Brewer Can Assign CBMA Tax Refunds, Despite Physical Brewing by Another Brewer, CBP Says

Labatt can act as a “brewer” and assign reduced excise tax rates to importers under the Craft Beverage Modernization Act, even though the beer was brewed by a different company under a production agreement, CBP said in a recent ruling. Labatt and the actual brewer of the beer, Molson, were operating in a manner similar to an “alternating proprietor” arrangement for small brewers, rather than a contract brewing relationship that would not qualify for the tax refunds, CBP said in HQ H304179, issued Feb. 28.

Labatt had sought out Molson, normally a competitor, to brew the beer in order to comply with an anti-trust settlement that had required InBev to divest Labatt as part of its merger with Harnesser in 2008. Molson and Labatt remained independent from each other, but Labatt entered into the agreement because it had to find supply sources that were completely independent from the newly merged ABI. The brewing was governed by a production agreement between Labatt and Molson.

The Craft Beverage Modernization Act allows importers to seek refunds on taxes paid above the reduced tax rate set by the law. But because the reduced rate is limited to a certain quantity of beer per brewer, foreign brewers must “assign” portions of their production eligible for the reduced rate to their respective importers. Labatt USA, the importer, was unable to get an assignment certification from Molson, so Labatt sought the ability to itself assign the reduced tax rate as a brewer, even though it didn’t physically brew the beer. The Alcohol and Tobacco Tax and Trade Bureau said the decision was CBP’s.

CBP looked to a different reduced tax rate for small brewers to inform its consideration of whether Labatt could be a brewer under the CBMA. For small brewers, TTB has generally considered “alternating proprietor” arrangements, “in which two or more people take turns using the physical premises of a brewery,” to qualify for the reduced tax rate. On the other hand, contract brewing, a “’business relationship in which one person, such as a wholesale or retail dealer or brewer, pays a brewing company, the ‘contract brewer,’ to produce beer for him or her,” generally does not qualify, CBP said.

CBP applied TTB’s five factor test to determine the type of arrangement between Labatt and Molson. It found the two companies operated more as alternating proprietors. Labatt paid Molson on a per-unit basis, including charges for materials, which is allowed in alternating proprietor arrangements. Operationally, though Molson provided many raw materials, Labatt provided its own unique yeast, had the right to inspect the production facility, and was responsible for sales and payment of tax. Labatt continued to have oversight over the brewing of its beer at Molson, and stayed involved in production. The two companies remained independent, and Molson had no control over labeling or packaging. Molson was also prohibited from using the labeling or formulas in any of its own products.

“In sum, under the factors articulated by TTB, the Production Agreement indicates the existence of an alternating proprietor arrangement between Molson and Labatt. While these factors are not binding on CBP’s determination in this protest, they provide helpful insight into what arrangements might qualify an entity to be a ‘brewer’ for purposes of reduced excise tax rates,” CBP said. “The Production Agreement certainly does not seem to conflict with policy concerns stated by TTB regarding contract brewing arrangements where a larger company splits into smaller companies merely to improperly claim status as a small brewer. Instead, the evidence in this case suggests that Labatt is independent of Molson and is merely taking advantage of an existing physical brewery premises owned by Molson,” it said.

“As such, given the facts presented, Labatt qualifies as a ‘brewer’ for purposes of assigning excise tax relief on imports of beer pursuant to the CBMA,” CBP said. “Accordingly, Labatt can properly assign the reduced excise tax to its importers of Labatt beer in accordance and compliance with the requirements established by CBP.”