The TTB "Single Taxpayer Rule" went into effect at the beginning of 2018 as a part of the Tax Cuts and Jobs Act of 2017 and has significant tax implications for producers of beer, wine, or distilled spirits.
To summarize the rule at a high level, TTB may require that reduced federal excise tax rates on beer, wine, or spirits be allocated between otherwise unrelated legal entities in certain circumstances - i.e. two or more unrelated entities could be treated as a "single taxpayer" for the purposes of federal excise tax rates.
The Single Taxpayer Rule as it appears in 26 U.S.C. 5001(c)(2)(D), specifically as it pertains to distilled spirits, is copied below:
"Pursuant to rules issued by the Secretary, two or more entities (whether or not under common control) that produce or process distilled spirits under a license, franchise, or other arrangement shall be treated as a single taxpayer for purposes of the application of this subsection."
Perhaps the most interesting part of the Single Taxpayer Rule is the phrase "or other arrangement", as such an application is very broad and could be very difficult to predict.
For instance, a TTB permit holder could operate a distilled spirits plant ("ABC Distillery"), and contract-manufacture for a private label customer. ABC Distillery may produce and remove for sale 100,000 proof gallons per calendar year, all of which would ordinarily qualify for the reduced federal excise tax rate of $2.70 per proof gallon. For the sake of this hypothetical, let's assume that ABC Distillery makes 80,000 proof gallons per year for its contract customer.
Now let's assume that the contract customer decides to contract with another distilled spirits plant, "XYZ Distilling", to manufacture another 80,000 proof gallons per year of the same brand as part of an expansion strategy on the opposite coast of the country. Let's also assume that XYZ Distilling produces 100,000 proof gallons per year in total.
Here, the two distilled spirits plants could unwittingly be producing the same brand as part of an "other arrangement" covered by the Single Taxpayer Rule, and therefore TTB could assert that the particular brand should have been limited to 100,000 proof gallons at the $2.70 rate, allocated between the two unrelated distilled spirits plants.
The result? TTB could assess unpaid federal excise taxes of the difference between $2.70 and $13.34 per proof gallon, up to 60,000 proof gallons (because the contract customer's brand received the benefit of the $2.70 rate applied to 160,000 proof gallons).
In other words, TTB could assess an underpayment of tax of $10.64 per proof gallon, applied to 60,000 proof gallons, or $638,400. If the arrangement occurred for several years, TTB will generally apply a 3-year statute of limitations, increasing the liability to nearly $2 million. Additionally, late payment penalties and interest could also be imposed, and before long, a very honest mistake could turn into literally millions of unpaid tax liability, and TTB could potentially assess it all on one distilled spirits plant or the other, depending on when the product was made and removed from bond in the calendar year.
What is the takeaway here? The Single Taxpayer Rule could create major landmines for industry members who contract-manufacture, so now may be a good time to develop new processes to help identify the issue in advance in order to avoid surprises down the road.
If you have questions about the TTB Single Taxpayer Rule, we recommend consulting with an experienced attorney familiar with these rules.