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Industry Circulars 18-4

June 27, 2018
Number: 2018 – 4

Calculating Effective Tax Rates for Distilled Spirits Products Containing Eligible Wine and Eligible Flavors, and Obtaining Approval of Standard Effective Tax Rates for Imported Distilled Spirits Products

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

1.   Purpose.

In this industry circular, the Alcohol and Tobacco Tax and Trade Bureau (TTB) is providing guidance on calculating effective tax rates for distilled spirits products containing eligible wine and eligible flavors in light of recent changes to the Internal Revenue Code of 1986 (IRC) made by the Tax Cuts and Jobs Act of 2017 (Public Law 115-97) ("the Act"). 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 allowable under 26 U.S.C. 5010 for the wine content and flavors content of the product. 

This industry circular provides guidance for distilled spirits plants (DSPs) and importers on how to calculate effective tax rates for distilled spirits products that are subject to reduced tax rates under the Act. This industry circular also provides guidance for importers on how to obtain TTB approval of standard effective tax rates (SETRs) under 27 CFR 27.77 for imported products that are eligible for reduced tax rates under the Act. For purposes of this industry circular, the term "reduced tax rate" refers to the tax rates on distilled spirits set forth in 26 U.S.C. 5001(c)(1), which are discussed further below.

2.   Background. 

In general, the 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, as amended by the Act, provides for reduced tax rates of $2.70 and $13.34 per proof gallon under certain circumstances for calendar years 2018 and 2019. See 26 U.S.C. 5001(c)(1). 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. The terms "eligible wine" and "eligible flavor" are defined in 27 CFR 19.1 and 27.11. These credits apply to distilled spirits that are subject to the reduced tax rates of $2.70 and $13.34 per proof gallon.

The credits allowable under section 5010 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 credits allowable under section 5010 are $3.00 per proof gallon, the total allowable 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.

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

Sections 19.246 and 27.41 of the TTB regulations (27 CFR 19.246 and 27.41) prescribe how DSPs and importers, respectively, must compute effective tax rates for distilled spirits products. The equation outlined in §§ 19.246(a) and 27.41(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 and importers should instead use the procedure described below for calculating effective tax rates for distilled spirits products subject to these reduced tax rates.

  1. Calculation Procedure

     
    1. Calculate the initial effective tax rate for the distilled spirits product in accordance with §§ 19.246(a) or 27.41(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. 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) or 27.41(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).
  3. 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) or 27.41(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 on SETRs for Imported Distilled Spirits Products

  1. Overview

A standard effective tax rate (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 U.S. Customs and Border Protection (CBP) officer. See also 27 CFR 27.137.  

  1. SETRs for Imported Products Subject to Reduced Tax Rates

Section 27.77 does not provide a specific procedure for obtaining TTB approval of SETRs for imported distilled spirits products subject to the reduced tax rates in section 5001(c)(1).  Therefore, through this industry circular, TTB is providing guidance on how it will approve SETRs under § 27.77 for imported products subject to the reduced tax rates.

In the case of an SETR for a distilled spirits product that TTB approved prior to the effective date of the Act based on the $13.50 tax rate, TTB is authorizing the importer of the product to use this approved SETR to calculate SETRs for the same product in cases where the product is subject to the reduced tax rates of $2.70 or $13.34. An importer who wishes to calculate an SETR for a product subject to a reduced tax rate must follow the calculation procedure outlined in Section 3 above. The importer is not required to submit a new application under § 27.77 to establish an SETR based on a reduced tax rate using this calculation procedure as long as no changes occur that require submission of a new application. For example, an importer must submit a new application if the amounts of eligible wine or eligible flavors in the product change and the importer is required to establish a new SETR for the product as a result of this change.

In the case of a distilled spirits product for which an importer obtains SETR approval from TTB after the passage of the Act, the same guidance in the previous paragraph will apply. After the importer obtains approval of the SETR in accordance with the procedures set forth in § 27.77 based on a tax rate of $13.50 per proof gallon, the importer is authorized to use the approved SETR to calculate SETRs for the same product based on the reduced tax rates of $2.70 and $13.34 as described in the previous paragraph without obtaining additional approval from TTB. However, the importer must submit a new application to TTB if other changes occur that affect the SETR for the product, such as changes in the amounts of eligible wine or eligible flavors in the product.

A copy of the SETR approval from TTB for a specific distilled spirits product and a copy of this industry circular may be furnished as proof of approval to use an SETR for the product based on a reduced tax rate, but the SETR approval and this industry circular do not provide authority for the importer to pay a reduced tax rate of $2.70 or $13.34 for the product. Under the Act, appropriate procedures must be established in order for an importer to pay a reduced tax rate for the product. Importers should monitor CBP's and TTB's websites for the latest guidance to importers on these procedures.        

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.

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

Last updated: April 8, 2024
Maintained by: Regulations and Rulings Division