Contract Brewing vs. Alternating Brewery Proprietorship: Which One Is Right for You?

You’ve perfected several of your brews, but you realize that you do not have the ability to produce the volume necessary to take your brewery to the next level. Once you reach this point, you have two options: open your own brewery or contract with an existing brewery to produce your beer there. Depending on the circumstances, you may not have the resources to invest in a premises or the equipment so brewing at another brewery may be your best option. This is typically done in one of two ways: contract brewing or through an alternating brewery proprietorship. It’s important to understand the key differences between these arrangements so you can decide what works best for you and your growing business.

In a contract brewing relationship, you pay a brewing company, the “contract brewer” to brew the beer for you. Under this arrangement, the contract brewer is solely responsible for brewing the beer, maintaining all of the brewing records, labeling the beer using its name and address, obtaining necessary COLAs, and paying the tax associated with removing the beer from the brewery. You provide the recipes for your beer to the contract brewer. Title to the beer remains with the contract brewer until the tax is paid or the beer is removed from the brewery. The TTB considers this arrangement to be an ordinary commercial business relationship.

In an alternating brewery proprietorship relationship, you take control of a portion of a brewery to produce your beer. You, the “tenant brewer,” essentially “rent” space and equipment from the brewery, the “host brewer,” who may also rent space and equipment to another tenant brewer. Under this arrangement, you are solely responsible for brewing your beer, maintaining all of the brewing records, labeling the beer using your own name and address, obtaining necessary COLAs, and paying tax on the beer upon your removal of the beer from the brewery. Title to the beer remains with you at all times and taxes are paid by you.

The key differences between these two relationships can be summarized as follows:

Contract Brewing Alternating Proprietorship
·      Contract brewer holds title to the beer, including the ingredients and raw materials used to brew the beer, during all stages of production. ·      Tenant brewer holds title to its beer, including the ingredients and raw materials it uses to produce its beer, during all stages of production.
·      Contract brewer retains all records of production and removal of beer and provides reports to the TTB. ·      Tenant brewer and host brewer each retain their own records for production and removal of beer and each provides reports to the TTB.
·      Contract brewer is solely responsible for paying taxes on beer removed from the brewery. ·      Tenant brewer and host brewer are individually responsible for paying their own taxes on their own beer removed from the brewery.
·      Only the contract brewer must qualify as a brewer. ·      Tenant brewer and host brewer must each qualify as a brewer.

A notable benefit of being an alternating proprietor is that you may be eligible to pay a lower tax rate on beer. Where a brewer produces less than 2,000,000 barrels of beer during a calendar year, there is a reduced tax rate of $7 per barrel on the first 60,000 barrels of beer produced that is also consumed or sold in that same year. Additional beer produced during that calendar year is taxed at the full rate of $18 per barrel up to 2,000,000 barrels. The reduced tax rate does not apply to any brewer that brews more than 2,000,000 barrels in a year.

However, the tenant brewer must be separately licensed as a brewer under an alternating proprietorship arrangement, and must file at least the following documents with the TTB: (1) a Brewer’s Notice; (2) a Brewer’s Bond; (3) Consent of Surety; (4) an attachment to the Brewer’s Notice that describes security in the brewery; (5) Environmental Information and Water Quality Considerations; (6) Special Tax Registration and Return; (7) request for alternate method of operation (if tenant brewer records will be stored on premises); (8) Power of Attorney (if the host brewer plans to prepare any records on behalf of the tenant brewer); (9) request to establish alternating proprietorship; (10) copy of the alternating proprietorship agreement between the tenant and host brewers; and (11) the tenant brewer’s business plan.

The TTB has noted a number of concerns that it looks for during qualification of the operations and subsequent field audits of an alternating brewery proprietorship. Is the tenant brewer, in fact, acting as a brewer and producing the beer? Is the tenant brewer independently operating from the host brewer with respect to operations, production, and marketing of the beer? Is the alternating proprietorship arrangement primarily designed to split the production of a larger company into smaller companies to qualify for the reduced tax rate? Is the tenant brewer contracting beer production to the host brewer?

The foregoing only touches upon the many things that you should take into consideration when deciding whether to contract brew or brew as an alternating proprietor. It is also vitally important that any contract you enter into with a brewery, regardless of the type of arrangement, is in writing and that you are protected not only in the present, but in the future as well.

 

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Gina McCreadie