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Alternating Proprietorships – A solution for smaller wineries.

An Alternating Proprietorship is best defined as a bona-fide winery operating within another bona-fide winery.  For both legal (county/local restrictions) and economic (equipment/lease expenses) reasons, smaller wineries are often faced with the problem that they cannot obtain a State license to produce wine at their preferred location.

If the smaller winery wants to actually produce the wine, rather than become a virtual winery under a wholesaler/off-site retailer license (e.g. a California 17/20 license), then the options are limited to either obtaining exclusive rights to a facility not subject to the local restrictions to “produce” wine (lease commercial space), or contract with an existing bonded facility under the “Alternating Proprietorship”  rules.

The advantage of the alternating proprietorship is that the facility to be used by the tenant is already bonded/licensed by the Federal/State government so obtaining the necessary permits/licenses to operate a bona-fide winery become easier.  The disadvantage is that the “tenant” winery must enter into a lease agreement that meets the legal requirements imposed by the TTB and the State Alcohol Control Board (ABC).

The following are key factors to consider when establishing an AP relationship:

  • Host and AP will independently make their own wine.

  • Independent record keeping.

  • Use of Host’s crush facilities / equipment.

  • Separately define leased/subleased space.

  • Will the host's employees, including the winemaker be available to the AP?

  • Define AP’s reasonable access to the premises and wine.

  • Are the bonded areas used by host and alternating proprietor clearly marked?

  • Does the alternating proprietor have an area that is set aside for its exclusive use?

  • Is the 24-hour alternation requirement being met?

Other factors to consider when entering into an AP agreement involve the terms of the agreement. The parties will need to consider and provide for the following factors in the  AP agreement:

  • What are the responsibilities of the parties? Who will do what, when, and how?

  • Is the alternating proprietor truly an independent producer?

  • What space will be used by the alternating proprietor?

  • Who will be making the wine and be responsible for record keeping and reporting?

  • Who is responsible for paying taxes? Will the alternating proprietor be receiving and paying taxes based on the Small Producer Tax Credit?

  • How is the price calculated? By square footage, by an hourly rate for cellar employees, by the case?

  • How does scheduling for delivery, crush, and fermentation of grapes work?

  • Is there cross indemnity? Should each party be responsible to protect the other in case one party causes damage to others as part of its independent operations?

  • Who will carry insurance and what kind of coverage including limits are required?

  • What representation has been made as to suitability of winery premises including equipment?

  • What are the termination provisions?

  • Does the agreement set out a process to address disputes, and in the event of a dispute, if it cannot be resolved informally, is the next step litigation or arbitration?

LEGAL AUTHORITIES

27 Code of Federal Regulation § 24.10 Meaning of terms.

Provides in relevant part:

Bonded wine cellar. Premises established under the provisions of this part. For the purposes of this part a wine premises designated a bonded winery is also a bonded wine cellar.

Bonded wine premises. Premises established under the provisions of this part on which operations in untaxpaid wine are authorized to be conducted.

Bonded wine warehouse. Bonded warehouse facilities established under the provisions of this part on wine premises by a warehouse company or other person for the storage of wine and allied products for credit purposes.

Bonded winery. Premises established under the provisions of this part on which wine production operations are conducted and other authorized operations may be conducted.

In bond. When used with respect to wine or spirits, “in bond” refers to wine or spirits possessed under bond to secure the payment of the taxes imposed by 26 U.S.C. Chapter 51, and on which such taxes have not been determined. The term includes any wine or spirits on the bonded wine premises or a distilled spirits plant, or in transit between bonded premises (including in the case of wine, bonded wine premises). Additionally, the term refers to wine withdrawn without payment of tax under 26 U.S.C. 5362 and to spirits withdrawn without payment of tax under 26 U.S.C. 5214(a)(5) or (a)(13) with respect to which relief from liability has not yet occurred.

Proprietor. The person qualified under this part to operate a wine premises, and includes the term “winemaker” when the context so requires.

Wine premises. Premises established under the provisions of this part on which wine operations or other operations are authorized to be conducted.

[note, many definitions have been removed for the purposes of this article]

27 Code of Federal Regulation § 24.135 Wine premises alternation.

(a) General. The proprietor of a bonded winery or bonded wine cellar may alternate all or a portion of wine premises for use as a taxpaid wine bottling house or use as taxpaid wine premises. The proprietor may also alternate the use of adjacent or contiguous premises qualified under 26 U.S.C. chapter 51 (distilled spirits plant, brewery, etc.) for use as wine premises or vice versa. If a proprietor of a bonded wine cellar or winery wishes to use all or a portion of such premises alternately as a volatile fruit-flavor concentrate plant or vice-a-versa, the proprietor must comply with the requirements of §§ 18.40 through 18.43 of this title.

(b) Qualifying documents. Where the proprietor desires to alternate bonded wine premises as taxpaid wine bottling house premises or taxpaid wine premises, or other premises qualified under 26 U.S.C. chapter 51, the following qualifying documents will be filed:

(1) A statement on the application TTB F 5120.25 that an alternation of wine premises will occur;

(2) Evidence of existing bond, consent of surety, or a new bond covering the alternation;

(3) A description of how taxpaid wine or spirits, or untaxpaid wine or spirits will be identified and segregated; and

(4) Any other document or additional information the appropriate TTB officer may require.

(c) Alternation. After the necessary qualifying documents have been approved by the appropriate TTB officer, the proprietor may alternate wine premises as described in the application. Any portion of wine premises on which taxpaid wine is located will be considered taxpaid wine premises or taxpaid wine bottling house premises and any portion of the premises on which wine not identified as taxpaid is located will be considered bonded wine premises. The proprietor shall, prior to the initial alternation of the premises, identify by portable signs or tags, or by any other method or manner satisfactory to the appropriate TTB officer, either all taxpaid wine on taxpaid wine premises or taxpaid wine bottling house premises or all untaxpaid wine on bonded wine premises.

(d) Segregation. The proprietor shall keep untaxpaid wine or spirits physically separated from taxpaid wine or spirits and on the designated premises. This separation will be by use of tanks, rooms, buildings, partitions, pallet stacks, or complete physical separation, or by any other method or manner which will clearly and readily distinguish untaxpaid wine or spirits from taxpaid wine or spirits and is satisfactory to the appropriate TTB officer. Where necessary for the protection of the revenue or enforcement of 26 U.S.C. chapter 51, the appropriate TTB officer may require that the portions of wine premises alternated under this section be separated by partitions or otherwise.

(e) Conditions. Authority for the alternation of bonded wine premises, taxpaid wine bottling house premises, taxpaid wine premises, or other premises qualified under 26 U.S.C chapter 51 is conditioned on compliance by the proprietor with the provisions of this section. Authority for the alternation of bonded wine premises, taxpaid wine bottling house premises, taxpaid wine premises, or other premises qualified under 26 U.S.C. chapter 51 may be withdrawn whenever in the judgment of the appropriate TTB officer the revenue is jeopardized or the effective administration of this part is hindered by the continuation of the authorization.

27 Code of Federal Regulation §24.136 Procedure for alternating proprietors.

(a) General. Wine premises, or parts thereof, may be operated alternately by proprietors who have each filed and received approval of the necessary applications and bonds and have qualified under the provisions of this part. Where operations by alternating proprietors are limited to parts of the wine premises, the application will describe areas, buildings, floors, or rooms which will be alternated and will be accompanied by a diagram delineating the parts of the wine premises to be alternated. A separate diagram will be submitted to depict each arrangement under which the wine premises will be operated. Once the qualifying documents have been approved, and operations initiated, the wine premises, or parts thereof, may be alternated. Any transfer of wine, spirits, or other accountable materials from one proprietor to the other proprietor will be indicated in the records and reports of each proprietor. Operation of a bonded winery engaged in the production of wine by an alternate proprietor will be at least one calendar day in length.

(b) Alternation. All operations in any area, building, floor, or room to be alternated will be completely finished and all wine, spirits, and other accountable materials will be removed from the alternated wine premises or transferred to the incoming proprietor. However, wine, spirits, and other accountable materials may be retained in locked tanks at wine premises to be alternated and remain in the custody of the outgoing proprietor.

(c) Bonds. The outgoing proprietor who has filed bond and intends to resume operation of the alternated areas, buildings, floors, or rooms following suspension of operations by an alternating proprietor shall execute a consent of surety to continue in effect all bonds. Where wine, spirits, or other accountable materials subject to tax under 26 U.S.C. chapter 51 are to be retained in tanks on the wine premises to be alternated, the outgoing proprietor shall also execute a consent of surety to continue the liability of all bonds for the tax on the materials, notwithstanding the change in proprietorship.

(d) Records. Each proprietor shall maintain separate records and submit a TTB separate F 5120.17, Report of Bonded Wine Premises Operations. All transfers of wine, spirits, and other accountable materials will be reflected in the records of each proprietor. Each proprietor shall maintain a record showing the name and registry number of the incoming or outgoing proprietor, the effective date and hour of alternation, and the quantity in gallons and the percent alcohol by volume or proof of any wine, spirits, or other accountable materials transferred or received.