TTB Brewer’s Bond Amount: How Much of a Bond Does a Brewery Need?

TTB Brewer's Bond
What TTB Brewer’s Bond amount does a brewery need? This post goes over the essentials for a TTB-compliant brewery’s operation.

What TTB brewer’s bond amount does a brewery need? Learn the essentials—calculating the right brewer’s bond amount, and choosing the right kind of bond.

What brewer’s bond amount does a brewery need? It’s a question that often comes up when a new brewery is completing its TTB application for its Brewer’s Notice. The TTB brewer’s bond form can look intimdating, but it’s fairly straightforward. First some background, then some guidance to frequently asked questions.

What is a TTB brewer’s bond?

A brewer’s bond is a way of guaranteeing TTB (or states that require them) that production tax, also known as excise tax on beer, is going to get paid. If a brewery fails to make its tax obligations, the bond is going to kick in and cover the deficient amount. That’s why it’s important to get a brewer’s bond amount right. In fact, if a brewer’s bond is too low for a brewery’s production, the brewery is not compliant.

How can I get a TTB brewer’s bond?

There are two kinds of TTB brewer’s bonds. A brewer’s surety bond and a brewer’s collateral bond. A TTB brewer’s surety bond is when a third party covers the brewery; it’s essentially insurance. The brewery pays a certain amount up front, and the insurance company is obligated to cover the bond. A brewery can get a surety bond by contacting an insurance agent. Many breweries go this route because the start-up brewery needs to put all of its cash toward start-up and build out expenses, and the bonds are relatively cheap. Typically $100 up front for a $1,000 bond and sometimes still just that $100 for a $5,000 bond.  To avoid having to deal with a third party, and keep filing paperwork every few years, another option is a Brewer’s Collateral Bond. Instead of paying a certain amount up front for the bond coverage, with a collateral bond, the brewery itself pays its full bond amount to TTB and TTB holds onto that cash. If a brewery doesn’t mind locking up the cash, it’s an option.

What TTB brewer’s bond amount is adequate?

The right TTB brewer’s bond amount depends on a brewery’s production. How many barrels of beer will a brewery produce in a quarter, and what would the brewery’s federal tax obligation on that beer be? That’s the amount of a TTB brewer’s bond a brewery needs to have on file. If a brewery anticipates its quarterly production and, in turn, brewery tax obligation is going to go up in a quarter, a brewery needs to strengthen its bond. The first bond a brewery files is an original. A superseding bond replaces that bond. A strengthening bond strengthens the amount of the one that’s on file.

Currently, the minimum TTB brewer’s bond amount for a production facility is $1,000. For nano breweries opening today, that’s sufficient. Or, at least, it wouldn’t take much more to be sufficient. If you plan to brew more than around 12 bbl per week, the bond would need to be bigger. We’ll walk through the numbers. Tax on beer is, at the time of writing, $7 per barrel for nearly all brewers. If you’re producing below 60,000 bbl per year, it’s $7/bbl today. So, a brewery would have to produce a bit more than 142 bbl per quarter—about 48 bbl per month or 12 bbl per week—to need a bigger brewer’s bond than the minimum $1,000 TTB brewer’s bond. Showing the math, $7 * 142 = $994. That 143rd bbl would bring the quarterly tax obligation to $1001, putting a brewery over the $1,000 minimum coverage. A greater bond would be required.

Notably, if a brewery is seeking a surety bond, very frequently a brewery can pay the same up-front amount, but get a much bigger bond. If a brewery is not posting a cash brewer’s collateral bond, it’s best to get the biggest surety bond it can while paying the lowest amount. This covers the brewery for increased production, without thinking twice. A brewery can shop around for coverage, often a $5,000 bond can be obtained for the same price as a $1,000 bond—that’d be 5x the coverage, giving headroom for production of up to nearly 60 bbl per week. As a brewery expands, or makes plan to, the amount of bond coverage on file with TTB should be in the back of the brewery’s mind.

Do TTB brewer’s bonds expire?

They do. Keep in mind that a brewer’s bond expires after four years. A Brewer’s Bond Continuation Certificate, whether for a surety brewer’s bond or a collateral brewer’s bond, must be filed and accepted by TTB.

Can a brewer change its TTB brewer’s bond type?

Yes, a brewery could switch from a surety brewer’s bond to a collateral brewer’s bond, or go from a collateral brewer’s bond to a surety brewer’s bond.

Help with a TTB Brewer’s Bond or TTB Brewer’s Notice Application

We regularly help handle TTB bonds as a part of our two Brewer’s Notice federal licensing packages. The first is our Comprehensive TTB Licensing Package, where we oversee the entire licensing process, guiding a brewery through every step of the way and handling all the application drafting. The second is our TTB Application Review, which is geared toward DIY breweries who want to save money by taking a stab at the Brewer’s Notice, but want an experienced professional’s review for completeness, removal of errors that may hold up the application, and guidance on streamlining the application for an efficient TTB review. Breweries in planning may call or email for details.

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The 2015 Beer Tax Bills: Insight and Coverage

Will we see brewery tax reform in 2015? I hope so, no matter which bill ends up making it through the gauntlet.
Will we see brewery tax reform in 2015? I hope so, no matter which bill ends up making it through the gauntlet.

I want to point you to excellent reporting by Chris Drosner (aka the Beer Baron) over at the Wisconsin State Journal on the potential impact of the two competing beer tax bills. Check out his article here. We covered the Beer Institute’s Fair BEER Act and the Brewers Association’s Small BREW Act last week here, and through insightful discussion with Chris, edited it to correct and improve our coverage. Good stuff, and glad the Brewery Law Blog can help create a dialogue on these important topics, which is what Doug envisioned when launching five years ago. Most importantly for this story, Chris helps tell the part that keeps getting lost in other coverage; the Fair BEER Act is not just beneficial for “big beer.” Of course, that act would cause the biggest cuts to the federal revenue, but may also position the majority of today’s brewers for the most explosive growth. Check out Chris’s article for more details on that. What do you think?

Note: I should disclose, I’m a member of the Brewers Association. However, as a member and given my position as a small-brewery lawyer, I’m interested in what’s best for craft breweries but also the beer industry at large. At times, the line drawing between “us” and “them” and “our growth” vs. “their growth” can seem less important, and this tax scenario might be a case where everyone could come together and agree that more jobs and growth in the entire beer industry is a good thing. After all, consumers still seem to be cheering for the little guys, even when they’re not so little anymore. I doubt that tax cuts and attendant growth across the board will dupe craft consumers and change their David-leaning preferences. Even if big beer exposes more would-be craft beer lovers to the product through their efforts to become more relevant, I think that, just like all of us did, we’d eventually still see those consumers start coming out to their local taprooms, plugging into the truly craft beer scene, and evangelizing the awesome awesome stuff microbreweries are making today. That excites me more than line drawing on these tax issues here. Either way, passage of some measure of brewery tax reform would be a wonderful thing, and a huge accomplishment for the industry.

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Guest Post: A Primer on Brewer Surety Bond Contracts

Today's lesson: Getting a brewery bond

 

***Brewers need to know a lot about regulation to function everyday. Whether you have a legal team or not, it is vital to understand what the TTB requires of your brewery. I have asked Danielle Rodabaugh of SuretyBonds.com to stop by and talk about what types  of surety contracts a brewer might need to know about. Thanks to Danielle for the following post.***

 

Whether you’re looking to start up a new brewery or have been working in the industry for decades, you’ve probably heard that you need to purchase a surety bond before your enterprise can be legally licensed. Government agencies that regulate breweries typically require them to provide brewer bonds to ensure all taxes are paid appropriately.

 

Brewer bonds are a specific type of license and permit bond used to guarantee compliance with licensing laws and other relevant industry regulations. Brewery surety bonds are known by a number of aliases, including alcohol tax bonds, liquor license bonds, ATF bonds (short for the state Alcohol, Tobacco and Firearm agencies that might require them) and TTB bonds (short for the federal Alcohol, Tobacco Tax and Trade Bureau).

 

Each alcohol bond that’s issued is a legal contract that binds three entities together.

 

  • The principal is the business or individual that plans to sell, manufacture or warehouse beer.
  • The obligee is the government agency that requires the bond to ensure taxes are paid appropriately.
  • The surety is the insurance company that backs the brewer’s future performance with a financial guarantee.

If a bonded brewery fails to pay taxes appropriately, the bond amount can be used to pay the owed taxes as well as any other fees that might accompany the unfulfilled payment. Claims on brewery bond contracts are rare, but without the bonding requirement, state agencies would lose the benefit of the surety’s prequalification standards. But what does this mean?

 

Because surety providers intend to avoid losing money on claims, they carefully review applicants before issuing brewers bonds. To put it simply, the bonding process keeps individuals who lack the financial capacity to fulfill their tax obligations from getting a surety bond. Without the required bond, breweries cannot qualify for the necessary licenses and permits. Thus, unqualified individuals are kept from working in the industry if they lack financial stability.

 

Another barrier to getting bonds is their costs, which depend on a number of factors such as the bond amount and the applicant’s financial credentials. The amount of surety bond protection a brewery must provide typically depends on the enterprise’s anticipated tax liability for a full calendar year. Brewery owners who have good credit should expect to pay a rate that’s 1 to 5 percent of the bond amount, and those with poor credit should expect a rate that ranges from 15 to 25 percent of the bond amount. So if a brewery is expected to pay $10,000 in taxes during a year, a $10,000 surety bond will be required. Those with good credit will pay $100 to $500 while those with bad credit will pay $1,500 to $2,500.

 

Before applying for a bond, brewery owners should check with their state, county and city government agencies to verify bonding requirements. Failing to understand which bonding regulations apply to your brewery could hinder the licensing process. This guide should help you on your way.

 

Danielle Rodabaugh is the chief editor at SuretyBonds.com, a surety provider that issues bonds to working professionals across the nation. As a part of the company’s educational outreach program, Danielle writes articles that help new business owners better understand how surety bonds affect the business licensing process. You can keep up with Danielle on Google+.

 

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