Understanding Kombucha Law: Legally Selling Hard Kombucha

Kombucha law can be mystifying—here, we discuss whether a permit may be needed, spot sources of risk, and touch on steps to be compliant.
Kombucha law can be mystifying—here, we discuss whether a permit may be needed, spot sources of risk, and touch on steps to be compliant.

My fascination with kombucha started in the kitchen, as I raised my first SCOBY from a bottle of GT’s. As she grew, so did another fascination with kombucha—the issues involved in kombucha law. Do you need a federal license to produce kombucha? What about a state license? Can you make kombucha at home and then sell it? Or, do you need a commercial premises to make and sell kombucha—must that be your own commercial space, or could you make kombucha at a commercial kitchen and then sell it? I found that the answer, responsive to so many questions in the law, is that it depends.

As a preliminary matter, though, the first thing to consider is what the alcohol content of the kombucha is (or will be). When producing traditional kombucha, the alcohol content often drifts above .5% ABV (that is, one half of one percent). A product that consists of .5% ABV or more is legally considered alcohol, and a permit is required from the federal government. Moreover, a TTB permit is required even if the ultimate final product is less than .5% ABV. For example, if a producer makes anything beyond .5% ABV—even if the producer plans to dilute that later in the final product—a permit is still required. Of course, there’s no “kombucha permit”—at least not yet!—and so the options for alcohol permits are the ones you would expect. The federal government (the Alcohol and Tobacco Tax and Trade Bureau, or the TTB for short) has three kinds of alcohol permits. There is the brewery permit, the winery permit, or the distilled spirits plant permit.

Through vigil efforts, a kombucha producer (side note: I often think of them as a professional “kombuchery,” and I’m seeing others are starting to use the term as well!) may keep the ABV below .5% at all times. If this is the tact the producer is taking, a permit is not required, and sales would not be limited to those of legal drinking age. Nevertheless, because of the steps involved in making kombucha, it is often not a product eligible to be made at home under the cottage food laws in each state. Moreover, keep in mind that if the product drifts above .5% ABV while it is on the retail shelves (perhaps due to unrefrigerated storage and continued fermentation), then the producer is liable for alcohol taxes, and is essentially producing alcohol without proper licensure. Not good. Indeed, this issue spawned a recall of kombucha products five or so years back, and caused a few entrants into the kombucha market to reconsider. More regulation, federal taxes (at the time of writing $7 for every 31 gallons, also known as a barrel, on the first 50,000 bbls), state taxes (depends on the state), a regulated premises, sales to those 21+ only, potential placement in the alcohol aisle of the grocery store (and many natural foods stores lack permits to even sell alcohol), and so on. It’s a lot to deal with and more risk—especially when dealing with unpasteurized kombucha with live cultures, which for many producers and consumers is the very point—there’s far more inherent risk than when selling a pasteurized orange juice.

If you are making traditional kombucha, or want the ability to produce a line of .5% ABV+ kombucha, then the TTB brewery permit is what tends to fit. Without drilling too far into the legal nitty gritty, a TTB-approved brewer is able to produce alcohol through extracting sugars from malted barley, or using any number of approved substitutes . Sugar is one of those substitutes. Moreover, a TTB-approved brewer is able to use various adjuncts in flavoring the final product—and so this is how tea and various herbal seasonings may be introduced into the product. Keep in mind, though, that a beer product—or any food product—may only contain ingredients that FDA deems “Generally Recognized as Safe,” or GRAS.

Key, though, is that if a TTB-approved brewer is making a product that lacks malted barley and hops (which defines beer under the Federal Alcohol Administration Act), then the product is not subject to TTB Certificate of Label Approval requirements. This may seem like a boon, but it’s a bit more complicated than that. Because the product is not TTB “beer,” it may not be subject to COLAs, but it is subject to labeling requirements of the Food and Drug Administration (FDA). Thus, nutrition facts would be necessary. (And, notably, laws prevent producers from dropping in just a tiny bit of  hops and malted barley to get around this requirement.)

Further, depending on the composition of the kombucha, a formula approval may be required. However, if all the ingredients come from the exempted list, then the formula approval may be avoided.

All in all, the legal requirements for making kombucha are nuanced. They also can vary by the state. For someone interested in opening a kombucha brewery, it is well worth learning about the legal requirements involved in producing kombucha—and forming a plan for a compliant launch of your new business endeavor. If you are going the the traditional permitted route, then obtaining federal, state, and local permits may affect your kombucha company start-up timeline, not to mention your start-up costs.

This kicks off a series of posts we’ll be making about kombucha law, including diving into more detail about the above issues we’ve already noted.

 

 

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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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