subpart P.5

For example, an importer who is eligible for a 5010 credit of $0.34 might pay an SETR of $13.16 to CBP for a product containing eligible flavors. If the importer has an assigned CBMA tax benefit, the importer could file a claim with TTB for an additional CBMA tax benefit of $0.16 per proof gallon (if the assigned benefit is based on the difference between the $13.50 tax rate and the $13.34 reduced tax rate), or $10.80 per proof gallon (if the assigned benefit is based on the difference between the $13.50 tax rate and the $2.70 reduced tax rate).

     c. CBMA Tax Benefit Refunds Cannot Exceed Effective Tax Rate

Consistent with the guidance above for DSPs, an importer may not claim a CBMA tax benefit refund for a product that exceeds the effective tax rate or SETR the importer paid to CBP. Claim amounts calculated by myTTB for CBMA tax benefits will not exceed the amount of tax paid to CBP.

For example, an importer who paid an effective tax rate of $10.50 to CBP (based on a 5010 credit of $3.00 per proof gallon) for a product could not obtain a full refund with TTB for $10.80 per proof gallon (the full benefit available for an assigned CBMA tax benefit based on the $2.70 reduced tax rate) for the product. The importer’s refund could not exceed its effective tax rate (in this example $10.50). If an importer pays an effective tax rate that is less than or equal to the rate at which the importer would otherwise be entitled to claim a CBMA tax benefit, then there is no remaining refund for TTB to provide to the importer in lieu of the reduced rate. In other words, for any given imported product, the total 5010 credit plus the CBMA tax benefit may not exceed the full rate of tax ($13.50 per proof gallon). 

5. 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.

1 See 27 CFR 27.76.

2 See 27 CFR 27.77.

3 The 2020 Act made permanent most CBMA provisions of the Tax Cuts and Jobs Act of 2017, including the reduced tax rates of $2.70 and $13.34 per proof gallon for certain limited quantities of distilled spirits products produced in or imported into the United States during the calendar year. The 2020 Act also changed some CBMA provisions. For more information on how CBMA has affected TTB’s regulations, see TTBGov - Craft Beverage Modernization and Tax Reform (CBMTRA).

4 For more information on how importers may submit claims to TTB for CBMA reduced tax rates, see TTB’s regulations at 27 CFR part 27, Subpart P, as well as TTB’s guidance on CBMA import refunds.

5 See TTBGov - Imports – Tax Benefits under the Craft Beverage Modernization Act (CBMA) for more information.

 

Mary G. Ryan 
Administrator 
Alcohol and Tobacco Tax and Trade Bureau

Last updated: April 5, 2024