This month, the U.S. Alcohol and Tobacco Tax and Trade Bureau (TTB) published an industry circular on single taxpayer rules for certain Craft Beverage Modernization Act (CBMA) benefits. TTB originally issued this industry circular in 2018 to respond to questions received regarding the application of the “single taxpayer” rules of CBMA provisions of the Tax Cuts and Jobs Act of 2017 (Public Law 115-97) (“the 2017 Act”). Specifically, this industry circular addresses certain scenarios where two or more domestic industry members would be treated as a “single taxpayer” and how this affects their eligibility to claim the credits or reduced rates (collectively, “tax benefits” or “CBMA tax benefits”) available under CBMA on the beer, wine, or distilled spirits they produce and remove subject to tax.
Industry Circular 2023-2 reissues the guidance in Industry Circular 2018-5, with minor edits to reflect certain amendments to the CBMA provisions and clarify how single taxpayer groups can apportion their CBMA benefits in advance. As a result, this Industry Circular supersedes TTB Industry Circular 2018-5. There are no substantive changes to the scenarios described.
What domestic activities constitute ‘processing’ for the purpose of determining eligibility for the reduced distilled spirits tax rates?
Reduced tax rates are allowed on distilled spirits that are distilled or processed by a domestic distilled spirits plant (DSP) and removed by a DSP during the calendar year. A domestic DSP is considered a processor of distilled spirits if it “manufactures, mixes, or otherwise processes distilled spirits” or “manufactures any article.” See 26 U.S.C. 5002(a)(5)(A). “The term ‘processor’ includes (but is not limited to) a rectifier, bottler, or denaturer.” See 26 U.S.C. 5002(a)(5)(B). For distilled spirits removed after December 31, 2021, “[a] distilled spirit shall not be treated as processed [for reduced rate purposes] unless a process described in [26 U.S.C. 5002(a)(5)(A)] (other than bottling) is performed with respect to such distilled spirit.” See 26 U.S.C. 5001(c)(5).
For purposes of the reduced rates, a domestic DSP is considered a processor of distilled spirits if it:
- manufactures distilled spirits,
- mixes distilled spirits with materials including flavors, wines, water (except that the addition of water during the normal process of bottling for the purpose of ensuring label proof does not constitute “processing” for reduced rate purposes), or other distilled spirits of any type, and/or
- otherwise physically changes the distilled spirits inside the container, including filtering distilled spirits to remove material from those distilled spirits.
Processing does not include changing the marks or labels on distilled spirits containers or repacking containers of distilled spirits without physically changing the distilled spirits inside the containers.
Note: Eligibility for the reduced tax rates or new tax credits may be limited by application of the single taxpayer or controlled group rules.