PRO
OT:RR:CTF:ER
H204179 ABH
Port Director
U.S. Customs & Border Protection
726 Exchange Street
Suite 400
Buffalo, NY 14210
Attn: Sherri Rudy, Supervisory Import Specialist
RE: Application for Further Review of Protest 0901-19-100320; Craft Beverage Modernization and Tax Reform Act; Excise Tax; Reduced Rate for Beer
Dear Port Director:
The purpose of this correspondence is to address the application for further review (“AFR”) of Protest 0901-19-100320, dated May 15, 2019, filed by Labatt USA Operating Co., LLC (“Labatt”). Labatt protests the determination that its imports are not eligible for the reduced excise tax rate on beer pursuant to the Craft Beverage Modernization and Tax Reform Act (“CBMA”). The issue presented is whether Labatt qualifies as a “brewer” under the facts presented.
Facts:
On May 15, 2019, Labatt USA Operating Co., LLC (“Labatt”) filed a protest and application for further review (“AFR”) with the Port of Buffalo, NY. Labatt claimed that it is entitled to benefit from the reduced excise tax rate available under the Craft Beverage Modernization and Tax Reform Act of 2017 (“CBMA”). On May 29, 2019, the Port of Buffalo denied the protest and sent the AFR to Headquarters.
Labatt brand beer (such as Labatt Blue, Labatt Blue Light, Labatt’s 50, Labatt ICE, Labatt Double Blue, Labatt Nordic, Labatt Select, Labatt Non-Alcoholic, Labatt Holiday, and Max ICE) was previously owned by InBev N.V./S.A., InBev USALLC d/b/a Labatt USA. In July 2008, InBev N.V./S.A. entered into an agreement to acquire Anheuser-Busch Companies, Inc. to form ABI. The U.S. Department of Justice filed an antitrust complaint alleging that the proposed merger would reduce competition in certain territories within the United States where Labatt brands were effective competitors of the brands of ABI. On August 11, 2009, the parties entered into a Consent Decree requiring ABI to divest the Labatt brands of beer. The divestiture was to include the exclusive, perpetual, assignable, transferable, and fully-paid-up license that would grant the acquirer the right to brew Labatt brand beer in Canada and/or the United States for sale for consumption in the United States; to promote, market, distribute, and sell Labatt brand beer for sale for consumption in the United States; and to use all intellectual property rights associated with the brewing, marketing, sale, and distribution of Labatt brand beer for sale for consumption in the United States.
Labatt states that in order to comply with the Consent Decree and secure a supply of Labatt Beer that was completely independent from ABI, Labatt began production of certain Labatt beer products in Canada (Labatt Blue, Labatt Blue Light, Labatt Ice, Labatt Maximum Ice) at facilities owned by Molson, which was traditionally a competitor. Labatt asserts that the only relationship between the two companies is governed by their Production Agreement and its subsequent three amendments (hereinafter “Production Agreement”). Labatt states that it does not own equity in Molson, nor does Molson own equity in Labatt.
After the promulgation of the Craft Beverage Modernization and Tax Reform Act of 2017 (“CBMA”), which is discussed at length below, Labatt sought to take advantage of the excise tax relief provided by the CBMA. In order to make a CBMA claim on imports, CBP requires, inter alia, an Assignment Certification from the brewer of the foreign manufactured beer to the importer in order to establish the right of the importer to claim the excise tax relief. Labatt, however, was not able to obtain an Assignment Certification from Molson to claim the benefit of the CBMA. To this end, on March 14, 2019, Labatt (through FIFCO USA) sought guidance from TTB regarding its eligibility to seek the reduced excise tax rate under the CBMA. On April 4, 2019, in a letter to Labatt’s counsel, TTB indicated that CBP is responsible for the collection of tax on imported alcohol products and, accordingly, any determination with regard to a foreign producer’s ability to assign the reduced tax rate would be made by CBP.
At the time of entry, Labatt did not claim the reduced excise tax rate under the CBMA. Upon liquidation of the entries at issue, Labatt filed a protest asserting that although the Labatt beers are produced in a Molson facility, Labatt is entitled to the CBMA rate because Labatt maintains the independence and control necessary to be considered the “brewer” for purposes of the CBMA. Accordingly, Labatt asserts that it should be able to complete the Assignment Certification and assign its importer the right to excise tax relief under the CBMA. The Port of Buffalo disagreed and denied Labatt’s protest because Labatt did not provide the appropriate Assignment Certification to establish eligibility for the reduced excise tax rate for the imported beer under the CBMA.
Legal Analysis:
It is the opinion of your office that this protest meets the criteria for further review. We agree and are of the opinion that this protest involves questions of law and fact upon which there has not been a previously ruling. 19 C.F.R. § 174.24(b). Additionally, Labatt’s protest is timely, pursuant to 19 U.S.C. § 1514(c)(3)(A), because it was filed within 180 days after the date CBP liquidated the entries at issue.
Effective January 1, 2018, the Craft Beverage Modernization and Tax Reform Act of 2017 (“CBMA”), amended the Internal Revenue Code (“IRC”) with regard to the excise tax treatment of certain alcoholic beverages. Pub. L. No. 115-97, Subpart A of Part IX of the Tax Cuts and Jobs Act §§ 13801-13808, signed December 22, 2017, as implemented by 26 U.S.C. §§ 5001, 5041, & 5051. Under the CBMA, reduced tax rates and/or tax credits are applicable to the domestic and foreign production of certain limited quantities of beer, wine, and distilled spirits during the calendar years 2018-2019.
U.S. Customs and Border Protection (“CBP”) assesses, collects, and enforces the excise taxes imposed on the importation of alcoholic beverages. 6 U.S.C. §§ 212, 215. The Alcohol and Tobacco Tax and Trade Bureau (“TTB”) of the U.S. Department of Treasury administers and enforces excise taxes on the domestic production of alcoholic beverages. Regulations limit CBP’s authority to issue refunds of excessive duties, taxes, or fees, or interest imposed on beer, wine, and distilled spirits. 19 C.F.R. § 24.36(d). CBP and the U.S. Department of Treasury expanded this limited authority on August 16, 2018, by amending 19 C.F.R. § 24.36(10), and authorizing CBP to refund excessive duties, taxes, fees, or interest imposed on imported beer, wine, and distilled spirits in order to facilitate the implementation of the CBMA. Refund of Alcohol Excise Tax, 83 Fed. Reg. 40,675 (Aug. 16, 2018). The new § 24.36(d)(10) makes it clear that CBP has authority to refund the difference between the full excise taxes an importer pays at the time of entry summary filing and the CBMA’s lower effective tax rate. Id.
An importer, however, must request and substantiate its entitlement to the reduced tax rate or tax credit appropriately. Id. Under the CBMA,
[i]n the case of beer removed after December 31, 2017, and before January 1, 2020, the rate of tax shall be . . . $16 on the first 6,000,000 barrels of beer . . . brewed by the brewer and removed during the calendar year for consumption or sale; . . . or imported by the importer into the United States during the calendar year . . . .
26 U.S.C. §§ 5051(a)(1)(C). With regard to the “[r]educed tax rate for foreign manufacturers and importers,” and in the case of barrels of beer “brewed or produced outside of the United States and imported into the United States,” the reduced tax rate of $16.00 per barrel “may be assigned by the brewer” to an importer pursuant to procedures established by CBP. Id. at § 5051(a)(4)(A)-(B). Thus, an importer may only receive the reduced excise tax rate on the first 6,000,000 barrels of imported beer if the barrels have been assigned to the importer by the “brewer.” Id. at §§ 5051(a)(1)(C)(i)(I)-(II) & 5051(a)(4).
To substantiate the brewer’s assignment to the importer, CBP established a procedure by which importers are required to submit an Assignment Certification (pursuant to a provided template) that must be issued on the letterhead of the assigning entity and signed by a duly authorized official or employee. See CSMS# 18-000609 - Procedures & Requirements: Implementing Craft Beverage Modernization & Tax Reform of 2017 (Oct. 16, 2018). The Assignment Certification template states,
I (PRINTED NAME AND TITLE), currently employed by (ASSIGNING ENTITY NAME AND ADDRESS) and authorized to bind the company, certify that (ASSIGNING ENTITY) is the producer/manufacturer of the imported (BEER/WINE/CIDER/DISTILLED SPIRITS) that is subject to a Craft Beverage Modernization and Tax Reform Act (CBMA) claim. I certify that I assigned (IMPORTER NAME) to receive the (X REDUCED TAX RATE/CREDIT) for (X NUMBER OF BARRELS/WINE GALLONS/PROOF GALLONS) for (X CALENDAR YEAR). I certify that this assignment and any other assignment given by (ASSIGNING ENTITY) during this calendar year does not exceed the production of (ASSIGNING ENTITY) during (X CALENDAR YEAR). I certify that (ASSIGNING ENTITY) has not assigned more (BARRELS/WINE GALLONS/PROOF GALLONS) to this importer or any other importer, individually or collectively, to receive a reduced tax rate/tax credit than is permissible by the CBMA.
I certify that the information contained in this submission is accurate and complete to the best of my knowledge and belief. I am aware that the information contained in this submission may be subject to verification. I am aware that eligibility of the (ASSIGNING ENTITY) and (IMPORTER) for the reduced tax rate/tax credit under the CBMA can be revoked in the case of any erroneous or fraudulent information provided which is deemed to be material to qualifying for the reduced rate.
As discussed above, Labatt was unable to obtain an Assignment Certification from Molson and seeks through protest, to be able to avail itself of the CBMA as an assigning brewer to its importer. With its protest, Labatt provided an Assignment Certification, maintaining that it is the producer/manufacturer, but also assigning rights to reduced tax rates to itself.
The statutes and regulations governing CBP do not define the term “brewer.” The Internal Revenue Code, however, defines “brewer” for purposes of the statutory chapter codifying the CBMA as “any person who brews beer or produces beer for sale.” 26 U.S.C. § 5052(d). The corresponding regulations promulgated by TTB to implement the IRC beer provisions in 27 C.F.R. Part 25 similarly define a “brewer” as “[a]ny person who brews beer . . . and any person who produces beer for sale.” 27 C.F.R. § 25.11.
In the context of small domestic brewers, a reduced excise tax rate existed prior to the promulgation of the CBMA. See e.g., 26 U.S.C. § 5051 (2017). As a result, TTB has had to evaluate arrangements similar to that described by Labatt to determine eligibility for the reduced excise tax rate. Indeed, since the mid-1980s, TTB’s predecessor the Bureau of Alcohol, Tobacco and Firearms (“ATF”) began approving applications for alternate methods and procedures that allowed two or more brewers to alternate the use of brewery premises and equipment. Industry Circular 2005-2 (Aug. 12, 2005). In Industry Circular 2005-2 (Aug. 12, 2005), TTB summarized its existing policy regarding the qualification and operation of alternating proprietors (“APs”) at breweries for purposes of reduced excise tax rate eligibility for small domestic brewers. TTB defined APs as “an arrangement in which two or more people take turns using the physical premises of a brewery.” Industry Circular 2005-2 (Aug. 12, 2005).
TTB generally allows APs to qualify for the reduced tax rate for small brewers because it promotes similar policy goals of aiding small producers and “allow[s] existing breweries to use excess capacity and give new entrants to the beer business an opportunity to begin on a small scale, without investing in premises and equipment.” Id. “Contract brewing,” on the other hand, is a “business relationship in which one person, such as a wholesale or retail dealer or brewer, pays a brewing company, the ‘contract brewer,’ to produce beer for him or her.” TTB generally does not permit “contract brewing” arrangements to qualify for the same small brewer tax relief when the arrangement is merely designed to split the production of a larger company into additional smaller companies in order to improperly claim status as a small brewer or to enable the payment of the reduced rate of tax on a larger quantity of beer than would otherwise be possible. Id.
In order distinguish between APs and contract brewing relationships, TTB identifies several differences between the two arrangements to establish whether the second party (or “tenant brewer”) qualifies as a “brewer” or merely has a contractual agreement for the “host brewer” to brew the beer. Id. TTB evaluates each application to operate an alternating proprietorship on its individual merits and on a case-by-case basis. While these factors are not binding on CBP’s determination in this protest, they expand upon and provide insight into the definition of brewer under the IRC. In the absence of other illuminating definitions, we will look to these factors to determine whether Labatt is a qualifying brewer for purposes of the CBMA.
TTB looks to five factors to determine whether to permit an alternating proprietor at brewery premises to qualify as a brewer. First, TTB looks to the agreement between the host and tenant brewer. A rental or lease agreement of the brewery premises and the equipment is a clear indicator of an AP arrangement. A brewing services agreement is also permissible and the tenant may pay a host for its employees’ services on a per-unit or per-time basis. A tenant may also purchase raw materials from the host prior to brewing.
In the case of Labatt, the Production Agreement (including its three amendments) with Molson is not a rental or lease agreement, but rather Labatt pays Molson for the production of Labatt beer on a per-unit (per SKU) basis. The price includes a materials charge for the cost of certain brewing materials such as malt, hops, and additives, as well as packaging materials such as cans and bottles. The price also includes a manufacturing fee and a logistics fee, which are calculated per SKU. Thus, the Production Agreement seems to be a permissible form of tenant-host arrangement under TTB’s definition of an alternating proprietorship.
Second, TTB looks to operational aspects of the tenant as a brewer. For example, TTB considers whether the tenant holds title to the raw materials or ingredients prior to brewing. TTB assesses whether the tenant has access to the brewery premises and whether the tenant has plans for the development of future brewery assets and investment in the business. The tenant’s beer must be separate and identifiable from the host’s beer at all stages during the production process. TTB states that the tenant brewer must keep records as required under 27 C.F.R. Part 25, but recognizes that as a practical matter, the preparation of records and reports may be contract to host brewery employees. TTB states that the tenant brewer must be responsible for tax payment of the beer at the rate applicable to that brewer.
In the case of Labatt, the title of the beer produced transfers from Molson to Labatt at the shipping dock of the brewery. Although Molson provides many of the raw materials and packaging materials, Labatt provides the slope cultures or “yeast” to Molson as required. Under the Production Agreement, “Molson acknowledges that the Yeast is an essential and unique raw material used by [Labatt] to import a unique and characteristic flavor to the Approved Products.” As such, Molson agrees to maintain the yeast in accordance with the Manual provided by Labatt and to ensure that the yeast is not used in any other product other than those approved by Labatt. In the event that the Production Agreement expires, Molson is to ensure that all yeast is properly disposed of to Labatt’s satisfaction. Further, with twenty-four hours’ notice, Labatt is to have access and the right to examine any part of the Molson plant in which Labatt products are brewed or packaged in order to inspect for quality control and food safety procedures. The Production Agreement requires Molson to manage all documents and technical information from Labatt within its document management system and Molson “shall ensure that all documents . . . are strictly controlled and accessible only to those employees who need the information to perform their work functions . . . .” The Production Agreement includes a paragraph by which Molson agrees to the implementation of a minimum required number of “innovations,” at the expense of Labatt that demonstrate Labatt’s intent for continued investment in the business. Additionally, the Production Agreement provides that Labatt is responsible for “all sales and use, value-added, excise and other taxes, excise duties, tariffs and customs duties, levies, fees, mark ups and any other similar [charges].” Thus, Labatt seems to maintain the operational aspects required of the tenant by TTB to be considered a brewer.
Third, TTB looks to the tenant brewer’s involvement and oversight of brewery operations. The tenant must be involved in the development of the beer, whether by hiring a brewmaster, using its own formula, retaining a brewery consultant or working with the host to develop formulas. The tenant brewer must maintain completely separate records of brewery operations from those of the host. TTB recognizes that the tenant may contract the preparation of these records to host brewery employees. TTB also expects the tenant brewer to establish quality control standards and procedures, such as: employing a brewmaster to supervise the production of his or her beer; establishing procedures for overseeing the testing of the tenants beer by the host brewer; receiving samples regularly of his or her own beer for testing and quality control purposes; and making regular or periodic visits to the brewery premises to oversee production (although the presence of a tenant brewer or tenant brewer representative is not required during the production of the tenant brewer’s beer). TTB also expects the tenant to be accountable for any risk or loss of beer during production.
In the case of Labatt, the Production Agreement indicates that Molson agrees to brew the Labatt products “using, and in conformity with, the Manual and any other agreed to quality specifications by the parties.” All packaging and storage is also required to be done in accordance with the specifications address in the Manual. Labatt maintains ownership over the Manual which are “loaned” to Molson and Molson is required to ensure that all documents from Labatt are strictly controlled and accessible only to those employees who need the information to perform work functions. For purposes of quality control, Molson is required to send Labatt randomly selected samples in accordance with a schedule specified in the Manual. The Production Agreement provides that Labatt will make experienced personnel available to Molson as needed to assist and advise Molson in relation to the manufacture and packaging of Labatt Products. As discussed above, with twenty-four hours’ notice, Labatt is to have access and the right to examine any part of the Molson plant in which Labatt products are brewed or packaged in order to inspect for quality control and food safety procedures. Further, the Production Agreement indicates that Labatt shall indemnify Molson for “all losses, reasonable out-of-pocket costs and damages, incurred by Molson as a result of the distribution and sale of any [Labatt product] that has been formulated, manufactured, produced and distributed by Molson in accordance with the terms and conditions of the [Production] Agreement (including the Manual).” Thus, Labatt seems to have the brewer involvement and oversight of brewery operations contemplated by TTB in an alternating proprietorship relationship.
Fourth, TTB looks to the independence of the tenant brewer operation and whether they operate independently with regard to brands, formulas, trademarks, marketing, or direct sales of beer to each other or to each other’s customers. For example, TTB expects the tenant to direct the production of beer at the host brewery and provide input about the amount of beer to be produced. The tenant should have customer to whom the beer is to be sold and TTB expects the marketing of the tenant to be independent from the marketing of beer by the host. Additionally, a tenant brewer may produce beer at any suitable location and TTB does not approve an alternating arrangement that does not permit the tenant brewer to move production of its beer to another facility.
In the case of Labatt, Molson is required to maintain production in conformity with a schedule provided by Labatt to meet Labatt’s forecast and orders. Labatt provides Molson with an annual forecast at the SKU level and provides a rolling forecast, which is updated weekly. Labatt secures its own customers and strictly prohibits Molson from selling Labatt products in the United States or Canada. Under the Production Agreement, Labatt grants Molson a non-transferable license to use Labatt’s marks (including intellectual property) for the sole purpose of the formulation, manufacturing, production, packaging and the sale of Labatt products to Labatt. Labatt provides Molson with the requisite product labels and the Production Agreement prohibits Molson from affixing other labels to Labatt products brewed by Molson. Labatt must approve the plants at which Molson brews Labatt products. With regard to brands, the Production Agreement prohibits the Molson name from appearing on any label or packaging of Labatt products. The Production Agreement also provides that either party shall have the right to terminate the agreement for any reason with twenty-four months’ notice. Thus, Labatt seems to have the independent tenant brewer operation that TTB would require to find an alternating proprietorship arrangement.
Fifth, TTB considers labeling issues and the formula. The tenant should not use identical or similar labels, brand names, trademarks, or trade names. The sale or assignment of such between a host and tenant brewer may be evidence of a contractual agreement. Finally, if the formula for beer produced by the tenant brewer is identical to that for beer produced by the host brewer, TTB may consider that fact to indicate contract beer production.
In the case of Labatt, the Production Agreement indicates that Molson is required to manufacture Labatt products in strict compliance with the Manual provided by Labatt. The Manual includes the product formulas and Molson is required to use the yeast provided by Labatt which “imparts a unique and characteristic flavour” to Labatt’s products. The Production Agreement expressly prohibits Molson from using the formulas or labels provided by Labatt or any other marks or intellectual property for anything other than Labatt’s approved products. Thus, the agreement between Labatt and Molson with regard to labeling and formulas does not indicate a contract beer production arrangement.
In sum, under the factors articulated by TTB, the Production Agreement indicates the existence of an alternating proprietor arrangement between Molson and Labatt. While these factors are not binding on CBP’s determination in this protest, they provide helpful insight into what arrangements might qualify an entity to be a “brewer” for purposes of reduced excise tax rates granted under the IRC. The Production Agreement certainly does not seem to conflict with policy concerns stated by TTB regarding contract brewing arrangements where a larger company splits into smaller companies merely to improperly claim status as a small brewer. Instead, the evidence in this case suggests that Labatt is independent of Molson and is merely taking advantage of an existing physical brewery premises owned by Molson. TTB has allowed such arrangements to qualify for reduced excise tax rates granted to small brewers because it promotes similar policy goals of aiding small producers. We see no reason to find differently for purposes of the CBMA. As such, given the facts presented, Labatt qualifies as a “brewer” for purposes of assigning excise tax relief on imports of beer pursuant to the CBMA. Accordingly, Labatt can properly assign the reduced excise tax to its importers of Labatt beer in accordance and compliance with the requirements established by CBP.
HOLDING:
Based on the above, Labatt’s protest should be GRANTED, because Labatt qualifies as a “brewer” for purposes of the CBMA. Accordingly, Labatt constitutes an assigning entity and can assign reduced excise tax rates for beer under the CBMA to its importer(s). In processing this lead protest and other Labatt protests, however, the Port should still verify that other CBMA requirements have been met (such as total production and assignment amounts) before approving Labatt’s CBMA claims.
In accordance with Sections IV and VI of the CBP Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings, will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Craig T. Clark, Director
Commercial & Trade Facilitation Division