May 16, 2018
Number: 2018 – 3
Alternation of Premises for Storage of Tax-Determined and Non-Tax Determined Distilled Spirits, Wine, and Beer
To: Proprietors of Distilled Spirits Plants, Bonded Wine Cellars, Breweries, and Others Concerned.
1. Purpose.
The Alcohol and Tobacco Tax and Trade Bureau (TTB) is advising proprietors of distilled spirits plants (DSPs), bonded wine cellars (BWCs), and breweries that they may submit requests for approval to store tax-determined and non-tax-determined products on their premises in a manner that varies from the requirements in the TTB regulations. Specifically, this industry circular provides guidance for proprietors who wish to "alternate" their premises in a way that varies from TTB requirements for the purpose of storing tax-determined and non-tax-determined products in a more flexible or efficient manner. These requests should be submitted to TTB's Regulations and Rulings Division as applications to use alternate methods or procedures under 27 CFR 19.27, 24.22, or 25.52, as applicable. Additional information about submission and review of the applications is provided below.
2. TTB Authority Relating to DSPs, BWCs, and Breweries.
TTB regulates DSPs, BWCs, and breweries for tax purposes under chapter 51 of the Internal Revenue Code of 1986 (IRC) (see 26 U.S.C. chapter 51). The TTB regulations implementing these provisions are in chapter I of title 27 of the Code of Federal Regulations (27 CFR). The regulations in 27 CFR parts 19, 24, and 25 govern operations at the facilities where DSPs, BWCs, and breweries are located. For purposes of the TTB regulations, a DSP, BWC, or brewery includes certain premises where specified operations take place but does not necessarily include the entire facility where the DSP, BWC, or brewery is located (see definitions of these three terms in 27 CFR 19.1, 24.10, and 25.11). This industry circular explains, as applicable, where different rules or terms apply to operations involving DSPs, BWCs, or breweries.
The regulations in 27 CFR parts 19, 24, and 25 contain provisions prescribing how proprietors must determine and pay taxes imposed on distilled spirits, wine, and beer. Generally, taxes are determined (i.e., become due for payment) when the products are removed from certain premises at the proprietors' facilities. Taxes on distilled spirits and wine are determined when the products are removed from the bonded premises of the DSP or BWC, respectively (see 27 CFR 19.227 and 24.270). Taxes on beer are determined when the products are removed from the brewery premises for consumption or sale (see 27 CFR 25.159). Once taxes are determined, proprietors must pay the taxes due in accordance with the procedures outlined in the regulations (see 27 CFR 19.229, 24.271, 24.275, 25.164, and 25.175).
Subject to specific exceptions, tax-determined products cannot be stored on the bonded premises of a DSP or BWC or on the brewery premises. Tax-determined distilled spirits and tax-determined wine may not be stored or allowed to remain on bonded premises and must be kept separate from non-tax-determined products, subject to a limited exception for tax-determined bulk wine (see 27 CFR 19.58 and 24.90, and 26 U.S.C. 5612). Tax-determined beer of a brewer's own production may not be stored on the brewery premises, subject to exceptions for tax-determined beer sold at an authorized tavern on brewery premises and for tax-determined beer returned to the brewery premises (see 27 CFR 25.24(a)). Taxpaid beer produced by other brewers may be stored on brewery premises if certain conditions outlined in § 25.24(a) are met. One of these conditions is that tax-determined beer of another brewer's production must be segregated in a manner to preclude mixing with the receiving brewer's non-tax-determined beer.
The storage requirements discussed in the previous paragraph help ensure that tax-determined and non-tax-determined products are distinguishable from each other and that taxes are properly paid on products removed from the premises.
3. Storage of Tax-Determined Products at Facilities Where DSPs, BWCs, and Breweries Are Located.
Proprietors of DSPs, BWCs, and breweries may wish to store tax-determined finished products (such as cases of bottled products) at their facilities. Because proprietors may not store tax-determined products on bonded premises or brewery premises (subject to the exceptions discussed above), proprietors generally must store tax-determined product on premises that are not designated as bonded or brewery premises. When a proprietor files an application with TTB for a permit or files a brewer's notice, the proprietor must distinguish between the areas considered to be bonded premises or brewery premises and the areas not considered to be bonded premises or brewery premises (see 27 CFR 19.74, 24.111, and 25.68). The regulations also require proprietors to amend the information associated with their permits or brewer's notices if they wish to change how the premises at their facilities are designated (see 27 CFR 19.119, 24.131, and 25.78)
In some cases, a proprietor may wish to use the same area of the facility to store either tax-determined products or non-tax-determined products at different times depending on business needs. Because proprietors generally may not store tax-determined and non-tax-determined products on the same premises at the same time, the proprietor must properly designate whether or not the specified area of the facility is bonded premises (in the case of DSPs and BWCs) or brewery premises (in the case of breweries) depending on the tax status of the products the proprietor will store there at any particular time.
The regulations governing DSPs and BWCs authorize proprietors to apply to change the designation of specified areas using a procedure called "alternation" of premises (see 27 CFR 19.143 and 24.135). If a proprietor of a DSP or BWC wishes to alternate between using an area as bonded premises or non-bonded premises under §§ 19.143 or 24.135, the proprietor must receive TTB approval to do so when applying for a permit or applying to amend the information associated with the permit. In the application, the proprietor must submit information required under §§ 19.143 or 24.135, including information about how the premises will be alternated and how tax-determined and non-tax-determined products will be separated. Upon approval of the alternation, the proprietor of the DSP or BWC may alternate the use of the area without obtaining TTB approval each time the alternation occurs.
The current regulations governing breweries do not contain provisions similar to §§ 19.143 or 24.135 authorizing the alternation of brewery premises and non-brewery premises. Therefore, brewers who wish to redesignate their brewery premises as non-brewery premises or vice versa have two potential options under the current regulations. First, the brewer may amend the information associated with the brewer's notice in accordance with § 25.78 each time the proprietor changes the designation of the premises. Second, the brewer may apply for approval of an alternate method or procedure under § 25.52 to alternate the premises using procedures similar to those authorized for DSPs and BWCs under §§ 19.143 or 24.135.
4. Identification of Areas Subject to Alternation of Premises.
The alternation regulations include requirements outlining how the proprietor must identify the physical areas subject to alternation at the times the alternations occur. Section 19.143 includes the requirement that a DSP proprietor must provide a diagram that shows how the premises will exist during the alternation in their relative operating sequence, and § 24.135 requires the BWC proprietor to identify the alternated premises by portable signs, tags, or other satisfactory method. The alternations authorized under §§ 19.143 and 24.135 therefore generally involve the change in designation of specified areas at specified times. For example, a proprietor may request approval under §§ 19.143 or 24.135 to alternate a physically identified room or row of a warehouse from bonded premises to non-bonded premises on an occasional basis when other non-bonded premises dedicated for storing tax-determined products are at storage capacity.
The regulations generally do not authorize the alternation of any area of a facility at any given time solely based on whether the proprietor chooses to store tax-determined or non-tax-determined products there. This is true when the alternations are frequent and the alternated areas are small and numerous. For example, the alternation regulations generally do not address circumstances where a proprietor wishes to alternate any number of many storage bays or pallet locations in a large warehouse at any time for any reason pertaining to storage of tax-determined and non-tax-determined products.
5. Alternate Method or Procedure to Alternate Premises for Storage of Tax-Determined and Non-Tax-Determined Products.
In the past, TTB has received requests from proprietors to store tax-determined and non-tax-determined finished products at their facilities in ways that vary from the type of alternation authorized in the regulations. Some of these requests have involved circumstances where the proprietor has sought approval to alternate large numbers of small areas at any time to store tax-determined or non-tax-determined products.
For example, TTB has received requests to use certain automated systems where pallets of finished products are stored in high-density warehouses and retrieved by computer-controlled equipment for removal from the facility. Under these systems, each pallet and pallet location is physically designated with unique identifiers, and the recordkeeping system tracks the location of the pallet from receipt to removal. In addition to pallets of non-tax-determined products, the warehouse also contains pallets of tax-determined products. The pallets of tax-determined products are comprised of products that are imported into the United States, bottled at other U.S. facilities and shipped to the proprietor's facility, or returned to the proprietor's facility after previous removal on determination of tax. To efficiently use space and prepare products for orderly removal from the facility, the proprietor of the facility may wish not to set aside a dedicated portion of the warehouse to store solely tax-determined or non-tax-determined products.
In evaluating the types of requests described in the previous paragraph, TTB determined that approval may be appropriate in cases where the requested alternation meets the requirements for approval of an alternate method or procedure under §§ 19.27, 24.22, or 25.52. These regulations provide that TTB may approve the use of an alternate method or procedure that varies from requirements in the regulations where the proprietor shows good cause for its use and the method or procedure meets certain other requirements. These requirements include that the method or procedure provides equal security to the revenue, is not contrary to law, is consistent with the purpose and effect of the method or procedure prescribed in the regulations, will not cause an increase in cost to the Government, and will not hinder TTB's administration of the regulations.
The following outlines some of the major points that a proprietor should consider or address when preparing a request for an alternate method or procedure under §§ 19.27, 24.22, or 25.52:
- Good Cause: The proprietor should explain the good cause basis to use the alternate method or procedure. For example, the proprietor may believe the method or procedure will improve the facility's efficiency, reduce costs, or improve recordkeeping and inventory accuracy.
- Compliance History: In evaluating requests, TTB will review the proprietor's compliance history to ensure that approval will provide equal security to the revenue and will not hinder TTB's administration of the regulations.
- Identification of Products and Alternated Areas: The proprietor should provide information about how the finished products and alternated areas will be identified. For example, the proprietor should note whether each pallet of finished product is assigned a unique identifier that enables the tracking of the product from receipt or manufacture to removal from the facility. Regarding the areas to be alternated, the proprietor should describe how each area will be uniquely identified and should provide a diagram showing the physical layout of the areas.
- Equipment: The proprietor should describe the equipment that will be used to receive, track, and remove the products. The proprietor should explain whether recordkeeping software will be used to identify the location and tax status of products in real time, whether historical information about all product movements is maintained, and whether this information is kept in a manner to protect against temporary and permanent loss of data. Additionally, the proprietor should explain whether recordkeeping software will allow for the tax status of each area (that is, as either bonded or non-bonded premises or as either brewery or non-brewery premises) to be determined at any time.
- Physical Marking of Tax-Determined Products: The proprietor should explain how the outermost packaging of tax-determined products in storage (for example, the outer wrapping of cases stacked on pallets) will be physically marked to show that those products are tax-determined. Such physical markings help distinguish between tax-determined and non-tax-determined products.
- Separation of Products: The proprietor should expressly state in the request that tax-determined and non-tax-determined products will not be stored or otherwise commingled in the same area at the same time if that area is designated as one type of premises (that is, as either bonded or non-bonded premises or as either brewery or non-brewery premises). An area designated as one type of premises should not be smaller than one pallet location. If the proposed alternate method or procedure limits TTB's ability to verify the tax status of products based on their physical location, please note that the locations used for this practice will be presumed to be bonded premises in the event of recordkeeping discrepancies.
- Recordkeeping and Inventory Discrepancies: As the number of alternated areas and the frequency of the alternations increase, it becomes more difficult to rely on the physical location of the products to verify the products' tax status when recordkeeping and inventory discrepancies occur. Because these discrepancies may indicate that non-tax-determined products have been removed without proper determination of tax or have otherwise not been properly accounted for, TTB approvals may impose conditions on the tax consequences of recordkeeping and inventory discrepancies. For example, a proprietor may be required to pay taxes on inventory shortages or to treat inventory overages as non-tax-determined if the overages and shortages cannot be explained.
- Amendment of Information Associated with Permit or Brewer's Notice: If a proprietor receives approval of an alternate method or procedure, the proprietor will also be required to document the alternation by filing an application to amend the information associated with the permit or brewer's notice (see, e.g., §§ 19.143 or 24.135).
- Modification or Rescission: TTB will take action to modify or rescind an approval if TTB finds that the approval causes jeopardy to the revenue, hinders effective administration of the regulations, or is otherwise inconsistent with the requirements in §§ 19.27, 24.22, or 25.52. The approval will no longer be effective if subsequent statutory changes or changes to the TTB regulations render it obsolete.
- Cooperation: Approval of a request in no way diminishes the level of cooperation and assistance the proprietor is required to provide TTB officers during any examination of the proprietor's facility (see, e.g., 27 CFR 19.11, 19.12, 24.35, 24.40, 24.41, and 25.51).
6. Submission of Requests and Questions
Requests for approval of an alternate method or procedure described in this industry circular or questions concerning this industry circular should be submitted to TTB's Regulations and Rulings Division (RRD). RRD's contact information is as follows:
Alcohol and Tobacco Tax and Trade Bureau
Regulations and Rulings Division
1310 G Street, NW, Box 12
Washington, DC 20005
Phone: 202-453-2265
Email: Regulations@ttb.gov
John J. Manfreda
Administrator
Alcohol and Tobacco Tax and Trade Bureau