Custom crush or alternating proprietorship?

Government treats them very differently, TTB explains

by Paul Franson
Custom crush or alternating proprietorship?
Napa, Calif. -- More and more wine brands are being created every week, and most new brands come from custom crush and shared facilities, not individual wineries. Napa County reportedly produces 1,200 wine brands, for example, yet has "only" 425 bonded wineries and 325 physical ("brick and mortar"--though few are made from bricks) winery buildings.

The reasons are obvious. Though it's possible to build and equip a winery at relatively low cost, one suitable for visitors can cost $1 million or more, and the equipment, fees and especially the paperwork can be intimidating to the small producer.

Fortunately, the Alcohol and Tobacco Trade and Tax Bureau (TTB) that administers many of the federal requirements is very helpful, and conducts seminars and meetings to help potential winery owners and existing producers fulfill its requirements.

One such presentation was part of the two-day conference, "Best Practices for Owning & Operating a Winery," produced by The Seminar Group. While intended to help lawyers meet continuing education requirements, it was equally applicable to winemakers and proprietors.

The speaker was Mari Kirrane, a familiar presenter at wine industry events. She's a wine technical trade advisor for the TTB's San Francisco office, and naturally expert in the subtleties of the regulations.

She notes that any company that produce wines for sale, distributes or stores wine on which taxes have not been paid, must apply to the TTB, though it will also have to register with local and state authorities.

To start, the traditional stand-alone winery is bonded and is responsible for all production, records, reports, labeling and taxes. It also incurs all the capital and operating expenses for winemaking equipment and operations.

Alternating proprietor (shared space) and custom crush facilities are often confused, but are very different. Legally, a custom crush facility is just a winery that makes wine to order for clients, and sells the wine to the clients who then resell it. It can use the customers' grapes or procure them elsewhere. Because the custom crush facility is a regular winery, it is responsible for all product, records, labeling and taxes. It contracts with clients to produce wine, and the clients receive finished, tax-paid wines. The wine merely bears the client's name, rather than that of the producer, which is also responsible for all equipment and costs of production.

To the TTB, the custom crush clients are the same as wholesalers. They have minimal recordkeeping requirements, and don't have to file reports to the TTB. They take no responsibility for production, recordkeeping, reporting, labeling or taxes, and they don't make any investment in winemaking equipment or premises. This is a simple way for clients to have their own wine, and understandably popular.

The alternating proprietor arrangement is considerably more complex. Two or more wineries share (alternate) use of part of a bonded winery's facility. The host is a bonded winery, but the alternating proprietors are also bonded wineries. They take turns using the equipment for a 24-hour minimum period. The exception is crushing equipment not on the bond. It's normally owned by the host, who crushes for its clients (the grapes aren't yet wine in this case).

The host winery is responsible for all its records and filing, but not for that of its clients.

The alternating proprietor must qualify as a winery on its own, however. Though it has lower investment in equipment and premises, it is responsible for all its own production, records, reporting, labeling and taxes.

Wineries deal with two different federal laws, the Internal Revenue Code (IRC) and the Federal Alcohol Administration Act (FAAA). The IRC is responsible for the qualification of the premises, and the payment of taxes and production. The FAAA defines the basic permits for qualified applicants, truthful labeling and advertising, and fair trade practices.

Stand-alone or custom crush wineries are responsible for the IRC application, FAAA application as a wine producer, bond and supporting documents.

An alternating proprietor has the same responsibilities--plus a diagram describing the parts of the winery allocated to each user. The custom crush client only has to apply under the FAAA as a wholesaler, and maintain supporting documents.

The basic application to establish and operate wine premises, IRC Form 5120.25, is required from all winery applicants. It describes the bonded premises and operations. The application for a basic permit under the FAAA act, form 5100.24, is required from wineries and wholesalers. It provides information about ownership of the operation.

A wine bond, Form 5120.36, is required from winery applicants to ensure that taxes will be paid. The amount is based on the tax liability. Supporting documents that must be maintained include environmental forms from all bonded wine premises applicants, signature authority, trade name registration and a diagram from bonded premises if the space is shared.

Bonded wineries must file environmental information form 5000.29 and supplemental information on water quality considerations, form 5000.30.
In addition, signature authority (power of attorney, form 5000.8, and corporate officers form 5100.1) and partnership agreements and board minutes must also be maintained. And although this tax is no longer due, wineries still must file form 5630.5, a special tax registration originally designed to finance the Civil War.

Trade names must be registered with the appropriate authority, which differs by state.

Applications are filed with the National Revenue Center in Cincinnati, then a telephone interview is conducted with applicants. Applicants may be referred to the TTB's trade investigations division field office, which will visit the premises. The field agents make recommendations, which must be approved by the NRC before winemaking can start.

After approval, the winery must maintain appropriate records and file reports, as well as pay excise taxes and get label approval. A summary of operations must be filed each month (or year), and excise tax must be paid whenever wine is removed from bonded premises for consumption or sale. Wholesalers receive tax-paid wine.

All labels must be approved before the wine is bottled--even in unmarked bottles--or packaged and labeled. Label applications and taxes are normally filed online these days.

One recent complication is registration of facilities and importation of wine under the Bioterrorism Act. Details on these and other rules and issues are found at ttb.gov.
Posted on 02.22.2017 - 16:43:52 PST
Thank you for this guide. Very useful.