Important Update on Availability of Tax Credit for Bond to Bond Transfers

March 15, 2018
By

Editor’s Note: The following is a guest post by Mary Beth Williams. Mary Beth is the President of Williams Compliance, a compliance services provider based in Hanover County, Virginia.

What Happened – Background

There was a misstep in the law creating the new tax credit for 2018-2019.

The Small Domestic Producer Credit (SDPC) was applicable through December 31, 2017,
and unless the law is extended, will apply again for removals as of January 1, 2020. The
SDPC was allowable for any producer (with production in the period) on wine they
removed from bond, so long as they either produced the wine or purchased it in bond
from another qualified domestic producer. The new law specifies that the credit is
allowable only on wine “produced by the producer”. The intent was NOT to change the
way the credit is claimed, but rather just the level of the credit and by whom the credit
could be claimed. However, the law was drafted quickly, and has created an unintended
consequence.

We were hoping that TTB would be able to find an internal way to address the
applicability of the credit under the new law, but knew that with the very direct
language in the new Act, it might be tough to do it. On Friday, March 2, 2018, TTB
issued guidance that clarified the issue, but not in favor of wineries that buy or sell wine
in bond to other wineries.

The Outcome

For wine removed from bond in 2018 and 2019, the new credit may only be taken by
the winery that actually produces the wine. The definition of production is very
specifically defined for the determination of the eligibility for credit. Production means
wine produced by fermentation, plus volume increases due to amelioration, wine spirits
addition, sweetening, production of a formula wine, or the creation of sparkling wine.
The net effect of this change is that a winery may NOT take a credit against federal
excise tax for any wine they purchase from another winery. This includes bulk wine,
shiners, and wine made under a contract winemaking agreement. The producing
winery can certainly take the credit and pass the lower net tax rate on to the receiving
winery, but the receiving winery will not be able to directly take the credit on received
wine.

Note that this is applicable to wine removed from bond in 2018 and 2019, not produced.
Many of you may have wine on hand at your wineries that was produced by another
winery in prior years, which remains in bond at your facility.

TTB enacted a provisional procedure to allow wines previously produced by another
winery to be transferred in bond (on paper only) back to the producing winery for them
to remove the product from bond, pay the net tax (minus the new credit), and transfer
(again, on paper only) the wine taxpaid back to the receiving winery. This alternate
procedure is available only through June 30, 2018. All such transactions must be
documented showing that they are occurring under the “Industry Circular 2018-1
procedure”, and must take place before the June 30th deadline. The producing winery
will pay the net taxes on that wine at their next regular reporting cycle in order to
capitalize on the credit. The producing winery may, of course, bill the net taxes back to
the receiving winery.

The additional tax due under this procedure is due by the producing winery whenever
their next scheduled tax return is due.

What Does All This Mean For You?

If you don’t buy or sell wine in bond: Nothing changes. You claim the credit for all your
produced wine on your Excise Tax Return with the new higher credit rates.

For wine being purchased from another winery but which has not yet been transferred
in bond: The producing winery should pay the federal excise tax and claim the credit on
the wine prior to transfer, then transfer the wine taxpaid to the receiving winery.

For wine previously produced by another winery of which the receiving winery already
has possession: Prior to June 30, 2018, prepare paperwork for the wine showing a
transfer in bond back to the producing winery (this is a paper transaction only – the
product does not physically move). The producing winery should pay the federal excise
tax on the wine, claiming the credit, then prepare paperwork showing the product
returning to the receiving winery as federally taxpaid wine. The documents should note
that the transactions are taking place under the “Industry Circular 2018-1 Procedure”.

Q&A:

1) Q: If bulk wine is purchased from another winery and blended with wine produced
onsite, is the blended wine eligible for the credit? A: You are only entitled to the
credit on the portion of the wine you produced onsite. For example, if you bought
1000 gallons of wine and blended it with 1500 gallons of your own wine for a total
batch production of 2500 gallons, you would only be able to claim the credit on
1500 gallons of that wine when it was removed from bond.
2) Q: If I hold 2 different federal winery permits at different locations, with most of the
production is done at one and most of the bottling done at the other, can I claim the
credit at whichever location actually removed the product from bond? A: We’re
still waiting for final clarification on this, but based on the strict interpretation so
far, it seems likely that the credit would have to be taken at the location that
actually produced the wine.
3) A: If I’m having wine produced for me at another winery using a dba with my name,
does that allow me to claim the credit directly? A: No, only the producing winery is
eligible for the credit. That means that whichever winery shows the production
of the wine on their TTB Report of Wine Premise Operations is who is eligible for
the credit.

WineAmerica is pushing for a legislative correction, but it’s uncertain at this point that
Congress will be willing or able to fix the error. WineAmerica is also pushing for an
extension of this June 30 deadline for the interim procedure to be able to spread out the
tax burden on the producing wineries. We’ll keep you posted if the requirements
change.


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