Alternating Proprietorship Requires Strict Segregation

It’s another Alt-prop/Contract Brewing Tuesday here at Libation.  That’s when we bring you some discussion on alternating proprietorships or contract brewing… sometimes both.

Today we’d like to take a look at some specifically forbidden activities under these arrangements.  Specifically, segregating the host and tenant’s beer and wine.  This may seem like a no-brainer, but it actually requires a little more than you’d think and there are a host of interpretations about what needs to be segregated that aren’t completely clear.

For beer, if you’re brewing under an Alt-prop arrangement, this means you can’t brew and split out any portion of the brew at any stage of the process for another brewery.

Circular 2005-02 addresses the requirements that a brewer separate and segregate the beer so that it is identifiable as the either the tenant or the host brewer’s and only that brewer’s throughout the process.  This is an important point – not only in operating the premises as a tenant and host under an alt-prop arrangement – but also in addressing the party’s rights under the agreement.  Codifying this method of operation can go a long way to assuring the TTB that you’re not in violation of these rules.

Some considerations for brewers are that:

• Each tenant brewer’s beer must be separate and identifiable from the beer of all other tenants and host brewer at all stages, including prior to fermentation, during fermentation, during cellar storage, and as finished beer after production and before removal from the brewery. 
• The TTB needs to be able to trace, in brewery records, beer produced by a single brewer from raw materials, to fermentation, to removal from the brewery. 
• Blending beer is also verboten, the TTB views the blending of beer produced by different brewers as constituting the taxable removal of beer from one or more brewery premises to a different brewery.  This could trigger the immediate need for payment of tax.

Circular 2008-4 addresses the requirements that a vintner segregate

Some considerations for vintners are:

• That the TTB must be able to locate and identify cased goods, barrels, and tanks assigned to each alternating proprietor. 
• That under the regulations covering alternating proprietors, all operations in any area, building, floor, or room to be alternated will be completely finished and all wine, spirits, and other accountable materials will be removed from the alternated wine premises or transferred to the incoming proprietor. 
• That the TTB will not approve plans that suggest that the floor space occupied by an alternating proprietor’s barrels or cased goods constitutes that proprietor’s premises. 
• Determining whether segregated space meets the requirements is a case-by-case matter for the TTB.
• Untaxpaid wine of an alternating proprietor which cannot be stored in space specifically designated for that alternating proprietor must be taxpaid or transferred in bond to the bonded premises of another proprietor with sufficient storage space. 
• Wine in bond can’t be transferred to another proprietor.

Each of these considerations should be something you discuss in negotiating the terms of the alternating proprietorship agreement so that the TTB review process runs smoothly.  Taking these issues into account before application can help ensure a favorable and quicker review.