Bonded Winery Alternating Proprietors
On August 18, 2008, TTB issued a circular regarding Alternating Proprietors at a Bonded Wine Premises. This circular supersedes the one from 2003 on this same topic, but contains a similar analysis of this arrangement. The 2008 circular focuses on the differences between alternating proprietor arrangement and custom crushers and expounds upon the criteria of each and the details TTB will look at to verify a true alternate proprietor relationship.
An arrangement for alternating proprietors arises either where an existing proprietor agrees to rent space and equipment to a new proprietor, or where two or more persons determine to operate bonded wine premises and alternate the use of space and equipment. In an arrangement for alternating proprietors, each proprietor must qualify on its own as a bonded winery. The winery premises can only be shared after the TTB approves the alternation applications.
In contrast, a “custom crush” arrangement arises where a customer engages a wine producer to produce custom wines which the customer will market. Only the producer is authorized by TTB to produce wine pay taxes and meet other regulatory requirements.
There are several distinctions between an alternate proprietor arrangement and “custom crush”.
In an alternate proprietor arrangement each proprietor must qualify with TTB as a bonded winery and obtain a basic permit as a wine producer. Each proprietor must also keep its own required production records, obtain COLAs and pay excise tax for wine removed from its premises. Each producer’s eligibility for the small domestic wine producer tax credit is based on the wine removed by that proprietor. Where a group of proprietors are determined to be under common control they are treated as a single winery for tax credit purposes. In addition each producer must have access to its premises at the winery and to its wine, and each proprietor’s area must be designated at minimum by signage or other marks (areas designated by floor space occupied by the producer’s barrels and cased goods is not sufficient and in some situations physical segregation, such as gates or fencing, will be required).
In a custom crush arrangement, only the producer registers as a bonded winery and obtains a wine producer basic permit. (The customer will need a wholesaler’s basic permit.) Similarly only the producer is responsible for production records, COLAs and excise tax (although the customer may arrange to compensate the producer for taxes paid as part of the cost of services). Finally, the eligibility for tax credits is determined based on the winery’s total production including wines produced specially for a customer.
As before, the National Revenue Center Director will review each application for a bonded winery with an alternating proprietor arrangement individually and focuses on whether the arrangement will create any administrative issues, jeopardy to revenue or will deceive customers. TTB will evaluate the ongoing operations, the physical layout of the premises, and the compliance and business history of each party and consider whether the applicant will commence operations in a reasonable time and maintain operations for an extended period (TTB can revoke a permit where there are no operations for 2 years) as a true alternating proprietor and not a custom crush.
TTB will analyze the business plan of each proprietor and the contract regarding the alternate proprietor relationship and view the following as indications that the arrangement is not a true alternation and one party has little to do with the production:
- A business plan that is primarily to market wine and with little or no involvement in production.
- A contract where one party receives juice, ferments it into wine, and then transfers it to another party.
- A contract based on quantity of wine produced rather than rental of space and equipment.
- An agreement where it appears the alternating proprietor has little involvement in its own wine operations, i.e. another company’s employees handle production, records, reports and tax filings. Although an alternating proprietor may employ another company’s staff, the proprietor must be involved in and responsible for management and all activities generally associated with production, bottling, and storage of wines. This includes recordkeeping and reporting. If the proprietor relinquishes control over the records to a contract employee TTB will consider this inadequate control. In addition, if the proprietor’s records may only be found in another proprietor’s computer system or the contract requires the landlord proprietor to have access to the tenant’s records TTB will consider these factors as proof the tenant is not operating as an independent producer.
And with respect to tax credits:
- A contract that allows one proprietor to transfer “excess” custom crush to another.
- An arrangement where an existing proprietor produces a small volume of wine annually to qualify for the small producer’s tax credit and obtains a large volume of wine from another winery.
- Evidence the producer encourages its customers to become alternating proprietors to split production.
Neither party may change the terms of the arrangement without approval by TTB and an amended application for each proprietor.
TTB will consider arrangements where the alternating proprietor suspends and then resumes operations, but the wines must be transferred in bond to another qualified bonded wine premise before the suspension takes effect. However, where the proprietor will use the premise on an infrequent basis TTB will carefully determine whether qualification as a producer is necessary for that proprietor. The operation of the winery must be at least one calendar day in length and require something more than receiving and crushing grapes to be considered production.
Although the regulations governing alternating proprietors are largely the same as those established in 2003, the TTB has more clearly defined the criteria for approval and the factors considered in determining whether the arrangement is an alternating proprietorship or a custom crush scenario. Editor’s Note: We believe the motivation behind this second circular on this topic, is to caution the industry that TTB will be carefully scrutinizing these arrangements to insure alternating proprietors are approved only where there truly exists two distinctly separate and individually owned winery operations.