How does my winery transfer its’ Small Domestic Producer’s Credit?
If you are a new winery, the best question to ask first may be: what is the Small Domestic Producer’s Credit? Back in 1991 the federal government increased the wine excise tax. In order to keep the rate the same for smaller producers, a credit was created for those wineries that produced less than 250,000 gallons of wine per year, on the first 100,000 gallons produced. Because of the credit there is no change from 1991 on the tax rate for those producing less than 100,000 gallons. Those producing more than that see a phase out of the credit in the amount of 1% per 1,000 gallons produced over 150,000 gallons, with total phase out at 250,000 gallons.
Sometimes producers may have the right to take the tax credit, but because of certain circumstances, choose not to do so. For example, physical space restrictions of the production area, perhaps because of an urban winery setting, will sometimes effectively force a winery to transfer their wine to other bonded wine premises, including commercial bonded wine cellars. At that point, the product may be stored and then distributed. The producers may elect to pay the excise tax on the wine prior to shipping it to the bonded wine cellar. Many times the motivation for this is to make sure that the small producer gets the tax credit. What the producer may not realize is that it is possible to transfer the credit to the other bonded wine premises to be used when the wine is removed for consumption or sale.
Of course, proper procedure must be followed in order to make sure the credit transfer is technically correct. According to TTB, a winery may transfer its credit if it meets the following four conditions:
• The wine produced by the small winery would be eligible for the small winery tax credit if removed from its own premises.
• The transferee becomes liable for the tax when it receives the wine in bond.
• The producer holds title to the wine at time of taxable removal, and
• The producer provides credit information to the transferee in writing each time wine is to be tax paid.
The documentation expected in a transaction of this sort contemplates the producer providing the bonded wine cellar with a document that includes both the name of the producer and the transferee, the quantity and tax class of the wines to be shipped, the date the wine is to be removed from bond for consumption or sale, confirmation that the producer is eligible for the credit and the credit rate to which the wine is entitled, and confirmation that the shipment is within the first 100,000 gallons removed by (or on behalf of) the producer for the calendar year.
From a tax return and operational reporting standpoint, either the producer is reflecting the calculation of the credit on its return, or reflecting that the credit was transferred. If a transferee is taking the credit, its return and operational report shall reflect the credit and from whom it was transferred so that TTB may track the credit and abuse can be deterred and detected.
If you have questions about the Small Domestic Producer’s Credit or transferring a credit, please don’t hesitate to contact Caraker Law.