By Erin Kelleher and Rob Tobiassen, Compliance Consultant and Former Chief Counsel (TTB)
On Friday, TTB issued an industry circular to help winery licensees struggling with an unintended consequence of the Tax Cuts and Jobs Act (the “Act”) - - which became effective on January 1 of this year. The “fix” to the problem described below is only temporary and expires on June 30, 2018. Hopefully that is enough time for a permanent solution to be adopted in a technical corrections bill, or by Rule change.
The Problem – In-Bond Wine in fulfillment warehouses is not eligible for tax credits because of a drafting error in the Act
The Act provides new excise tax credits for wine removed during 2018 and 2019 (see 26 USC 5041(c)(8)), which results in significant tax savings for producing wineries removing wine from bond during these years. However, because of an oversight (using the term charitably) and botched drafting, wine removed directly from bonded premises where the wine was not produced (i.e., fulfillment companies and bonded wine storage facilities) is not eligible for the new tax credits.
Put another way, fulfillment houses may not stand in the shoes of the producing winery that transferred the wine in bond for storage.
Essentially, for 2018 and 2019, the transferee in bond arrangement enacted in 1997 (which permits tax credits to be taken by bonded fulfillment houses) is suspended (see 26 USC 5041(c)(6)). While this unintended consequence of the speed in which the Act was drafted sent the industry scrambling, TTB has acted quickly and professionally to address the problem, at least through June 30th.
The TTB Fix – a temporary “Alternate Procedure”
TTB’s industry circular announces the availability of a temporary “Alternate Procedure” which allows producing wineries to reap the benefit of the favorable excise tax credits while continuing to utilize the services of fulfillment companies. TTB is permitting wineries to tax determine and tax pay wine of their own production stored at a bonded third-party facility without physically bringing the product back to the winery where it was produced for removal. Specifically, by using the Alternate Procedure wineries will constructively receive the wine back at their licensed premises virtually and through detailed documentation and reporting only. Most important, wine producers may take advantage of this alternate procedure without seeking any additional TTB approval.
Procedurally, it works like this:
The producing wineries report the wine on TTB Form 5120.17temp (Report of Wine Premises Operations) as “received in bond” and also “removed tax-paid” from the fulfillment company. Importantly, this “removed tax-paid” means that the producing winery must pay the tax (taking advantage of the new credits) on its next tax return. The industry circular explains how to handle the taxes if the winery files an annual return. Wineries then invoice the product as tax-paid back to the fulfillment company. The fulfillment company then records and ships the wine as tax-paid to the customer. This Alternate Procedure only applies to wine the producing winery declares as removed from bond on or before June 30, 2018. After that date another solution must be found.
The documentation related to the wine must clearly reference use of the alternate procedure under Industry Circular 2018-1.
Fulfillment Company Requirements
On its next regular Report of Wine Premises Operations filed after June 30, 2018, the fulfillment company must report any wine it “transfers” to a producing winery under this alternate procedure on TTB Form 5120.17temp in Part I, Section A, on line 15, and/or in Part I, Section B, Line 9, and (2) list the names of any wine producer for whom they are storing tax-paid wine under this alternate procedure in Part X, Remarks.
Once wine changes status at the fulfillment company under the invoice from the producing winery; records must the reflect the product as tax-paid.
Tax-Paid Storage Areas not required (if they do not already exist), and mandatory package marking
If the fulfillment company has a tax-paid area, the invoiced wine must be moved to that area. If they do not, the fulfillment company will not be required to file an amendment to designate one area solely for the storage of products “tax-paid” under this procedure. (Note that other tax-paid wine not covered by the Alternate Procedure must be stored on taxpaid premises.)
Rather, the fulfillment company must clearly identify the wine in their records as “tax-paid” and must mark the outermost packaging of the taxpaid wine in such a way it is readily identifiable as tax-paid. It cannot be over stressed that these markings are mandatory if the Alternate Procedure is used, and the markings must be clear that the wine stored this way is being stored under the Alternate Procedure under the industry circular.
While we give kudos to TTB for quickly addressing a vexing issue facing the wine industry in the wake of the swift implementation of the Act, this botched law will nonetheless create confusion during the next four months and the next two tax years.