2009 TTB Expo Presentation

Pitfalls [to avoid] of Artisan

Distillers
Presented by
Rob Schellhorn,
Trade Investigations Division
 Artisan or Not?

• Is there a category of distilled spirits plant for

small/artisan distillers?
– The answer is “No.”
• Small “artisan” distilled spirits plants:
– Need the same Federal basic permit and plant registration
to engage in business as a distilled spirits plant and
– Must follow the same laws [FAA and IRC] and regulations
[e.g., Part 5 and Part 19]
• So why should you attend this session?
 Why Should You Attend this Session?

• Because there are compliance issues that are unique

to the small, “artisan” distiller
• This session will cover pitfalls to avoid for small,
“artisan” distillers
 Overview
• State law vs. Federal law
• Location and use of premises
• Standards of Identity
• Gauging of Spirits
• Batch vs. Continuous Distillation
• Records and Reports
State Law vs. Federal Law
 State vs. Federal Law

• State law and regulations do not supersede

Federal law and regulations:
– You need to comply with all relevant city, county,
state and federal requirements.
• Federal Alcohol Administration Act,
Webb- Kenyon Act, and 21st Amendment:
– Violations of State law may result in suspension or
revocation of a proprietor's Federal Basic Permit
 State vs. Federal Law (Continued)

• There may be significant differences:

– Licensing requirements
– Labeling requirements
– Tax rates and periods for filing
– Reporting of operations
– Trade practice restrictions
– Distribution/direct shipment
– Operations allowed on premises
 Licensing
[State vs. Federal Law]

• Even though your State law may not require special

licensing to engage in business as a distilled spirits
plant;
– You must have an approved Federal basic permit
and plant registration to engage in business as a
distilled spirits plant.
 Licensing Issue- Example
[State vs. Federal Law]

340A.315 – MN Farm Winery License:

• Subd. 7 – Distilled spirits permitted —
– Farm wineries licensed under this section are permitted to
manufacture distilled spirits as defined under section
340A.101, subdivision 9, which may exceed 25 percent
alcohol by volume, made from Minnesota-produced or -
grown grapes, grape juice, other fruit bases, or honey
[Amendment – May 12, 2008]
 Labeling Requirements [State vs. Federal Law]

• State Requirements:
– Some States adopt Federal labeling requirements
– Some States do not impose any labeling requirements
– Some States have minimal “brand registration”
• Federal Requirements:
– You must also comply with all of the labeling requirements
imposed by the IRC, FAA Act, and the Alcoholic Beverage
Labeling Act [as well as all State requirements]
 Legal Resources
[State vs. Federal Law]

TTB provides information on both at:

• Federal Requirements —
– TTB Web site at www.TTB.gov
– Distilled Spirits Tab
– Laws and Regulations
• State Requirements —
– TTB website at www.TTB.gov
– Distilled Spirits Tab
– Quick Links - Alcohol Beverage Control Boards
Location and Use of Premises
 Restrictions as to Location

• Distilled spirits plants shall not be located:

– In any dwelling house, or in any shed, yard, or
enclosure connected with any dwelling house
– On board any vessel or boat
– On premises where beer or wine is produced
– Where liquors of any description are retailed
– On premises where any other business is
conducted (except as provided in §19.133)
27 CFR 19.131
Distilled spirits plants shall not be located:

“In any dwelling house, or in any shed,

yard, or enclosure connected with any
dwelling house.”
 “Connected with any Dwelling House”

• Examples:
– Land back behind the wood lot
– An outbuilding next to a farm residence
– An attached or detached garage on residential
properly
– A commercial building with attached apartments
or condominiums

27 CFR 19.131
Distilled spirits plants shall not be located:

“On board any vessel or boat.”

Distilled spirits plants shall not be located:

“Where beer or wine are produced. ”

 “Where Wine or Beer are Produced”

• DSP must be physically separated from a winery or

brewery.
– Separate building; or same building but different floor;
– Different rooms on the same floor with separate means of
entrance/egress.
• Alternation of equipment may occur only after TTB
approval.
– Wine, beer, or spirits must be removed to permanent
premises at the conclusion of alternation of equipment.

27 CFR 19.131
Distilled spirits plants shall not be located:

“Where liquors of any kind

[wine, beer or spirits] are retailed. ”
 No Retail Sales
• Unlike brewpubs and bonded winery
premises, DSPs cannot sell at retail from the
bonded premises:
– DSP premises must be physically separated from
retail sales area.
– That means separated by a wall with a separate
means of access.

27 CFR 19.131
Distilled spirits plants shall not be located:

“Where any other business is conducted.”

“Where any other Business is Conducted”

• “Bonded premises shall be used exclusively for

distilled spirits operations”
– i.e., Production, Storage, and Processing of spirits
– No tasting room
– No banquet facilities
– Etc.
– Exception: TTB officer may approve an alternative
method or procedure.
Standards of Identity
 Standards of Identity

• There are 12 standards of identity for distilled

spirits under 27 CFR part 5.
– Issue: Small DSPs may have difficulty meeting
certain standards.
– We will cover two of them to highlight certain
issues:
• 5.22(a)(1)Vodka
• 5.22(d) Brandy
27 CFR 5.22
 Can I Call it Vodka?

“A rose by any other name…”

 Vodka
[Standards of Identity]

Class 1; neutral spirits or alcohol

• “Neutral spirits” or “alcohol” are distilled
spirits produced from any material at or above
190° proof, and, if bottled, bottled at not less
than 80° proof.
• Vodka is produced from neutral spirits

27 CFR 5.22(a)(1)
 Vodka
[Standards of Identity]

• “Vodka” is neutral spirits so distilled, or so

treated after distillation, with charcoal or
other materials, as to be without distinctive
character, aroma, taste, or color:
– Must be distilled at or above 190° proof and
– Bottled at not less than 80° proof

27 CFR 5.22(a)(1)
 Vodka
[Standards of Identity]

• If it wasn’t distilled at or above

190° proof…
– Then you cannot label it as vodka
– The label must identify an accurate class/type
designation; for example:
• “Spirits distilled from corn”
• “Spirits distilled from grape wine”

27 CFR 5.22(a)(1)
 Vodka
[Standards of Identity]

Production of Vodka:
• Neutral spirits can be “re-designated”
as vodka, or vodka can be “produced after
distillation” by treatment with charcoal or
other materials…
– Provided, that the spirits are without distinctive
character, aroma, taste, or color

27 CFR 5.22(a)(1)
 Vodka
[Standards of Identity]

• Question: What are the conditions under

which bottlers may use on labels of vodka the
terms “distilled by,” “produced by,” “prepared
by,” or “bottled by”?
– [Answer: Rev. Ruling 69-496]

27 CFR 5.22(a)(1)
 Vodka
(Rev. Ruling 69-496)

“Distilled by”
• A bottler who actually redistills neutral spirits
in the production of vodka or who is the
proprietor of the bonded production facilities
where the eligible neutral spirits were distilled
may use on labels the term “distilled by”
– Must be distilled or redistilled at or
above 190° proof

27 CFR 5.22(a)(1)
 Vodka
(Rev. Ruling 69-496)

“Produced by”
• A bottler who treats neutral spirits on bottling
premises or on production premises (1) with a least
one ounce of activated carbon for each 100 wine
gallons of neutral spirits or (2) by any other approved
method of purifying or refining neutral spirits for the
purpose of producing vodka may indicate on labels
that the vodka was “produced by” him

27 CFR 5.22(a)(1)
 Vodka
(Rev. Ruling 69-496)

“Bottled by” or “Prepared by”

• Where neutral spirits are given any lesser
treatment than that indicated in the previous
slides, then the bottler may show on labels
only that the vodka was “bottled by” or
“prepared by” him
• In such case, the term “produced by”
is not authorized
27 CFR 5.22(a)(1)
 Additions to Vodka

• Citric acid and sugar are not considered to be

flavoring ingredients that would materially
affect the taste of vodka or change its basic
character, so long as…
– The sugar does not exceed two-tenths
of 1% and
– Citric acid is only added in a “trace amount” not to
exceed 1,000 ppm

Revenue Ruling 56-98

 Class 4 - Brandy
27 CFR 5.22(d)

“Eau de vie”, Brandy, Grappa…

 Standards of Identity

Class 4; Brandy
• Distillate from fermented juice, • Different types:
mash, or wine of fruit, or from – Fruit Brandy
the residue thereof
– Grappa
• Distilled at less than 190° proof
– Pomace Brandy
and bottled at not less than 80°
proof – Neutral Brandy

• Possesses taste, aroma, and – Immature Brandy

characteristics generally
attributed to Brandy

27 CFR 5.22(d)
 Brandy

“Fruit Brandy” must be stored in oak for a minimum

of two years to be labeled as such
 Fruit Brandy
[Standards of Identity]

• If stored for less than 2 years, then statement

of class and type shall be immediately
preceded, in the same size and kind of type,
by the word “immature”
– Example: “Immature Grape Brandy”
– Note: Storage for 2 years is NOT required for
neutral brandy, pomace brandy, marc brandy, or
grappa brandy.
 Final Thoughts on Standards of Identity

• 27 CFR 5.22 lists all of the standards

• Become familiar with the parameters and limitations
of each standard regarding:
– Distillation proof
– Bottling proof
– Mixing or blending by type
– Storage in oak containers
• New, used, charred or uncharred
• Time in storage
– Adding coloring, flavoring, or blending materials
Gauging of Spirits
 Gauging Manual
• The term “gauging” means the determination
of the proof and the quantity of distilled
spirits.
– Subpart A – Scope
– Subpart B – Definitions
– Subpart C – Gauging Instruments
– Subpart D – Gauging Procedures
– Subpart E – Prescribed Tables
– Subpart F – Optional Gauging Procedures
27 CFR part 30
 Prescribed Tables
[Gauging Manual]

• Link to Gauging Manual Tables

– TTB website at www.TTB.gov
– Under the Distilled Spirits Tab

• http://www.ttb.gov/foia/gauging_manual_toc
.shtml

27 CFR part 30
 Gauging Instruments
• Tanks w/ sight glass or on scales, etc.
• Hydrometers and Thermometers:
– Should be “precision” instruments
– Should include manufacturer’s charts for
correction over a range of different
proof/temperature readings
• Example charts are included with handouts
 Gauging Instruments (Continued)

• Precision Instrument?
– Probably not

• Correct procedure?
– Definitely not
Precision Hydrometers (§ 30.22)

Precision Range Subdivision

F 0 – 20 0.20
G 20 – 40 0.20
H 40 – 60 0.20
I 60 – 80 0.20
K 75 – 95 0.20
L 90 – 110 0.20
M 105 – 125 0.20
N 125 – 145 0.20
P 145 – 165 0.20
Q 165 – 185 0.20
R 185 – 206 0.20
Precision Thermometers (§ 30.22)

Precision Range Subdivision

Pencil type 100 – 1000 10

V-back 100 – 1000 10

Glass shell
400 – 1000 ½0
(earlier model)
Glass shell 4
00 – 1000 ¼0
(later model)
 Gauging Procedures

Determination of proof.
– Shall be determined to nearest tenth
of a degree.
– If solids content not more than 600 milligrams:
• If 400 milligrams or less, then proof can be determined
directly;
• If over 400 milligrams, then see 27 CFR 30.32.
– Solids content greater than 600 milligrams
• Requires distillation of test sample

27 CFR 30.31
 Gauging Procedures (Continued)

• Hydrometer Readings — Do not read the top of the

meniscus.
 Gauging Procedures (Continued)

Determination of Proof and Volume

• Apparent proof and temperature readings should be
taken together and as quickly as possible:
– Readings will change as the sample heats up
• Readings should be recorded on a Bulk Gauge
Worksheet.
– This will allow for accuracy adjustments, temperature
corrections and interpolation.
 Bulk Gauge Worksheet
[Gauging Procedures]

Determination of Proof and Volume

• Hydrometer and thermometer readings
– Adjusted based on correction charts
– Corrected readings may be same, higher, or lower than
actual measurement taken, over a range of temperatures.
• BGW also allows you to interpolate between two
whole degrees proof / temperature
 True Percent Proof
[Gauging Procedures]

• Table 1 of the Gauging Manual must be used

to determine the true percent of proof spirit
for any indication of the hydrometer at
temperatures between zero and 100 degrees
Fahrenheit

27 CFR 30.61
Table 1 – True Percent Proof
 Temp Corrected Volume
[Gauging Procedures]

Determination of Quantity
• Use Table 7 of the Gauging Manual for
correction of volume of spirituous liquors to
60 degrees Fahrenheit

27 CFR 30.67
Table 7 – Correction of Volume to 600 F
 Volume by Weight
[Gauging Procedures]

Determination of Quantity
• Use Table 4, showing the fractional part of a
gallon per pound at each percent and each
tenth percent of proof of spirituous liquor.

27 CFR 30.64
Table 4 – Gallons per Pound by ◦ Proof
 Subpart E—Prescribed Tables

http://www.ttb.gov/foia/gauging_manual_toc.shtml
• Table 1 True % of proof for spirits between 0°-100 F°
• Table 2 Wine gallons and proof gallons by weight
• Table 3 Proof gallons from weight and proof of spirits
• Table 4 Fractional part of a gal/lb for each % proof
• Table 5 Weight per wine gallon (at 60° F) and PG
• Table 6 Volumes of alcohol and water and specific
gravity of spirituous liquor
• Table 7 Correction of volume of spirits to 60° F
 Gauging Procedures (Continued)

Why make such a big deal about gauging?

• Tax Ramifications:
– Improper gauging may result in unexplained shortages
– $13.50 per Proof Gallon
• Standards of Identity Concerns
– The identity of spirits produced must be clearly established
[e.g., proof limits for vodka]
• Bottle Labeling Considerations
 Gauging Procedures (Continued)

Why make such a big deal about gauging?

• 27 CFR 19.386(b) – Variations in alcohol
content and fill:
– The proprietor shall rebottle, recondition, or re-
label spirits if the bottle contents do not agree
with the respective data on the label or bottle as
to:
• Alcohol Content (Proof)
• Quantity (Fill)
27 CFR 5.37(b); 5.38
 Tolerance – Proof

• 27 CFR 19.386(b)(2) – Alcohol content, subject

to a normal drop in alcohol content which may
occur during bottling operations not to
exceed:
– 0.25% alcohol by volume for spirits containing
solids in excess of 600 mg per 100 ml or
– 0.25% alcohol by volume for any spirits product
bottled in 50 or 100 ml size bottles or
– 0.15% alcohol by volume for all other spirits and
bottle sizes
 Proof – Example

• A product with a solids content of less than

600 mg per 100 ml, labeled as containing 40
percent alcohol by volume and bottled in a
750 ml bottle, would be acceptable if the test
for alcohol content found that it contained
39.85 percent alcohol by volume:
– 80 proof can be 79.7 to 80 proof
– 80.1 proof is taxable at a higher rate

27 CFR 19.386(b)(2)
Batch Distillation Issues
 General Requirements
[Batch Distillation]

• Spirits must pass through a continuous system from the first

still until production of the spirits is complete.

• Distiller may, in the course of production, convey the product

through as many distilling operations as desired, provided
operations are continuous.

• Distilling operations are continuous when the spirits are

conveyed through the various steps of production as
expeditiously as plant operation will permit.

27 CFR 19.316
 General Requirements
[Batch Distillation]

• Collection of unfinished spirits for purpose of redistillation is

not deemed to be a break in the continuity of the distilling
procedure.

• However, unfinished spirits shall be gauged and recorded

before any mingling with other materials or before any further
operations [e.g. Storage]

• Spirits may be held, prior to the production gauge, only for so

long as is reasonably necessary to complete production
procedure.
 Batch Distillation
(Continued)

When must I make a production gauge?

• Heads
• Heart
• Tails
 Production Gauge
[Batch Distillation]

Unfinished spirits (to be redistilled):

– Must be gauged and recorded at end of business
day.
– Should be entered for deposit into Storage
Account unless immediately processed.
– Storage records must be kept pursuant to 27 CFR
19.740 – 19.743.
 Production Gauge
[Batch Distillation]

• Production Account
– Production Gauge
• § 19.736 Daily Production Records
• § 19.768 [Production] Gauge Record
• Storage Account
– Receiving gauge
– Spirits deposited to Storage [and mingled]
• § 19.742 Tank record of wine or spirits of less
than 190 degrees of proof
 Heads / Heart / Tails
[Batch Distillation]

• Low boiling point compounds that come out of the

still first contain acetone, methanol, various esters
and aldehydes, and other volatiles:
– Are considered poisonous and are generally discarded
• How do you determine when to cut?
– Temperature?
– Smell?
 Chemical By-Products
[Batch Distillation]

• The alcohols begin to vaporize around specific

temperatures; if by themselves they would be:
– Acetone 56.5°C (134°F)
– Methanol (wood alcohol) 64°C (147°F)
– Ethyl acetate 77.1°C (171°F)
– Ethanol 78°C (172°F)
– 2-Propanol (rubbing alcohol) 82°C (180°F)
– 1-Propanol 97°C (207°F)
– Water 100°C (212°F)
– Butanol 116°C (241°F)
– Amyl alcohol 137.8°C (280°F)
– Furfural 161°C (322°F)
 Chemical By-Products
[Batch Distillation]

Spirits Content:
• All chemicals produced, including chemical by-products of the
spirits production system, shall be substantially free of spirits
before being removed from bonded premises.
– Spirits content shall not exceed 10% by volume.
– Proprietors shall test chemicals for spirits content.
– Records of the tests will be maintained according to §19.736.
• Note: Destruction of chemical by-products should be in
compliance with Federal and State environmental laws
regulations.

27 CFR 19.326
 Chemical By-Products
(Continued)

Quality Control Considerations

• Are finished spirits tested to determine
presence of any unwanted compounds?
– In-house analysis or are samples submitted to an
outside laboratory?
– Are any records kept of the results?
Records and Reports
 Small Distillers and their Records

• Proprietors of small DSPs “wear many hats”

• They often do not have accounting staff
• Records are often hand-written
• Records are often done at end of a busy day
• Recordkeeping is the least enjoyable task
• Intention behind record keeping is different
 Records

• What the DSP is • What TTB is interested

interested in: in:
– Profit and Loss Statement – Verification of Tax
– Quality Control Returns and Reports
Considerations – Verification of labels on
– Selling their Products bottled distilled spirits
 Records (Continued)

• What TTB often • What the regulations

encounters: require:
– All records kept in a – Separate records by DSP
spiral notebook account (i.e., Production,
– Not all mandatory info Storage, Processing)
– Do not support reports, – Mandatory information
returns, and label claims. – Audit trail from source
records to tax returns.
 Audit Trail
[Records]

• Provide TTB the ability to verify and trace the

quantity and movement of materials, spirits,
denatured spirits, wines, or alcoholic flavoring
materials involved in each transaction or operation.
– Daily records
– Summary records/reports
– DSP Monthly Reports
– Excise Tax Returns
– Labels on bottled spirits
 Distilled Spirits Accounts

Production Records
Production:
(27 CFR 19.736)

Storage Records
Storage:
(27 CFR 19.740 – 19.743)

Processing Records
Processing:
(27 CFR 19.746 – 19.753)
 Records (Continued)

Where to begin? Some suggestions…

Throw away your spiral notebook. Actually, keep

Step 1
it, but use it for a different purpose
Go to records section of
Step 2
27 CFR part 19
For each operation that you conduct, create a
dedicated record that contains all of the
Step 3
mandatory information listed in the
corresponding regulation

Step 4 Give each a heading and Part 19 reference

 Records (Continued)

• Subpart W—Records and Reports:

– §19.736 Daily production records
– §19.740 - §19.743 Storage records/Tank records
– § 19.748 Dump/batch records
– § 19.749 Bottling and packaging record
– § 19.750 Records of alcohol content and fill tests
– § 19.761 Record of tax determination
– § 19.762 Daily summary record of tax determinations
– § 19.768 Gauge record
 Monthly Reports / Excise Tax Return

• Records should flow into monthly reports and

tax returns:
– Production Report TTB F 5110.40
– Storage Report TTB F 5110.11
– Processing Report TTB F 5110.28
– Federal Excise Tax Return TTB F 5000.24

27 CFR 19.792
 Final Words
• State vs. Federal Law
• Location and Use of Premises
• Standards of Identity
• Gauging of Spirits
• Batch vs. Continuous Distillation
• Records and Reports
 Contact Information

• Dave Bateman
Distilled Spirits Industry Analyst
Phone: 202-302-3859
E-mail: Dave.Bateman@ttb.gov
 Contact Information

• Advertising, Labeling and Formulation Division:

Phone: 1-866-927-2533 (Toll-Free)
Mail: 1310 G Street, NW, 4th Floor
Washington, DC 20220
Fax: (202) 435-7643
E-mail: alfd@ttb.treas.gov
 Contact Information
• National Revenue Center:
Phone: 1-877-882-3277 (Toll-Free)
Mail: 550 Main Street, Suite 8002
Cincinnati, Ohio 45202
 Contact Information
• www.tt.gov
– Click the “Contact Us” in the maroon banner at
the top of the page.
– Click the link: Regional Contacts
• Tax Audit Division :
– Use the TTB District Field Offices map to find the address of the TTB
field office nearest you.
• Trade Investigations:
– Use the TID Contact Information page to find the phone numbers,
addresses, and fax numbers of the Trade Investigations field offices.