Contract Brewing in a Nutshell
The brewing world has come a long way over the past ten years. Local breweries are an everyday part of our lives providing a wide variety of product on a local, regional and national level to even the most novice of beer drinkers. As a result of this boon, there are endless opportunities to become a part of the craft beer movement. One of these opportunities is afforded through the concept of contract brewing. Contract brewing is a burgeoning trend whereby an aspiring, or existing, brewer contracts with another brewery to brew and package beer on their behalf. This may be done for several reasons, such as the desire for a small business to get its foot into the brewing door, the expanded capacity or bottling ability of the contract brewer. The Department of the Treasury Alcohol and Tobacco Tax and Trade Bureau (“TTB”), which oversees many federal alcohol regulations, considers contract brewing arrangements to be “ordinary commercial agreements.” As alcohol production is a highly-regulated industry, there are still, of course, several regulations and considerations in place with respect to brewing beer on a contract basis, so what follows is a brief overview of the various federal law issues at play.
A brewer under Section 5092 of the Internal Revenue Code is a person who brews or produces beer for sale. The position taken by the TTB is that the brewer must have title to the ingredients in the beer to create the beer, and therefore the brewer also has title to the beer itself once produced. In a contract brewing relationship, then, the contract brewer possesses title to the ingredients and the beer until after production, payment of taxes and removal of the beer from the contract brewery. What this means is that the brewer that contracts with the contract brewery is not considered to be a brewer at all under federal law. In fact, the contracting party may need to be permitted as a wholesaler or retailer to receive and then sell the beer to others.
So much of alcohol production law is focused on taxation, and the question of which entity pays taxes is a vital one. In the case of ownership, the contract brewer is responsible for paying the appropriate amount of tax on the beer when it is removed from the brewery. As such, the brewer contracting with the contract brewer is not liable for any taxes directly. However, the brewing contract may contain a clause calling for the contract brewer to be compensated for the amount of tax paid.
Once again, the contract brewer keeps all records of production and provides operation reports to TTB. Any record-keeping required of the other brewer will be related to that brewer acting as a wholesaler or retailer under federal law.
There are, of course, also arrangements known as “alternating proprietor agreements” where brewers trade off using the same space. Those circumstances are quite different than in a contract brewing situation, as both brewers must comply with the multitude of regulations. In a contract brewing arrangement, the onus of compliance with federal regulations falls mainly on the brewer actually producing the beer, which is why contract brewing is seen as a simple way for brewers to launch their business and grow their brand even before they build their brewery. For more information on contract brewing, contact the attorneys at McBrayer.
Masten Childers, III, is a member of the firm's Litigation department where he focuses his practice on bank litigation, estate planning litigation, personal injury and closely-held business services. As a prior small business owner, he understands first-hand the unique needs a small business needs in order to succeed. Mr. Childers is well versed in assisting small businesses with their industry-specific concerns and can address a multitude of considerations when operating your own business. He works closely with our in-house tax department and can advise on the most advantageous methods to keep your business operating smoothly for the long-term. He can be reached at firstname.lastname@example.org or (859) 231-8780, ext. 161. This article does not constitute legal advice.