Law Offices of John P. Connell, P.C.: Generally, to obtain approval from the Alcohol and Tobacco Tax and Trade Bureau (TTB), a brewery must comply with the federal regulations set forth in 27 CFR part 25, which provides requirements regarding the method and procedure of producing beer. However, when a business’s brewing operations employ an alternate method for producing beer, such as contracting the manufacturing responsibilities to another party, or contracting to manufacture on another party’s premises, the legal implications may differ. Alternate types of brewers, such as those operating with a “contract brewer” or “tenant brewer” status, should be aware of any additional legal obligations their status may incur them.
Contract brewing occurs when a business hires another existing brewery to produce its beer, the “Contract Brewer.” The Contract Brewer must have title to the ingredients throughout manufacturing and shall be responsible for keeping brewery records, labeling the beer, obtaining necessary COLA’s and paying tax on the beer manufactured. Title the to the beer passes to the party contracting for the beer production only after tax payment and removal from the brewery.
The party contracting the “Contract Brewer” need not have its own physical brewery premises but it must have a Massachusetts ABCC license as a wholesaler, manufacturer or farmer brewer in order to enter into a contract brewing agreement. The contracting party, however, does not need to pay the federal tax on the beer manufactured and can only sell such beer to other licensed entities depending on the type of license it possesses.
Still, sometimes a business may choose to retain all the brewing responsibilities and produce beer via the lease of another, existing brewery’s premises and equipment. In this situation, the business is a “tenant brewer” and it operates through a “host brewer” in an arrangement called an alternating brewery proprietorship. Here, the two parties alternate use of the brewery and both are separately involved in the manufacture of beer.
The benefit of these alternate brewing arrangements is that they allow brewers to save money on fixed costs, such as rent and salaries for additional employees, and spend more money on activities such as marketing. In addition, using an existing brewery may help a brewer meet market demand. If a brewer does not have enough manufacturing capacity itself, leasing the premises of another brewery or hiring another brewery to produce its recipe, will enable further production and increase output.
Yet brewers involved in these arrangements should be cognizant that their status may subject them to different legal qualifications than ordinary brewers. In general, a brewer is defined as “a person who brews beer or produces beer for sale.” 26 USC § 5092. A Contract Brewer is considered to be a “brewer” within the meaning of this statute.
On the other hand, both a tenant brewer and a host brewer must have title to the ingredients used to produce the beer and consequently both must qualify as “brewers” under § 5092. Here, the tenant and host brewers are subject to 27 CFR part 25. In addition, both are required to file an alternating arrangement request with the TTB, since this arrangement is not expressly authorized by part 25. The TTB website, states that such a request is reviewed “on its individual merits, based on factors that include physical layout of the brewery premises to be shared, the compliance and business history of each…and the likelihood that the alternation will take place without administrative difficulty or jeopardy to the revenue.” Only an authorization of the proposed alternate method makes an alternating brewery proprietorship possible.
To engage in an alternating proprietorship arrangement in Massachusetts, you will need TTB permission for the arrangement first before filing with the ABCC. The already existing host brewer will also need to to file an”Alteration of Licensed Premises” with the ABCC, the contract at issue between the parties and a list of other materials.
CONTRIBUTED BY COURTNEY MCGEE
© Law Offices of John P. Connell, P.C., 2013.