Proprietors At Bonded Wine Premises
Proprietors At Bonded Wine Premises
To Wine Premises
Proprietors and Others Concerned:
the purpose of this circular?
announces the policy of the Alcohol and Tobacco Tax and Trade Bureau
(TTB) with respect to the qualification of alternating proprietors
and related issues affecting alternating proprietors, such as the
small domestic producers' credit and the separation of operations.
As a result
of the Homeland Security Act of 2002, the revenue collection function
and certain other duties of the Bureau of Alcohol, Tobacco and Firearms
(ATF) were transferred to TTB. In this circular, "we"
refers to TTB. Sections 7805 and 5041(c) of the Internal Revenue
Code of 1986 (the IRC) authorize the Secretary of the Treasury (the
Secretary) to administer the tax and qualification requirements
for producing wine, including the qualification requirements for
the small producers' wine tax credit. Sections 103-106 and 117 of
the Federal Alcohol Administration Act (the FAA Act), 27 U.S.C.
203-206 and 211, authorize the Secretary to carry out the provisions
of the FAA Act with respect to qualification of wine producers and
blenders, and labeling of wine. The Secretary has delegated these
functions to TTB. Regulations in 27 CFR part 4 cover the labeling
requirements under the FAA Act and regulations in 27 CFR part 24
cover the production, removal, taxpayment and tax credit requirements
under the IRC. In these regulations, TTB sets out qualification
requirements, including those for qualifying alternating proprietorships
and for qualifying for the small domestic producers' wine tax credit
for which certain alternating proprietors may be eligible.
an "alternating proprietorship?"
proprietorship" is a term we use to describe an arrangement
where two or more persons take turns using the physical premises
of a winemaking facility. In most situations, the proprietor of
an existing bonded wine premises (the "host" proprietor)
agrees to rent space and equipment to a new ("tenant")
proprietor. This allows existing wineries to use excess capacity
and gives new entrants to the wine business an opportunity to begin
on a small scale without investing in equipment. ATF recognized
the need to formalize these arrangements after discovering that
winery proprietors were allowing unqualified outside individuals
to use crushing and fermentation equipment on their premises. In
the mid-1980's, ATF began approving alternate methods and procedures
to allow two qualified proprietors to alternate the use of parts
of a wine premises and, in 1990, ATF added §24.136 to its regulations
to specify procedures for alternating proprietors.
Why is TTB issuing this circular?
We are issuing
this circular because we and ATF received many inquiries regarding
the qualification of alternating proprietors at existing wine premises.
In some cases, we or ATF denied applications to establish alternating
proprietorships or approved such applications only after applicants
modified their premises. Applicants and their representatives questioned
these actions, which they claimed were not always consistent. This
apparent inconsistency was a result of the fact that authority to
approve or disapprove a premises had been delegated to local ATF
Area Supervisors. As a result, it may have appeared that some ATF
or TTB offices did not authorize arrangements that were acceptable
in other jurisdictions.
As we consider
applications from alternating proprietors, we have several areas
In some wine
premises, there are numerous alternating proprietors.
for alternating wine premises proprietorships had been "custom
crush" customers of the host proprietor, meaning they provided
the raw materials and possibly some instructions on the type of
wine to be made to the producing winery, but did not participate
in the winemaking process. The customer qualified as a wholesaler
and received the finished, bottled wine to sell. In many cases,
there is no change in the arrangements between the winemaker and
the customer, yet the customer seeks to qualify as a tenant proprietor.
for alternating proprietorships at an existing wine premises were
wholesale customers who had even less involvement in the winemaking
In some of
the agreements intended to establish alternating proprietorships,
those seeking to become tenant proprietors agree that they will
have no access to the wine premises and that all production will
be done by employees of the host proprietor.
of alternating proprietors for small domestic producers' wine tax
is really separate from qualification, but some applications for
alternating proprietorships appear to be efforts to split the
production of one large proprietor into several smaller businesses
in order to obtain the credit.
In 1990, the
IRC was amended to provide a tax credit to benefit proprietors
who produce less than 250,000 gallons of wine per year. The full
credit of 90 cents per gallon on the first 100,000 gallons removed
is available to a producer of less than 150,000 gallons of wine
per year. Between 150,000 and 250,000 gallons of production, the
credit is gradually phased out. The IRC gives the Secretary authority
to make regulations on this credit, including rules to prevent
the credit from benefiting a large producer and to assure reduction
of the credit for persons who qualify as small producers but produce
more than 150,000 gallons of wine per year.
eligibility requirements for the tax credit, groups of producers
under common control must share the credit as a single producer.
TTB has the responsibility to collect all the wine excise tax
that is rightfully due, and we must avoid the potential for abuse
of the credit in alternating proprietorship arrangements.
of the premises for sharing; awareness of the importance of keeping
all parties' wine separated and identified
officers have encountered difficulty in locating movable tanks
assigned to alternating proprietors and have discovered instances
where the host proprietor, as the designated recordkeeper of the
tenant proprietor, neglects to record removals of wine on behalf
of the tenant proprietor, resulting in underpayment of taxes.
These and other difficulties arise from the lack of separation
of physical and recordkeeping operations between the host and
While we recognize
the benefits of national consistency in the standards for handling
applications for alternating proprietors, those standards must not
compromise our mission to protect the revenue, protect the public,
and promote voluntary compliance. Accordingly, we will continue
to evaluate each application on its individual merits, including
the physical layout of the wine premises to be shared, the compliance
and business history of each applicant, and the likelihood that
the alternation will take place without administrative difficulty,
jeopardy to the revenue, or consumer deception. We are, however,
changing our policy and procedure in a number of ways to address
industry concerns about consistency and to give greater flexibility
to proprietors just entering the wine business.
the ATF Area Supervisor was the deciding official on the suitability
of premises under alternation agreements. Now, in TTB, the sole
official authorized to approve alternating proprietor applications
is the Chief, National Revenue Center (NRC). The Chief, NRC, will
use the general guidelines below and apply them uniformly in evaluating
applications for alternating proprietorships. These guidelines will
be used collectively (and not separately) to determine whether an
applicant qualifies as an alternating proprietor:
We may require
a copy of the contract between the host and tenant proprietors,
a business plan, or other information in support of an application
for an alternating proprietorship. We will consider the tenant
proprietor's business history (is the tenant proprietor a grower,
a winemaker or a retail grocery chain?), plans for development
of future winery assets, and level of commitment to the business
as evidenced by investment in vineyards or other permanent assets.
Marketing investment will not be considered for alternating proprietor
to become a tenant proprietor must qualify as a bona fide bonded
wine premises proprietor. The primary contract between the tenant
and the host proprietors should be for rental of space and equipment,
and not for gallons of wine produced. If the contract shows the
applicant is having wine custom made, for example, with no supervision
or control over the operation, we will not approve the application.
between a tenant proprietor and a host proprietor may include
the services of the host proprietor's cellar employees. The tenant
proprietor must direct and be fully responsible for those things
that are usual and customary for the production, bottling and
storage of wine (as applicable) and the managing of the business.
If a prospective tenant proprietor contracts to hire the host
proprietor's winemaker, the application will be subject to additional
scrutiny. We will look to factors of authority and control to
make a determination whether the tenant proprietor will run a
bona fide and independent bonded wine premises operation regardless
of the sharing of equipment.
between the host proprietor and the prospective tenant proprietor
must allow the tenant proprietor to have reasonable access to
the premises and to the wine.
premises must be set up in such a way that the bonded areas of
the host and tenant proprietors are clearly defined by partitions,
signs, or other means while the alternating proprietors are active,
and provide sufficient protection of the revenue. The Chief, NRC
may require the host and tenant proprietors to take additional
steps to identify or separate the areas before approving the application.
We have reexamined
our previous position that there must be a part of the premises
that stays under the control of each alternating proprietor at all
times. In the past, we held that a core premises had to exist for
each alternating proprietor, even if the alternator anticipated
no winery operations for a period of several months and had no wine
to account for. This holding was based on the idea that, since the
bond remained active, it should attach to a physical location. That
physical location, or core premises, would form the basis of any
future extension of premises covered by the bond. We have decided
that the entire bonded premises may revert to the host proprietor,
if the tenant proprietor transfers or removes all wine before curtailing
its premises. We must, however, be able to examine the tenant proprietor's
records, even during a curtailment of the tenant's premises. The
tenant proprietor may obtain approval of an alternate method or
procedure to maintain records at a separate and permanent business
office address (other than the host proprietor's premises) where
TTB may contact the proprietor and review records during business
qualified with other arrangements will not be asked to change their
arrangements unless we encounter difficulties resulting from those
arrangements. The Chief, NRC, may require more identification or
separation of alternating areas in any approved operation on a finding
that the approved premises do not provide adequate separation and
protection of the revenue. Existing alternating proprietorships
will also be subject to the same level of scrutiny as newly approved
arrangements, specifically relating to tax payments and accountability.
proprietors who change locations within one year of the date of
this circular may elect to maintain their qualification under the
old criteria (including the requirement for permanent premises).
They may exercise this option by filing a written statement with
their application for a change in location. The statement should
include the date of original qualification (prior to the date of
this circular). Any application for a change in location that does
not include such a statement will be evaluated under the new criteria,
and all applications filed more than one year after the date of
this circular will also be evaluated under the new criteria. New
applications and requalifications due to changes in ownership or
control will be evaluated under the new criteria.
to the qualification and tax issues discussed above, we wish to
remind proprietors that alternating proprietorships are conducted
under an approved alternation plan that describes the area to be
used by each proprietor when that proprietor is active. The host
proprietor must not change the portion of the premises assigned
to the tenant proprietor on an approved alternation plan without
notice to the tenant proprietor and the Chief, NRC. We also wish
to remind alternating proprietors of the potential label effects
of certain practices common in alternating proprietor arrangements:
for example, if wine is transferred in bond to another proprietor,
even if the wine remains in the same physical location, the producer
would not be able to make an "estate bottled" claim on
In the future,
we may undertake rulemaking on alternating proprietors. If we do,
any final rule on the subject will supersede this circular, with
appropriate transition rules.
that alternating proprietor arrangements may be undertaken for many
reasons. For instance, a tenant proprietor may qualify as a bonded
wine premises proprietor to obtain privileges under State law that
are not available to wholesalers. As a result, a qualified alternating
proprietor may or may not be a producer eligible for the small domestic
producers' wine tax credit. This credit was intended to encourage
small new businesses to enter the wine industry. We plan to continue
to review alternating proprietor arrangements to ensure that proprietors
who take the credit are entitled to it and that the facility where
the wine is made is used by small and independent producers. We
may instruct proprietors to adjust their taxes if we find the credit
was taken in error.
you have questions concerning this circular, contact the Chief,
Regulations and Procedures Division, Alcohol and Tobacco Tax and
Trade Bureau, 650 Massachusetts Avenue, NW, Washington, DC 20226.
Arthur J. Libertucci