Amendments to the Criteria for the Hard Cider Tax Rate and Information on Other Requirements that Apply to Wine that is Eligible for the Hard Cider Tax Rate
May 16, 2017
Number: 2017 - 2
To: Proprietors of Wine Premises, Importers of Wine, and Others Concerned.
1. Purpose.
In this Industry Circular, the Alcohol and Tobacco Tax and Trade Bureau (TTB) is providing guidance regarding recent changes to the eligibility criteria set forth in the Internal Revenue Code (IRC) for the "hard cider" tax rate, which applies to certain cider and perry products. The changes result from the Protecting Americans from Tax Hikes Act (PATH Act), Pub. L. 114-113, which amended sections of the IRC. The modified eligibility criteria for the hard cider tax rate, set forth at 26 U.S.C. 5041(b)(6), apply to wine that is removed from wine premises or released from customs custody on or after January 1, 2017. The PATH Act amendments do not change the tax rate applicable to hard cider; they only expand the eligibility criteria for the hard cider tax rate.
This guidance explains the modified criteria for the hard cider tax rate. It also provides information on the application of the small wine producer tax credit and formula requirements. These requirements have not changed; rather, TTB is providing this additional information to assist industry members in understanding how existing requirements may apply to their cider or perry products. This guidance also explains the new carbonation tolerance, recordkeeping, and testing requirements.
TTB recognizes that the terms "hard cider," "cider," and "perry" have broader meanings in the industry and among consumers than the meanings ascribed to them in the law and TTB regulations. When used in this document, the term "hard cider" is intended to refer to products eligible for the hard cider tax rate, as described herein. References to "cider and perry products" are intended to generally refer to products fermented primarily from apples and/or pears (or apple juice and/or pear juice) regardless of whether the products satisfy the criteria to be eligible for the hard cider tax rate.
We note that TTB published a temporary rule implementing the PATH Act changes in the Federal Register as T.D. TTB-147 on January 23, 2017. The temporary rule amended 27 CFR parts 24 and 27. The guidance in this Industry Circular reflects certain regulatory changes implemented by the temporary rule.
2. Applicable IRC and FAA Act Statutory Provisions.
TTB administers provisions of the IRC and the Federal Alcohol Administration Act (FAA Act) that pertain to hard cider and other wine.
The IRC tax at 26 U.S.C. 5041 applies to wine that contains at least 0.5 percent alcohol by volume and not more than 24 percent alcohol by volume. The IRC defines six tax classes of wine, set forth at 26 U.S.C. 5041(b). "Hard cider" is one of those six classes, and 26 U.S.C. 5041(g) sets forth specific criteria used to determine the eligibility of products for the hard cider tax rate. As a result of the enactment of the PATH Act, effective January 1, 2017, the eligibility criteria for the hard cider tax rate were amended and are now broader than the previous eligibility criteria. As a result, more products are now eligible to be taxed at the hard cider tax rate, which is the lowest of the tax rates applicable to wine.
The FAA Act applies to wine that contains at least 7 percent alcohol by volume and not more than 24 percent alcohol by volume. Note that the recent amendments to the IRC did not affect FAA Act requirements.
3. New Criteria for the Hard Cider Tax Rate.
As of January 1, 2017, the "hard cider" tax rate applies to wine that:
- Contains no more than 0.64 gram of carbon dioxide per 100 milliliters;
- Is derived primarily from apples or pears, or from apple juice concentrate or pear juice concentrate and water;
- Contains no fruit product or fruit flavoring other than apple or pear; and
- Contains at least one-half of 1 percent and less than 8.5 percent alcohol by volume.
Carbon dioxide. Prior to the change in the criteria for the hard cider tax rate, a wine had to be a "still wine" as defined by the IRC (that is, a wine containing not more than 0.392 gram of carbon dioxide per 100 milliliters) to be eligible for that tax rate. As a result of the change in the criteria, effervescent wine (wine that contains more than 0.392 gram of carbon dioxide per 100 milliliters) is eligible for the hard cider tax rate, as long as it contains no more than 0.64 gram of carbon dioxide per 100 milliliters. For related information, see section 7 of this document, "Carbonation."
Base fruit. TTB considers wine to be "derived primarily from apples or pears, or from apple juice concentrate or pear juice concentrate and water" for purposes of determining eligibility for the hard cider tax rate if the apple juice, pear juice, or combination of apple and pear juice, or the equivalent amount of concentrate of apple and/or pear juice reconstituted to the original brix of the juice prior to concentration, or any combination thereof, represents more than 50 percent of the volume of the finished product. Prior to the change in the criteria for the hard cider tax rate, wine that contained pear or pear juice concentrate (or the fruit or flavor of pear, as described below) was not eligible for the hard cider tax rate.
Fruit products. Wine is not eligible for the hard cider tax rate if it contains any fruit product other than a fruit product derived from apples or pears. A fruit product is any material derived or made from any fruit or part of a fruit, including but not limited to, concentrates, extracts, juices, powders, or wine spirits. In some circumstances, set forth in the TTB regulations at 27 CFR 24.332(b), an authorized wine treating material (listed in 27 CFR 24.246) that is derived from a fruit other than apple or pear may be used in the production of wine otherwise eligible for the hard cider tax rate. See § 24.332(b) for additional information.
Fruit flavoring. Wine is not eligible for the hard cider tax rate if it contains any ingredient that imparts a fruit flavoring other than apple or pear. An ingredient that imparts a fruit flavoring could be a natural fruit flavor, an artificial fruit flavor, or a natural flavor that artificially imparts the flavor of a fruit that is not contained in that flavor. Also, the use of ingredients that impart flavors other than a fruit flavor, for example spices, honey, hops, or pumpkins, do not make a wine ineligible for the hard cider tax rate. See § 24.332(c) for additional information.
Alcohol content. Prior to the change in the criteria for the hard cider tax rate, the limit on alcohol content for such wine was "less than 7 percent." The new criteria state that eligible wine must contain less than 8.5 percent alcohol by volume. (Note that wine that contains 8.5 percent alcohol by volume is not eligible for the hard cider tax rate, as only wine that contains less than 8.5 percent alcohol by volume is eligible.)
4. Applicability of the tax credit for small domestic producers.
The IRC provides a tax credit for small domestic producers of certain wines. Because of the expansion of the criteria for the hard cider tax rate, certain sparkling cider and perry products may now be eligible for this tax credit.
Domestic wine producers are eligible for a tax credit under 26 U.S.C. 5041(c) if they produce not more than 250,000 gallons of wine during a calendar year. Subject to certain conditions, the credit may be taken on the first 100,000 gallons of wine (other than wines that fall within the "champagne and sparkling wines" tax class) removed for consumption or sale during a calendar year. Prior to the change in the criteria for the hard cider tax rate, any cider or perry product that was a "sparkling wine" (that is, a wine that contained carbon dioxide due to secondary fermentation in a closed container) was taxed as a "sparkling wine" and, as a result, such wines were not eligible for the small producer tax credit. As a result of the change in the criteria for the hard cider tax rate, certain sparkling products – that is, those that contain more than 0.392 gram of carbon dioxide per 100 milliliters but no more than 0.64 gram of carbon dioxide per 100 milliliters, and that satisfy the other criteria for the hard cider tax rate – fall within the hard cider tax class rather than the "champagne and sparkling wines" tax class, and such wines may be eligible for the small producer tax credit. The credit for hard cider is up to 5.6 cents per wine gallon.
See 27 CFR 24.278 for more information about the conditions for taking the small producer tax credit. For additional information on computing the tax credit, please see TTB's Quick Reference Guide to Wine Excise Tax on our website at: https://www.ttb.gov/tax_audit/taxguide.shtml .
5. Labeling Requirements.
All wines are subject to IRC labeling requirements. Wines that contain at least 7 percent alcohol by volume are also subject to the FAA Act. Depending on the alcohol content and whether or not the wine is sold in interstate or foreign commerce, cider and perry products taxed at the hard cider tax rate may be subject to labeling requirements under just the IRC or under both the IRC and the FAA Act. The IRC provisions require that prior to removal for consumption or sale, wine must bear labels that provide certain basic information needed to administer the tax provisions, including identifying the product, the tax class of the product under the IRC, the net contents of the container, and the person who bottled or packed the wine. The IRC labeling requirements are set forth at 27 CFR 24.257 and reference or incorporate FAA Act requirements (in 27 CFR part 4) where applicable.
Wines that do not require label approval under the FAA Act.
Wine that is not subject to label approval under 27 CFR part 4, because it either is covered by a certificate of exemption from label approval or contains less than 7 percent alcohol by volume, must bear a designation on the label that includes enough information (when viewed with the alcohol content statement) to identify the tax class under 26 U.S.C. 5041. The wine must be identified by the term "wine" (or a word that signifies a type of wine, such as "cider," or "perry," as applicable). If the wine contains more than 0.392 gram of carbon dioxide per 100 milliliters, the word "sparkling" or "carbonated," as applicable, must be included in the designation. See 27 CFR 24.257(a)(4)(ii)(A).
Revised TTB regulations provide that for wines that are removed from wine premises on or after January 1, 2017, and are taxed at the "hard cider" tax rate, the label designation must be consistent with a hard cider tax class. For example, the designations "hard cider," "hard perry," "apple wine," "pear wine," "apple cider," "apple perry," "apple pear wine," "cider" and "perry" are consistent with the hard cider tax class. The designation "blueberry cider" is not consistent with the hard cider tax class, because it indicates that the product contains either blueberries or blueberry flavors, which are not authorized for use in wine that is eligible for the hard cider tax class. See 27 CFR 24.257(a)(4)(ii)(A).
When issuing the temporary rule, TTB recognized that following the statutory change to the definition of hard cider, existing wine labels may not contain enough information to identify the tax class. Accordingly, TTB has provided a one-year transitional period for industry members to comply with this requirement. For wine removed on or after January 1, 2017 and prior to January 1, 2018, TTB will not consider labels on these products non-compliant on the sole ground that the label does not provide enough information to identify whether the wine is eligible for a "hard cider" tax classification. See 27 CFR 4.257(a)(4)(ii)(A)(2).
TTB believes that this transitional period will help reduce any burden associated with having to change product labels. Also, as an option, wines eligible for the "hard cider" tax class may, prior to January 1, 2018, include the statement "Tax class 5041(b)(6)" on the label to adequately indicate the appropriate tax class.
As noted earlier, TTB recognizes that the term, "hard cider," has broader meaning in the industry and among consumers than the definition of hard cider that appears in the IRC, which is articulated solely for tax purposes. TTB's predecessor agency, the Bureau of Alcohol, Tobacco, and Firearms (ATF), issued regulations in 2001 that allowed the term "hard cider" to appear on labels of products that do not meet the criteria for the hard cider tax rate, and those regulations did not require the term "hard cider" to be placed on the labels of products that do meet the criteria for the hard cider tax rate. See T. D. ATF 470, 66 FR 58938.
To maintain this flexibility regarding the use of the term "hard cider" on labels, TTB amended its regulations through the publication of T.D. TTB–147 to require a specific statement for tax purposes on products taxed as hard cider.
For hard cider removed from wine premises on or after January 1, 2018, the label must include the statement "Tax class 5041(b)(6)." The statement must appear in a minimum type size of 2 millimeters for containers of more than 187 milliliters and a minimum of 1 millimeter for containers of 187 milliliters or less. See § 24.257(a). This tax class statement may appear anywhere on any label, and may be on a sticker that is firmly affixed on the container, as long as it does not obstruct any mandatory information required by TTB regulations in 27 CFR parts 16 or 24.
Wines that require label approval under the FAA Act.
If the wine contains 7 percent or more alcohol by volume and must have label approval under 27 CFR part 4, the wine must be labeled with its class, type, or other designation required by that part. See 27 CFR 24.257(a)(4)(i)(A).
For hard cider removed on or after January 1, 2017 and prior to January 1, 2018, the label may include the statement "Tax class 5041(b)(6)" to adequately indicate the appropriate tax class. However, that statement is not required until January 1, 2018.
For hard cider removed from wine premises on or after January 1, 2018, the label must also include the statement "Tax class 5041(b)(6)." See 27 CFR 24.257(a)(4)(i)(B)(2). This statement may appear anywhere on the label. The statement must appear in a minimum type size of 2 millimeters for containers of more than 187 milliliters and a minimum of 1 millimeter for containers of 187 milliliters or less. See § 24.257(a). This tax class statement may appear on any label, and may be on a sticker that is firmly affixed on the container, as long as it does not obstruct any mandatory information required by TTB regulations in 27 CFR parts 4, 16, or 24. A new certificate of label approval is not required if the addition of the tax class statement is the only change being made to an approved label.
Larger containers.
Note that 27 CFR 24.259 requires each container larger than 4 liters (including kegs) or each case used to remove wine for consumption or sale to be durably marked with the kind of wine, stated in accordance with § 24.257. As a result, larger containers or cases of hard cider that are removed on or after January 1, 2018 must also be marked, "Tax class 5041(b)(6)."
Imported hard cider.
TTB amended its regulations through the publication of T.D. TTB–147 to require that containers of imported hard cider be labeled in accordance with § 24.257(a)(4). See 27 CFR 27.59(b). This includes the requirement that imported hard cider must be labeled with "Tax class 5041(b)(6)" if removed from customs custody on or after January 1, 2018.
6. Formula Requirements.
General.
A formula is a list of the ingredients used to make a wine and a step-by-step description of how the wine is made. In some instances, a formula for a wine must be approved by TTB before the wine may be produced (in the case of certain domestic wines) or before removal from customs custody (in the case of certain imported wines containing at least 7 percent alcohol by volume). Formula approval requirements are not based on the tax classification of the wine. As a result some hard cider will require formula approval while other hard cider will not require such approval.
No formula approval is required to produce a wine, including hard cider, if it is a "natural wine." Natural wine is the product of the fermentation of the juice or must of sound, ripe fruit made with any cellar treatment authorized by Subparts F and L of part 24 and containing not more than 21 percent by weight (21 degrees Brix dealcoholized wine) of total solids. See 27 CFR 24.10. Examples include wines made solely by fermenting apples or pears, or a combination of apples and pears, and produced in accordance with the applicable provisions of part 24.
Production of cider and perry products, including hard cider, requires TTB formula approval if, under the IRC, the products are "special natural wine" or "other than standard wine." A "special natural wine" is a wine made from a base of "natural wine" with the addition of natural flavors such as natural herbs, spices, fruit juices, natural aromatics, natural essences, or other natural flavorings, subject to conditions outlined in subpart H of part 24.
Examples of hard cider that is "special natural wine," and would therefore require formula approval before domestic production, include products that are made from:
- Apples and flavored with hops;
- Apple concentrate and flavored with cinnamon and nutmeg; and
- Pears and flavored with honey.
An "other than standard wine" includes wine that is made: (1) with more sugar and/or water than is allowed in the production of natural wine or special natural wine; (2) from blending together different fruit or agricultural wines; and (3) from adding wine spirits of one kind of fruit to a finished wine that was produced from a different kind of fruit. See 27 CFR 24.218 and subpart F of part 24. Examples of cider and perry products that are "other than standard" wine and may be eligible for the hard cider tax rate, and for which a formula approval would be required before domestic production, include those made by:
- Blending apple wine (a fruit wine) with rhubarb wine (an agricultural wine); and
- Adding pear spirits to apple wine.
Certain imported cider and perry products are also subject to formula approval. The formula requirements for imported wine are substantially the same as for domestic wine. For domestic wine, see 27 CFR 24.80 and 24.81, and for imported wine see TTB Industry Circular 2007-4 at: https://www.ttb.gov/industry_circulars/index.shtml.
Changes to formulas related to the new hard cider tax rate criteria.
TTB reminds industry members that if they change the formulation of a wine, perhaps in order to become eligible for the hard cider tax rate, they still must comply with applicable formula requirements as outlined above. Examples of changes to formulations that may require formula approval include:
- Adding pear wine to apple wine;
- Adding flavors (such as honey, hops, or spices);
- Changing the alcohol content of a wine that is already covered by an approved formula to a level not covered by the approved formula; and
- Making a still wine that is already covered by an approved formula effervescent. (Note that a new formula is not required to change the level of effervescence in an effervescent wine when the approved formula covers the new level of effervescence.)
7. Carbonation.
Tolerance.
As noted above, a wine is eligible for the hard cider tax rate if it contains not more than 0.64 gram of carbon dioxide per 100 milliliters and all other criteria of the hard cider tax rate are met. The PATH Act authorizes TTB to prescribe through regulation tolerances to that limitation "as may be reasonably necessary in good commercial practice." Accordingly, TTB amended its regulations to provide a tolerance, consistent with the tolerance already applicable to "still wine," of not more than 0.009 gram of carbon dioxide per 100 milliliters of hard cider under circumstances where the amount of carbon dioxide in excess of 0.64 gram of carbon dioxide per 100 milliliters is due to mechanical variations or secondary fermentation variations that cannot be completely controlled under good commercial practice. This tolerance is not applicable where it is found that the proprietor continuously or intentionally exceeds 0.64 gram of carbon dioxide per 100 milliliters of hard cider, or where the variation results from the use of methods or equipment determined by the appropriate TTB officer not to be in accordance with good commercial practice. See 27 CFR 24.251. Apple or pear wine that has in excess of 0.64 gram of carbon dioxide per 100 milliliters (unless covered by an allowed tolerance) is classified and taxed at the applicable "sparkling wine" or "artificially carbonated wine" rate.
Recordkeeping requirement.
In addition to the other recordkeeping requirements applicable to the production and receipt of effervescent wine, TTB regulations at 27 CFR 24.302 now specify that a proprietor of a bonded wine premises or a taxpaid wine bottling house premises who produces or receives in bond sparkling hard cider and/or artificially carbonated hard cider is responsible for determining the correct amount of carbon dioxide in such sparkling or artificially carbonated hard cider and recording that amount in the effervescent wine record. See § 24.10 for the definitions of "sparkling hard cider" and "artificially carbonated hard cider."
Testing.
Industry members may use any method that has been formally validated (for example, that underwent a multi-laboratory performance evaluation) or that is otherwise scientifically valid to determine the carbon dioxide levels in wine. A scientifically valid method is, among other things, accurate, precise, and specific for its intended purpose, and it has results that are consistently reliable, accurate, and reproducible.
8. Questions.
If you have any questions concerning this circular, please contact the Regulations and Rulings Division, by phone at (202) 453-2265 or by e-mail at WineRegs@ttb.gov.
Date Signed: May 16, 2017
Signed by John Manfreda
John J. Manfreda
Administrator
Alcohol and Tobacco Tax and Trade Bureau
Page last reviewed: May 16, 2017