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Insurance Tip Tuesday – Understanding FETs and Bonding
Good Morning Dear Readers,
In today’s installment of the “Tidbit”, I wanted to touch upon bonding since it has been something that many folks have asked me about recently. I know, I know, bonding for the most part for many of you has been a non-factor in the recent years … OR HAS IT!??!?!! Dun-duh-daaaaah!!!!!!!!!!
I wrote a little posting here a while back about bonding and the fact that the Fed’s never really, clearly defined the new Federal Excise Tax’s (FET’s for those of us in “the know”) reduction, and whether or not you should carry a bond. At the time that they passed the “Tax Reform” bill, Congress only spoke about the removal (or withdrawal) of tax paid spirits. They did not address the potential need for a bond to be held on the stock that is aging, in process, bottled, or bulk spirits (we will just refer to all of these as “stored spirits” from this point forward).
There was a bit of debate between forum-goers as to if the “stored spirits” could ever have a need for taxes to be paid in the case of theft, destruction, etc. Addressed in the Code of Federal Regulations (CFR’s); Title 27; Subchapter A; Part 19 – Distilled Spirits Plants; §19.262 General requirements for filing claims – §19.268 the reasoning, ability, and what may happen is discussed in case you feel like reading it … or if you need a nap. Anyway, there is a possibility that “stored sprits” could have the taxes called for by the Fed’s, in which case a bond would or could come in very handy. I will leave that up to you to decide.
Really though, the heart of the matter and a question I get asked a lot is, “What is a surety bond for FET’s, do I need it, how does it work, and what about state bonding???!!?!” Well, InsuranceMan 2.0 is here to tell you.
What is a surety bond? Well, basically a bond is a legal agreement between entities (in this case the distillery and the governing body) that guarantees that in the case of taxes needing to be paid, that they will be paid, either by the distillery (Indemnitee), or in the case that they cannot make the payment, the surety company (Indemnitor) is obligated to make the payment on behalf of the distillery. In short, if you don’t have the money to pay the taxes, the surety company will make the payment for you to get the government off your back. Sounds like a sweet deal, right? Not so quick!
In the case that the indemnitor was to make a payment for you, yes, it satisfies the government by making them whole, but your obligation does not stop there. If the indemnitor has laid out money on your behalf, they are going to want to make up that loss somehow, and that now once again becomes your problem. A guy named “Guido” may show up to your door demanding payment, and “take your knees” if you can’t come up with the money. Actually, that probably isn’t going to happen … Probably. More likely, the surety company would ask you nicely for the money at first, but after that things could get icky. They may sue you over the lost funds, slap an injunction on you and your business (because you do sign the agreement as an individual and on behalf of your entity, if you have one) and make you liquidate assets until the loss is paid in full. Sounds kind of scary, huh? In reality, not really.
If you think about this, when are most taxes due? When the product is withdrawn from you bonded premise. Generally that would mean, if you are removing product, chances are the reason is because they were sold, in which case that means that you have the money to pay the taxes on said withdrawn spirits. So really, the surety bond is just a formal agreement, a placeholder, to make the governmental body feel all warm and fuzzy and sleep better at night knowing that they are going to be paid no matter what.
I personally have never seen a bond called on anyone that I work with, but I have heard of it in the case of loss/destroyed product (at which there may be a reduced rate on taxes due), or in the case that a distillery has become insolvent (again, thank goodness I have not had anyone with that issue). In any case, even though there is debate as to if you should carry a bond or not, a bond could be very nice to have should the unforeseen ever happen.
Just an FYI, a Federal TTB DSP bond is broken into two parts, and this is what was never really addressed. There is the “Operations” side of the bond, and the “Withdrawal”. The operations side contemplates spirits that are “bulk, bottled, or in process”, so again, the “stored spirits”. This is the section that the Fed’s never spoke about or addressed in the tax reform. Then there is the “withdrawal” side that contemplates the taxes needing to be paid when the spirits are removed from you premises. This is the ONLY part that they concerned themselves with. Again, you can see how with this being the case, there may still be need for a bond at this time and place.
Based on this recent tax reform, however, as illustrated, the Fed’s really are only concerned with the withdrawal side of things, and they lowered the taxes due from the historic $13.50 rate per proof gallon (100 proof, or 50% ABV) down to $2.70 per the same. A little aside here, the REAL tax rate for many was actually $10.80 since most product for many going out the door was 80 proof (or 40% ABV), which then made the tax rate $10.80 per proof gallon. Just wanted to share that little nerdy bit of knowledge with you. So, what the heck does this all mean?!?!?!? Well, it is too soon to say what Congress will do in the future, but the current FET reduction is due to sunset on December 31st, 2019.
In the tax reform document, it states the following:
PART IX—OTHER PROVISIONS Subpart A—Craft Beverage Modernization and Tax Reform
SEC. 13801. PRODUCTION PERIOD FOR BEER, WINE, AND DISTILLED SPIRITS.
(a) IN GENERAL.—Section 263A(f) is amended—
(4) EXEMPTION FOR AGING PROCESS OF BEER, WINE, AND DISTILLED SPIRITS.—
‘(B) TERMINATION.—This paragraph shall not apply to interest costs paid or accrued after December 31, 2019.
H. R. 1—123 SEC. 13807. REDUCED RATE OF EXCISE TAX ON CERTAIN DISTILLED SPIRITS.
‘(1) IN GENERAL.—In the case of a distilled spirits operation, the otherwise applicable tax rate under subsection (a)(1) shall be—
(A) $2.70 per proof gallon on the first 100,000 proof gallons of distilled spirits, and
(B) $13.34 per proof gallon on the first 22,130,000 of proof gallons of distilled spirits to which subparagraph (A) does not apply, which have been distilled or processed by such operation and removed during the calendar year for consumption or sale, or which have been imported by the importer into the United States during the calendar year.
So again, what does this all mean?!?!?!! It means that currently we are enjoying a bit of a reprieve in regards to the amount of taxes that are to be paid on withdrawn spirits, which is super nice! It leaves more money in your pockets and that is always a good thing. It also means that come the end of this year it could all go away. Maybe it will be voted to remain the same, that would be awesome! Or, it could potentially even go up to or above the historic levels that it was at. Truth be told, we have no idea what is going to happen.
One thing is for sure though, many, if not all states, require some type of surety bonding at a state level. Whether it is a “sales and use tax” bond, an “alcoholic beverage manufacturer” bond, or something else, there is probably still a bonding need for your distillery. I, InsuranceMan 2.0 am here to assist you. I can and have provided hundreds of bonds for distilleries across this great land, and I actually have the lowest bonding premiums of anyone in the country. So, if you have a bond and feel as though you are paying too much, or if you have a question about if you should get a bond or not, or if you are a new distillery and found out you do have a state bonding need, I am here to assist you. Maybe you are nearing that 100,000 gallons of withdrawn product and getting nervous as to when the right time to get a bond may be. Again, I am here to help. Give me a call, shoot me an email, text me, hit me up on a PM here on the forums, come see me at booth 434 in Denver in a few weeks, or send a smoke signal. Whatever you need, I am here to answer all of your deepest, darkest insurance and bonding questions. Until next time my friends …
Stay Vigilant,
Aaron Linden
a.k.a. InsuranceMan 2.0
307-752-5961
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