To apply for and operate a Distilled Spirits Plant (DSP), a distillery needs to maintain a distilled spirits bond, which covers the federal excise tax that will be due on the spirits. The federal excise tax for distilled spirits is $13.50 per proof gallon (ttb tax proof per gallon), and is due on the amount of finished product removed for consumption or sale.
Distilleries must pay their federal excise taxes semi-monthly (twice a month) or if the distillery projects to pay less than $50,000 in federal excise taxes per year, they may pay quarterly. Distilleries also have the option of paying their excise taxes before, or on the same day as, they remove finished product for consumption or sale. Regardless of how a distillery elects to pay their federal excise tax, they still need a distilled spirits bond to operate.
There are two types of bond coverage for distilled spirits bonds: operations bond coverage and withdrawal bond coverage. Operations bond coverage covers the excise tax value of spirits on the distillery premises and/or in transit to the distillery premises. The withdrawal bond coverage covers the excise tax value of spirits from the day they are withdrawn from the distillery premises until the distillery pays the tax to TTB.
Most new distilleries will generally have the following three activities as part of its operations: Distiller (distilling from an original source, not simply redistilling spirits), Warehouseman (storing bulk spirits) and Processor (rectifying and bottling). The minimum amount of coverage allowed for each operation is $5,000, so most new distilleries will need at least $15,000 in coverage (which covers approximately 1,100 proof gallons of spirits). To determine whether you need more coverage than the $15,000 minimum, estimate the amount of spirits (in proof gallons) that you might have on hand and/or in transit to your facility during a 30-day period, and multiply that by the $13.50 tax rate.
Unlike operations coverage, withdrawal bond coverage is not required. Distilleries can elect to forgo withdrawal bond coverage as long as they pay their excise taxes before, or on the same day as, they remove finished product for consumption or sale. However, it generally makes sense for new distilleries to get a bond that covers both operations and withdrawals under one bond form (unit bond).
For withdrawal coverage, the minimum withdrawal coverage for the unit bond is $1,000. To calculate how much coverage you might need, estimate what you will remove from bond (in proof gallons) in a two-week period (for semi-monthly filing) or three-month period (for quarterly filing), then multiply that amount by $13.50. The final number is what your withdrawal coverage should be.
The distilled spirits bond is one of the most important pieces of a new distillery’s application to TTB. Distillers unsure about any of the bond requirements should talk to their surety company, attorney or compliance consultant if they have any questions.
For more information about DSP bonds and TTB tax per proof gallon, contact John Messinger.