Taxation of Beer, Wine and Distilled Spirits. Prepared and Presented by: Arthur K. Griffin

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2 Taxation of Beer, Wine and Distilled Spirits Prepared and Presented by: Arthur K. Griffin

3 Summary of Topics Overview of Alcohol Production Sources of Liquor Laws & Enforcement Excise Taxes Distilled Spirits Plants and Other Locations Recordkeeping & Reporting Losses, Shortages, and Voluntary Destruction

4 Overview of Alcohol Production Manufacturing of Alcohol Key Definitions Daily Records and Monthly Operational Reports General and Bonded Premises, Prepayment vs. Deferred Payment, and In Bond Transfers Gauging

5 Creating Distilled Spirits Raw Materials Rye Corn Barley Milling Hammer Mill/Roller Mill Creates grist the milled grains prior to mashing. Cooking/Mash Process Mixing hot water with milled grains Processed used, for instance, to produce vodka, bourbon, or single malt. Fermentation Wort and yeast combine and produce alcohol. This is known as wash. Wash to Continuous Stripping Tower First distillation process for vodka or bourbon. Spirit Still Low wines are cut and sent to a spirit still for distillation.

6 Processing Distilled Spirits Holding Tanks Processing/Storage Storage Processing Sale or Transfer Partially or full finished spirits may be sent to a holding tank to be subsequently transferred for storage or processing. Spirits to be processed immediately (i.e., gin or vodka) may go straight to bottling. Spirits to be aged (i.e. bourbon) may be barreled and stored. Spirits may be temporarily stored prior to processing or aged in barrels for a specific period. Stored spirits may be returned to production prior to final processing. Bottle and case finished spirits. Taxes are accounted for on the case of spirits, whether under the prepaid tax method or deferred tax method, and the case is physically transferred to a tax paid vault. Spirits are sold to a distributor or wholesaler (or directly to a retailer in certain circumstances).

7 Key Definitions Alcohol flavoring materials Any non-beverage product on which drawback has been or will be claimed under [the I.R.C.], and any flavor imported free of tax which is unfit for beverage purposes. This term includes eligible flavors but does not include flavorings or flavoring extracts manufactured on the bonded premises of a [DSP] as an intermediate product. Distilled spirits operations Any authorized distilling, warehousing, or processing operation conducted on the bonded premises of a plant qualified under [Part 19]. Distilling material Any fermented or other alcoholic substance capable of, or intended for use in, the original distillation or other original processing of spirits. Fermenting material Any material that will be subject to a process of fermentation in order to produce distilling material. Gallon or wine gallon The liquid measure equivalent to the volume of 231 cubic inches.

8 Key Definitions Proof The ethyl alcohol content of a liquid at 60 Fahrenheit, stated as twice the percentage of ethyl alcohol by volume. Proof gallon A gallon of liquid at 60 Fahrenheit which contains 50% by volume of ethyl alcohol having a specific gravity of at 60 Fahrenheit referred to water at 60 Fahrenheit as unity, or the alcoholic equivalent thereof. Effective tax rate The net tax rate, after reduction for any credit allowable under [the I.R.C.] for wine and flavor content, at which the tax imposed on distilled spirits by [the I.R.C.] is paid or determined. Tax-determined When used with reference to any distilled spirits to be withdrawn from bond on determination of tax, that the taxable quantity of spirits has been established. Taxpaid When used with reference to distilled spirits, all applicable taxes imposed by law on those spirits have been determined or paid as provided by law. Transfer in bond The removal of spirits, denatured spirits and wines from one bonded premises to another bonded premises.

9 General Rules and Monthly Operational Reports (Production, Processing & Storage) A Distiller is required to maintain extensive source records to support any reports, tax assessments and claims. A Distiller is responsible for recording activities and transactions of three main operational accounts: Production, Storage, and Processing. A Distiller s actual operations and the way it moves spirits between and within its production, storage, and processing accounts will determine how it reports monthly activity.

10 In Bond, the Bonded Premises and Withdrawal Bonds To set up and operate a distilled spirits plant ( DSP ), a Distiller is required to provide the TTB with one or more bonds. Bond is defined as a formal guarantee for payment of monies due to TTB, including taxes imposed by [] Chapter 51 [of the IRC], and any related fines, penalties or interest that the proprietor of a [DSP] may incur, up to an amount specified by the bond (the bond penal sum ). 27 C.F.R There are two basic types of bonds, operations bonds and withdrawal bonds, as well as several variations of the two types. An operations bond covers the tax liability for various operations at a DSP, as well as any fines and penalties imposed for violations of laws and regulations related to the bond. A withdrawal bond covers the tax liability for distilled spirits withdrawn from the bonded premises on a tax deferred basis. A unit bond covers both withdrawals and operations at one or more DSPs.

11 Prepayment vs. Deferred Payment A Distiller has two options for paying taxes on the spirits removed from its bonded premises: prepayment and deferred payment. Under the prepayment system, the Distiller must pay applicable taxes after tax determination but prior to removing spirits from the Distiller s bonded premises. Under the deferred payment system, which is preferred among most distilleries, the Distiller may withdraw spirits from bond after tax determination but before payment of the tax. Regardless of whether a Distiller opts for prepayment or deferred payment of taxes, spirits must be gauged to determine the tax due prior to withdrawing any spirits from the Distiller s bonded premises and the Federal Excise Tax Return (TTB F ) must be submitted by the applicable due date.

12 In Bond, the Bonded Premises and Withdrawal Bonds A DSP remains liable for taxes on all distilled spirits on a Distiller s premises covered by a withdrawal bond, i.e., the bonded premises. Bonded premises is defined as [t]he premises of a [DSP], or part thereof, as described in the application for registration, on which the conduct of distilled spirits operations defined in [IRC 5002] is authorized. 27 C.F.R General premises include any portion of the [DSP] described in the notice of registration other than bonded premises. 27 C.F.R (c). The taxes a Distiller must pay are based on the taxable removal of the liquor from the Distiller s bonded premises. This is also referred to as in bond. Thus, this tax becomes a lien on the distilled spirits as soon as the spirits come into existence and, unless an exception applies, remains until the tax is paid. In bond, when in reference to spirits, denatured spirits, articles or wine, refers to spirits or wine held under bond to secure the payment of the taxes imposed by [the IRC], and on which those taxes have not been determined. The term also refers to such spirits or wine on the bonded premises of a [DSP], and such spirits or wines that are in transit between bonded premises. In addition, the term refers to spirits in transit from customs custody to bonded premises, and spirits withdrawn without payment of tax under [the IRC], and with respect to which relief from liability has not occurred under [the IRC].

13 Gauging Generally Gauging is the process for determining the proof and quantity of distilled spirits. A Distiller must make gauging a part of its standard operating procedures. Prior to removing any spirits from a DSP, spirits must be gauged to determine the tax due. This includes entries for each deposit of spirits on Distiller s premises for storage or production, withdrawal upon determination of tax, withdrawal from Distiller s premises free of tax or without payment of tax as allowed in limited circumstances, and transfer for redistillation.

14 Gauging Generally Distiller must gauge spirits and alcohol flavorings when required by the TTB or when the spirits or alcohol flavoring materials are: Produced and entered for deposit; Filled into packages from storage tanks; Received or transferred in bond; Transferred between operational accounts; Mixed in the manufacture of a distilled spirits product; Mingled in tanks; Reduced in proof prior to bottling; Voluntarily destroyed; Withdrawn or removed from bond; Tax determined; Returned to bond; or Denatured.

15 Tax Determination Gauging Requirements Generally, a distiller may gauge spirits for tax determination by the case, package, or tank. In the event a distiller will pay taxes on a deferred basis, once bottled and cased, the distiller must determine taxes on the case and then move the case(s) to a Tax Paid Vault. If making payments on a semi-monthly basis, taxes will be paid on those cases of spirits after the close of each semi-monthly excise tax return period.

16 Summary of Topics Overview of Alcohol Production Sources of Liquor Laws & Enforcement Excise Taxes Distilled Spirits Plants and Other Locations Recordkeeping & Reporting Losses, Shortages, and Voluntary Destruction

17 Understanding Liquor Laws Federal Laws Local Laws State Laws Industry Associations Internal Policies

18 Federal Liquor Laws and Guidance Internal Revenue Code ( I.R.C. ) Subtitle E Alcohol, Tobacco, and Certain Other Excise Tax Code of Federal Regulations ( C.F.R. ) Title 27 Alcohol, Tobacco Products and Firearms Federal Alcohol Administration Act ( FAA Act )

19 Internal Revenue Code Subtitle E Alcohol, Tobacco, and Certain Other Excise Tax Chapter 51. Distilled Spirits, Wines, and Beer Subchapter A. Gallonage Taxes ( ) Subchapter B. Qualification Requirements for Distilled Spirits Plants ( ) Subchapter C. Operation of Distilled Spirits Plants ( ) Subchapter D. Industrial Use of Distilled Spirits ( ) Subchapter E. General Provisions Relating to Distilled Spirits ( ) Subchapter F. Bonded and Taxpaid Wine Premises ( ) Subchapter G. Breweries ( ) Subchapter H. Miscellaneous Plants and Warehouses ( ) Subchapter I. Miscellaneous General Provisions ( ) Subchapter J. Penalties, Seizures, and Forfeitures Relating to Liquors ( )

20 Code of Federal Regulations 27 C.F.R. Part 1, Basic Permit Requirements Under the [FAA Act], Non-Industrial Use of Distilled Spirits and Wine, Bulk Sales and Bottling of Distilled Spirits 27 C.F.R. Part 19, Distilled Spirits Plants 27 C.F.R. Part 24, Wine 27 C.F.R. Part 25, Beer

21 Federal Alcohol Administration Act ( FAA Act ) Main FAA Act concerns: Tied-House Provisions Exclusive Outlets Commercial Bribery Consignment Sales Labeling Advertising

22 Federal Agencies Department of the Treasury Alcohol and Tobacco Tax and Trade Bureau ( TTB ) National Revenue Center ( NRC ) Tax Audit Division ( TAD ) Trade Investigations Division ( TID ) Intelligence Division ( ID ) U.S. Customs and Border Protection ( CBP )

23 TTB National Revenue Center NRC functions in two different areas: Tax Services Application Services General Mission: Collect tax revenues Screen applications Issue permits and approves registrations or notices Reconcile returns, reports and claims Provide technical assistance to TTB employees and industry members

24 TTB Tax Audit Division Agency division comprised of auditors to verify payment of alcohol excise taxes and ensure legal compliance. Through ensuring compliance, primary concern is to protect tax revenues, protect consumers, and promote voluntary compliance.

25 TTB Trade Investigations Division Generally, the TID provides assistance and advice regarding provisions of the FAA Act, the I.R.C., and related laws. General Responsibilities Ensure only qualified applicants are granted permits for alcohol/tobacco production. Investigate allegations of trade practice violations. Review Certificates of Label Approvals ( COLAs ) to determine compliance. Prevent misleading labeling and advertising of alcohol products. Ensure compliance with health-related issues in regard to alcohol products. Conduct investigations of suspected tax evasion.

26 TTB Intelligence Division Collects, coordinates, analyzes, distributes information in regard to alcohol production and trade practices. Works with Tax Audit Division and Trade Investigations Division. Assists TTB and IRS in criminal cases.

27 Colorado Laws and Guidance Colorado Liquor Code & Rules Article 47, Title 12, C.R.S. Regulation to Colorado Beer Code Article 46, Title 12, C.R.S. Miscellaneous Guidance Bulletins Publications Tax Service Division FYI For Your Information

28 Summary of Topics Overview of Alcohol Production Sources of Liquor Laws & Enforcement Excise Taxes Distilled Spirits Plants and Other Locations Recordkeeping & Reporting Losses, Shortages, & Voluntary Destruction

29 Distilled Spirits Federal Excise Taxes I.R.C imposes a tax on all distilled spirits domestically produced on each proof gallon and at a proportionate rate to all fractional parts of a proof gallon, and the tax attaches as soon as the substance (i.e., the distilled spirit) comes into existence. Proof gallon is defined under the I.R.C. as a United States gallon of proof spirits, or the alcoholic equivalent thereof. I.R.C. 5002(a)(11). Proof gallon is defined under the C.F.R. as [a] gallon of liquid at 60 degrees Fahrenheit which contains 50 percent by volume of ethyl alcohol having a specific gravity of at 60 degrees Fahrenheit referred to water at 60 degrees Fahrenheit as unity, or the alcoholic equivalent thereof. 27 C.F.R. 19.1; see also proof spirits, I.R.C. 5002(a)(10). This applies to all products containing distilled spirits, including wines with high alcohol content (containing more than 24% ABV). In other words, all products of distillation, or products containing distilled spirits, by whatever name known, on which any tax imposed has not been paid, any alcoholic ingredient added to such products, are considered to be distilled spirits and taxed as distilled spirits.

30 Distilled Spirits Federal Excise Taxes Generally, distilled spirits are taxed at a rate of $13.50 per proof gallon or a rate proportional to a fractional proof gallon. This rate, however, may be adjusted using applicable credits and is otherwise known as an effective tax rate. In sum, a credit against tax imposed on each proof gallon of alcohol derived from eligible wine is taxed at rates specific to wines, or from eligible flavors not exceeding 2.5% of the finished product on a proof gallon basis. Distiller must accurately record the results of each tax determination in accordance with Federal recordkeeping requirements.

31 Distilled Spirits Federal Excise Taxes Exemptions from Tax Distilled spirits may be removed from a Distiller s bonded premises, without payment of tax and with limitations, for the following purposes: Export; Transfer to customs manufacturing bonded warehouses; Transfer to foreign trade zones; Supplies for certain vessels and aircraft; Transfer to customs bonded warehouses; Use in wine production; Transfer to any university, college of learning, or institution of scientific research for experimental or research use; Research, development or testing; or Use on bonded wine cellar premises in the production of wine and wine products which will be rendered unfit for beverage use.

32 Wine Federal Excise Taxes Wine (including imitation, substandard, or artificial wine, and compounds sold as wine) is taxed as follows: On still wines containing not more than 14% of alcohol by volume, $1.07 per wine gallon; On still wines containing more than 14% and not exceeding 21% of alcohol by volume, $1.57 per wine gallon; On still wines containing more than 21% and not exceeding 24% of alcohol by volume, $3.15 per wine gallon; On champagne and other sparkling wines, $3.40 per wine gallon; On artificially carbonated wines, $3.30 per wine gallon; and On hard cider which is a still wine derived primarily from apples or apple concentrate and water, containing no other fruit product, and containing at least ½ of 1% and less then 7% alcohol by volume, 22.6 per wine gallon. All wines containing more than 24% of alcohol by volume is classed as a distilled spirit and taxed accordingly.

33 Wine Federal Excise Taxes Credit for Small Domestic Producers In the case of a person who produces no more than 250,000 wine gallons in a calendar year, a credit applies against taxes imposed, with limitations, of 90 per wine gallon on the 1 st 100,000 wine gallons of wine, except for champagne and other sparkling wines, which are removed for consumption or sale and which have been produced at qualified facilities in the U.S. This credit is reduced (but not below zero) by 1% per 1,000 wine gallons of wine produced in excess of 150,000 wine gallons of wine during the calendar year. Specific rules apply to controlled groups for determining applicability of credit.

34 Wine Federal Excise Taxes Exemptions from Tax Wine may be removed from bonded wine premises, without payment of tax and with limitations, for the following purposes: As a distilling material; For vinegar production; For exportation; For government use; For experimental use; For personal or family use; or For destruction.

35 Beer Federal Excise Taxes Except as otherwise provided, tax is imposed on all beer brewed or produced in the US, or imported into the US at the rate of $18 for every barrel containing not more than 31 gallons and at a like rate for any other quantity or for fractional parts of a barrel.

36 Beer Federal Excise Taxes Reduced Rate for Certain Domestic Producers In the case of a brewer who produces not more than 2,000,000 barrels of beer during the calendar year, the per barrel rate of the tax imposed is $7 on the first 60,000 barrels of beer which are removed for consumption or sale and which have been brewed or produced by a qualified brewer in the U.S. However, in the case of a controlled group, the 2,000,000 barrel quantity shall be applied to the controlled group and the 60,000 barrel limitation is apportioned among the brewer members of the group For purposes of this section and similar rules relating to wine, the term controlled group has the same meaning as defined in I.R.C (Consolidated Returns provisions), except that for such purposes the phrase more than 50 percent is substituted for the phrase at least 80 percent anywhere it appears in that subsection.

37 Beer Federal Excise Taxes Exemptions from Tax Beer may be removed from a brewery, without payment of tax and with limitations, for the following purposes: For export; When unfit for beverage use; For laboratory analysis; For research, development or testing; For personal or family use; For use as a distilling material; For use of foreign embassies, legations, etc.; or For destruction.

38 Colorado Excise Taxes Generally The current Colorado liquor excise taxes are as follows: per liter of spirituous liquor; 8 per gallon on all malt liquors, fermented malt beverages, and hard cider; 7.33 per liter on all vinous liquors except hard cider. A Monthly Report of Excise Tax for Alcohol Beverages (DR 0442) ( CO Excise Tax Form ) must be filed along with payment and supplemental schedules on or before the 20 th day of each month following the month such alcoholic beverage is first sold in Colorado. A Liquor and Beer Export Sales Report (DR 0443) ( CO Export Report ), when required, must be attached to each CO Excise Tax Form.

39 General Claims Requirements The TTB is authorized to allow claims for abatement, remission, credits and refunds of taxes. Distiller must file all claims for credit, refund, abatement, or remission on a Claim Alcohol and Tobacco Tax and Trade Bureau Taxes (TTB F ) ( TTB Claim Form ). Any submitted claim must be signed (under penalties of perjury), include Distiller s name, address and capacity, include any supporting documentation (which will be considered part of the claim), and be filed with the TTB s National Revenue Center ( NRC ). Abatement is relief from a liability that has been assessed. Remission is a decision which indicates that a particular tax is not owed.

40 Claims, Credits, Abatements, Remissions, and Refunds Possible claims include: Claims on Spirits or Wines Lost or Destroyed in Bond Claims on Spirits Lost After Tax Determination Claims on Spirits Returned to Bonded Premises Claims for Credits of Tax and Adjustments for Credited Tax

41 Claims for Credits of Tax and Adjustments for Credited Tax Distiller may file a claim for credit of tax after the tax has been determined, whether or not the tax has been paid. However, Distiller may not make an adjusting entry on an Excise Tax Return, or anticipate any allowance of the credit, during a pending claim. Only after Distiller receives a notice of allowance of credit from the TTB may Distiller make an adjusting entry, with an explanatory statement, on its next Excise Tax Return. Distiller must identify the notification of allowance of credit authorizing the adjusting entry in the explanatory statement. If the tax credit is greater than the tax due on the current Excise Tax Return, Distiller may apply the balance of the credit to one or more later tax returns until the credit is exhausted. Any claim for credit or refund must be filed within six (6) months of the date of the return, and no interest is allowed for any claims for credit or refund.

42 Summary of Topics Overview of Alcohol Production Sources of Liquor Laws & Enforcement Excise Taxes Distilled Spirits Plants and Other Locations Recordkeeping & Reporting Losses, Shortages, & Voluntary Destruction

43 Location Restrictions Distilled Spirits A DSP for the production of distilled spirits may not be located in any of the following: In any residence, shed, yard, or enclosure connected a residence; On premises where any beer or wine is produced; On premises where liquors of any description are retailed; or On premises where any other business is carried on (except where authorized). In other words, a Distiller must be careful in its planning stages to not include any retail area selling liquors, such as a manufacturer sales room or a distillery pub in the general or bonded premises of the DSP.

44 Contiguous/Continuity of Premises A licensed premises under Colorado law must be contiguous, however, Federal law requires continuity within the premises of a DSP (which allows for a DSP to be spread out over a general location ).

45 Continuity of Premises Under Federal Law Generally, DSP premises must be continuous except for separations by roads, public waterways, or carrier rights-ofway. However, a TTB officer may approve a DSP registration with separations and all parts of the DSP are in the same general location if the following conditions are met: The separation does not cause administrative problems for the TTB; and There is no jeopardy to revenue as a result of the separation of premises. Regarding approval of separations where all parts of the DSP are in the same general location, according to the TTB s National Revenue Center, this general location is limited to locations within a 10 mile area.

46 Contiguous Licensed Premises Under Colorado Law Under Colorado law, premises means a distinct and definite location, which may include a building, a part of a building, a room, or any other definite contiguous area. Thus, under Colorado law, all buildings, rooms or other area registered as the licensed premises of Distiller s DSP must be a definite contiguous area. Moreover, all other licensees on any premises shared with a DSP also must be of a contiguous nature. For example, if a multi-leveled DSP is to share a building with, for instance, a third-party owned restaurant, there must be a way to get from one floor of the DSP to the other without physically leaving the DSP s licensed premises. Furthermore, if the restaurant is a licensed alcohol retailer under Colorado law, neither the restaurant s licensed premises may overlap with the DSP licensed premises (or vice versa) nor can any spirits belonging to either entity be carried across the licensed premises of the other entity. Contiguous adjoining (sharing a boundary or touching each other physically), neighboring (situated next to something else or to each other), or continuous (connected together so as to form an unbroken sequence in time or an uninterrupted expanse in space)). Encarta. Contiguous Touching at a point or along a boundary; ADJOINING <Texas and Oklahoma are contiguous>. Black s Law Dictionary.

47 Conveyance of Distilled Spirits on DSP Premises A Distiller may choose, with limitations, as to whether it will prepay excise taxes or pay excise taxes on a deferred basis. Thus, once a case of bottled spirits has been produced, the distiller will determine the taxable quantity of spirits in the case and that case will be removed from bond and placed in a holding area for tax determined spirits ( Tax Paid Vault ). The withdrawal bond will cover any liability for taxes during the period from tax determination to when the spirits are sold and shipped.

48 Tax Determined Spirits on Bonded Premises A Distiller may move or convey its tax determined spirits across its bonded premises. However, these tax determined or paid spirits may not be allowed to remain or be stored on the bonded premises, and the distiller must keep these tax determined or paid spirits separate from any spirits on which tax has not been determined or paid (for instance, in a Tax Paid Vault on the bonded premises).

49 Non-Tax Determined Spirits Within the DSP Distiller may move spirits in which taxes have not been determined ( non-tax determined ) in the following scenarios: Between different portions of the distiller s bonded premises at the same DSP or across any other premises (e.g., general premises) of that DSP; Over any public thoroughfare by uninterrupted transportation; or Over a private roadway by uninterrupted transportation. However, any conveyance of non-tax determined spirits under one of these scenarios must comply with the following: Distiller must keep all non-tax determined spirits separate from spirits on which the tax has been determined or paid. Distiller may not store or allow for non-tax determined spirits to remain on any premises other than the bonded premises. E.g., Distiller may not leave a case of non-tax determined spirits in an office on the general premises. Distiller must submit to the TTB a description of the means, route of the conveyance, and the areas of the DSP, public thoroughfare or roadways across which the spirits will be conveyed, and a copy of any agreement with the possessor (owner or lessor) of any private roadways. E.g., anytime there is a situation where tax determined spirits are to be carried across the bonded premises of the DSP to get to the Tax Paid Vault as a regular procedure in its operations, this route must be submitted to the TTB. E.g., distiller must submit a description of any truck that will bring barrels of distilled spirits from any one production facility to another, the route the truck will take, and any agreement in place between applicable parties in the event the truck must use one of its private roads to get to the other facility. Distiller must provide a Consent of Surety (TTB Form ) on Distiller s DSP unit bond extending the terms of the bond to cover the conveyance.

50 Summary of Topics Overview of Alcohol Production Sources of Liquor Laws & Enforcement Excise Taxes Distilled Spirits Plants and Other Locations Recordkeeping & Reporting Losses, Shortages, & Voluntary Destruction

51 Overview of Recordkeeping General Rules for Records Excise Taxes Tax Records Alcohol Beverage Dealer Records Federal Gauging Requirements Manufacturing & Processing Recordkeeping and Reporting Other Operational Records Formulas Unfair Trade Practices, Advertising and Other Similar Recordkeeping Requirements Inspection of Records Compliance Measures

52 General Rules and Monthly Operational Reports (Production, Processing & Storage) A distiller is required to maintain extensive source records to support any reports, tax assessments and claims. A distiller is responsible for recording activities and transactions of three main operational accounts: Monthly Report of Production Operations (TTB F ) ( Monthly Production Report ), Monthly Report of Storage Operations (TTB F ) ( Monthly Storage Report ), and Monthly Report of Processing Operations (TTB F ) ( Monthly Processing Report ). A Distiller s actual operations and the way it moves spirits between and within its production, storage, and processing accounts will determine how it reports monthly activity.

53 General Rules and Monthly Operational Reports (Production, Processing & Storage) Operational reports are filed monthly and must be submitted no later than the 15 th day of the month following the reporting period, even when there is no activity for the month (specific rules apply for September). All three Operational Reports are to be completed using proof gallons and corresponding entry lines for each report are referenced throughout this section.

54 General Rules and Monthly Operational Reports (Production, Processing & Storage) Each of these records must show: Receipts in each account, Any movements from one account to another, Withdrawals of spirits, and Transfers in bond, and generally will include all specifically required individual transaction records, forms, and summaries, any and all auxiliary, supplemental, and source data a distiller uses to compile records, forms, and summaries and used in the preparation of reports, returns, and claims, any copies of notices, reports, returns approved applications, and other documents relating to any operations or transactions.

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65 General Rules and Monthly Operational Reports (Production, Processing & Storage) There is no specific format or medium required in regard to recordkeeping. Thus, create a system to summarize and streamline all required records for easier compilation of its operational reports and excise tax forms. A typical violation found during audits is when daily records do not total to the summary amounts recorded in Operational Reports. For example, mathematical errors such as footing (adding down report columns) and cross-footing (adding across report columns) can result in reporting errors (which can ultimately lead to miscalculation of taxes).

66 Tax Records Taxable Withdrawals, Tax Determination Record, and Form of Record Tax Determination Records Summaries Standard Effective Tax Rate Records Average Effective Tax Rate Records Daily Record Monthly Records Inventory Reserve Records Colorado Tax Determination Records

67 Manufacturing & Processing Recordkeeping and Reporting Production Records Production Materials Production of Spirits Withdrawals from the Production Account Storage Records Processing Records

68 Withdrawals from the Production Account A distiller must maintain daily records of distilled spirits withdrawn from the production account ( Production Withdrawal Record ). This includes, but is not limited to, the following: Withdrawals for tax payment; Transfers to customs bonded manufacturing warehouses; Use in wine production; Transfers in bond to other bonded premises; Transfers to storage operations; Transfers to processing operations; and Research, development or testing.

69 Manufacturing & Processing Recordkeeping and Reporting Production Records Storage Records Storage Operations Receipts Storage Activities Withdrawals from Storage Package Summary Records Tank Records Wine and Spirits Less Than 190 Tank Records Spirits 190 or Greater Processing Records

70 Manufacturing & Processing Recordkeeping and Reporting Production Records Storage Records Processing Records Generally Manufacturing Records Dump/Batch Records Bottling & Packaging Records Alcohol Content and Fill Test Record Finished Product Records Bottling & Packaging Finished Product Records Disposition Redistillation Records Liquor Bottle Records Rebottling, Relabeling & Reclosing Records

71 Manufacturing Records Distiller must maintain daily records of any spirits, wines, and alcoholic flavoring materials received into its processing account ( Manufacturing/Processing Record ). These receipts must be summarized to show each amount of the following: Spirits received from production or storage at the same DSP location; Spirits received from other DSPs via transfer in bond; Spirits received from customs custody; Spirits returned from bond; Wines received from storage at the same DSP; Wines received via transfer in bond; and Alcoholic flavoring materials received. Any such record must contain the name and DSP number of the producer or processor of the spirits, wines or alcohol flavoring materials, whether Distiller or another producer or processor, as well as the warehouseman for spirits of 190 or more received from storage.

72 Dump/Batch Records Any time a distiller processes, blends, or mixes any spirits in the processing account, it must maintain dump/batch records ( Dump/Batch Record ). These records must contain the following information, where applicable: Batch number or serial number of the record; Name and DSP number of distiller (or other producer); Kind and age of the spirits, together with a notation, if applicable, that the spirits were treated with oak chips, contained added caramel, were imported, or from the Virgin Islands or Puerto Rico; Serial number of the container or tank to which ingredients are added for use; Serial number of the container or tank from which spirits are removed; Quantity by ingredient of other alcoholic ingredients used, showing the percentage of alcohol by volume and proof, wine in wine gallons, and alcoholic flavoring materials in proof gallons; Serial number of the source transaction record (i.e., the record for spirits previously dumped); Each transaction date; Quantity of nonalcoholic ingredients used (not including water); Formula number; Quantity of ingredients used in the batch previously dumped, reported on dump records, and held in containers or tanks; Total quantity (in proof gallons) of all alcoholic ingredients used; Identification of each record to which the spirits are transferred; Quantity of each lot transferred; Date of each transfer; Total quantity (in proof gallons) of the product transferred; Batch gain or loss; and The effective tax rate for each batch to be tax determined.

73 Bottling & Packaging Records A distiller must prepare a record for any packaging and bottling in a record for each lot of spirits packaged or bottled ( Packaging Record and Bottling Record ). The record must contain the following information: Bottling tank number; Record serial number; This must start at 1 at the start of each calendar (or fiscal) year, or be otherwise a unique identifying number that is not repeated. Formula number, if applicable, under which the batch was produced; Dump/batch record serial number from which the spirits were received; Kind and age, if claimed, of the spirits product; Tank gauge details, including proof, wine gallons, proof gallons, and obscuration (where appropriate); Obscuration means the difference between true proof and apparent proof due to dissolved solids in the spirits. These are solid materials in spirits that prevent obtaining the true proof. Fill date of the packages or bottles; Size of packages or bottles filled, the quantity of bottles per case, and the number of total cases filled; Serial numbers by Distiller brand name of the containers or cases filled; Proof of the packaged or bottled spirits (if different from the proof recorded on the tank gauge); Total quantity of spirits packaged, bottled or disposed of in bulk; and Gains or losses of the spirits.

74 Other Operational Records Samples Destruction of Products Gauge Records Package Gauge Records Transfer Records Consignor s Responsibility Consignee s Responsibility Records of Taxpaid Storeroom ( Tax Paid Vault ) Operations Records of Wholesale Liquor Dealer Operations Records of Physical Inventories Generally Production Inventory Storage Inventory Processing Inventory Shipping Records Alternating Premises Records

75 Records of Taxpaid Storeroom ( Tax Paid Vault ) Operations Where Distiller in connection with plant operations operates any Taxpaid storeroom (i.e., the Tax Paid Vault) on or in the immediate vicinity of the general premises of its DSP or any other location, it must maintain daily records ( Tax Paid Vault Record ) covering the receipt and disposition of any spirits at that location.

76 Records of Taxpaid Storeroom ( Tax Paid Vault ) Operations This record must include; The transaction date (or date of discovery for any stolen products); The name and address of each consignor or consignee; The brand name; The kind of spirits; The quantity of spirits involved in the following manner: If in packages, liters, or wine gallons, by proof and proof gallons; If in bottles, by proof; The serial numbers or package identification of any packages involved; The TTB may, upon notice, require Distiller to record serial numbers of cases of spirits. Distiller s name (as the producer); and For any imported spirits, the country of origin (not applicable).

77 Summary of Topics Overview of Alcohol Production Sources of Liquor Laws & Enforcement Excise Taxes Distilled Spirits Plants and Other Locations Recordkeeping & Reporting Losses, Shortages, & Voluntary Destruction

78 Losses, Shortages, and Voluntary Destruction The TTB recognizes that it can be difficult to see the distinction between losses, shortages, and the destruction of spirits. Except as otherwise provided, a Distiller does not need to pay excise taxes on any spirits or wines that are lost, destroyed, or otherwise unaccounted for while in bond. Exceptions include theft, unexplained shortages, and any voluntary destruction not adhering to specific requirements. In the event of a claim for theft of spirits or wines, the burden of proof is on the Distiller. The Distiller will be required to prove that the theft did not result from negligence, fraud, collusion, or connivance on the part of Distiller, its members, or any employee, agent, consignor, consignee, bailee, or carrier of either.

79 Losses, Shortages, and Voluntary Destruction Any time spirits or wines in a container held in bond are lost as a result of theft or unauthorized voluntary destruction, either taxes must be paid for the amount of the loss or the container must be separated from other containers and the loss must be promptly reported to the TTB. If spirits or wines are lost or destroyed in bond, the TTB may require the Distiller to file a claim for relief from excise taxes. Additionally, the following losses must be reported and payment of excise taxes may be required: Missing packages, Excessive in-transit losses, Tampering, theft, and unauthorized destruction, Excessive storage losses.

80 Losses, Shortages, and Voluntary Destruction The following losses must be reported and payment of excise taxes may be required: Missing packages: If a Distiller is unable to locate a package of spirits or wines recorded as deposited on its bonded premises, it must promptly report the missing package to the TTB. Distiller must either pay excise taxes on the amount or file a claim for relief.

81 Losses, Shortages, and Voluntary Destruction The following losses must be reported and payment of excise taxes may be required: Excessive in-transit losses: If a Distiller sustains losses of spirits received in bond, Distiller must promptly report the amount to the TTB. Generally, an excessive loss is of spirits in the form of a bulk conveyance and the loss is greater than one percent (1%) of the quantity.

82 Losses, Shortages, and Voluntary Destruction The following losses must be reported and payment of excise taxes may be required: Tampering, theft, and unauthorized destruction: Where spirits or wines are lost or destroyed in bond, the Distiller must either pay excise taxes on the amount or promptly report the loss or destruction to the TTB. The TTB may require Distiller to file a claim for relief.

83 Losses, Shortages, and Voluntary Destruction The following losses must be reported and payment of excise taxes may be required: Excessive storage losses: A Distiller must pay excise taxes on excessive storage account losses unless it files a claim for remission and the TTB allows the remission. A storage account loss is excessive when the quantity of spirits lost during the calendar quarter (from all stored bulk conveyances and storage tanks) is greater than 1.5% of the total quantity of spirits contained in the stored bulk conveyances and storage tanks during the calendar quarter.

84 Losses, Shortages, and Voluntary Destruction If applicable, the TTB will refund any taxes on spirits if the tax has already been paid. Claims for any losses or shortages must be made to the TTB and may not take a decreasing adjustment towards its excise taxes until the claim has been approved.

85 Summary of Topics Overview of Alcohol Production Sources of Liquor Laws & Enforcement Excise Taxes Distilled Spirits Plants and Other Locations Recordkeeping & Reporting Losses, Shortages, & Voluntary Destruction