This article will review how the U.S. Alcohol and Tobacco Tax and Trade Bureau (TTB) regulates distilled spirits from a retired Federal Regulator’s perspective. That perspective is based on over 40 years of service with TTB and its agency predecessor, the U.S. Bureau of Alcohol, Tobacco and Firearms, with the last ten years serving as TTB’s principal Distilled Spirits Industry Analyst.
TTB currently issues up to nine different permits to licensees that produce, utilize or otherwise possess distilled spirits for commercial purposes. Ethyl alcohol, or ethanol, is the spirit that is consumed as a beverage. Although there is a demand for other types of alcohols, such as isoprophls and methyls, these are not considered potable under any circumstances and are not approved by TTB for human consumption. TTB does not regulate these other alcohol groups.
Unlike malt beverages and for the most part wines, potable distilled spirits often have commercial value other than as a beverage. For example, ethyl alcohol is used as a blender or attractor to other materials that make it very marketable as a component for hundreds of industrial and medical uses.
TTB regulates four major industries that use ethyl alcohol:
Each of these distinct industry groups use ethyl alcohol for specified, regulated, and approved uses. All have a potential tax liability attached to the alcohol, and all are required to account for the gallons of ethanol produced, stored, processed, and distributed. TTB issues a permit to all of these producers, as well as separate permits for companies to receive and use these ethanols.
Within the four major groups of industries that use ethanols, there is an inverse proportion between the amount of taxes collected relative to the quantity of ethyl alcohol used. The Beverage Industry accounts for the lowest total gallons of distilled spirits used, but pays the largest amount of excise taxes totaling over $5 billion annually for distilled spirits imported and produced domestically. In contrast, Alcohol Fuel Permittees produce and utilize the largest amounts of ethanol, over 13 billion gallons annually, but account for almost no measureable revenue to TTB.
Who are these companies? Unfortunately, TTB cannot identify all of these permit holders due to Privacy Act restrictions concerning taxpayers. Beverage Industry members have permits which are identified and available to the public under the Federal Alcohol Administration Act. Fuel Alcohol Permittees also are identifiable, because the privacy provisions of the Internal Revenue Code (IRC) were exempted for this category of permittee. However, the industrial permittees generally are covered by Privacy Act provisions under the IRC.
Why is this information significant to the beverage alcohol industry member?
Alcohol distilled at over 185 proof (92.5%) qualifies for both beverage and industrial use if it was distilled by a beverage distiller. Knowing who the industrial permittees are opens a new market opportunity for beverage distillers because current federal regulations allow beverage permittees with excess capacity to sell alcohol to industrial permittees – an especially attractive commercial option because industrial permittees do not compete in the beverage alcohol markets.
It’s also noteworthy that while the government classifies alcohol permittees into four categories, it is not uncommon for alcohol produced by one category member to find its way into the hands of a permittee from another category. Alcohol can be distributed between permittees in related industries through in-bond distributions. For example, if a beverage alcohol permittee has products that are spoiled or contaminated, it is allowed to transfer the ethanol from those products to specific industrial permit holders or an alcohol fuel permittee for commercial use.
For more information regarding the classification of spirits permittees and how they are regulated at the federal level, feel free to contact the author at david.bateman@gray-robinson.com.
This article is published in the February 2014 issue of Fintech Focus. For more information, click here.