​Here in the US our alcohol regulatory scheme was created in the mid 1930’s when Prohibition ended.  Back then very little wine was made in the US and most beer was German style lager.  The industry has changed dramatically since then, but the regulations haven’t.  Every time someone dreams up a new type of alcoholic beverage the regulators must figure out what to do with it.  Flavored malt beverages, like Mike’s Hard Lemonade, were on the market for about 10 years before the federal government figured out how to regulate them!  Now we are seeing an increase in products like alcoholic kombucha, hard seltzer, hard sodas and similar beverages that are generally sold like beer but don’t fit what most people think of as beer.  So, what do the regulators do with these?
 
First, let me clarify what type of products I’m talking about.  The classification of alcoholic beverages relies largely on the raw materials used so I’m talking about products where the main fermentable ingredient is sugar.  Not the sugar naturally found in grape juice, or the sugars in sprouted grains – the sort of sugar that is likely sitting in your kitchen right now.  You will soon see why this matters.
 
As you may know, TTB and most states divide alcoholic beverages into three commodities:  beer, wine and spirits.  Pale Ale, Pinot Noir and Whiskey fit neatly into these categories; hard kombucha, seltzer and soda don’t.  First, we will look at TTB, then take a very general look at state issues since there are too many states to deal with.
 
Federal Rules
 
TTB has the pleasure of enforcing regulations based on two different laws, each with their own set of definitions.  This is what happens when Congress writes a new law without looking at what they said last time.  The first law is the Internal Revenue Code (IRC) which impacts things like taxes and whether you need to be registered as a brewery, winery or distillery.  The other law, the Federal Alcohol Administration Act (FAA) covers things like labeling and advertising.  The IRC definitions of “beer”, “wine” and “spirits” can be found in 27 CFR 25.11, 24.10 and 19.1, but here is the abridged version:

• Beer is made from malt or malt substitutes, which includes sugar.
• Wine is made from fruit or other agricultural products, not including grains.
• Spirits is ethyl alcohol, or any alcoholic beverage that isn’t “beer” or “wine”.

 
This means that if you were to ferment sugar-water, then add flavorings and CO2 you would be creating “beer”.  This applies whether yeast or another microorganism was used for fermentation, which is why most kombucha with 0.5% ABV or more is classified as “beer”.   On the other hand, if you were to ferment juice, add flavor and CO2, and call it “Janene’s Hard Seltzer” you would be dealing with wine.  Regardless of what you call your products (hard seltzer, hard root beer, spritzer, etc.), the classification is based on the materials used.
 
Since brewers are creative people, we need to drill down a little further to see what happens when you use some combination of grains, sugar and/or juice.  Sometime back in the 1800’s the government decided that “beer” has to must be fermented from at least 51% malt or malt substitute.   This is why things like raspberry ale are classified as “beer” – because they generally contain much more than 51% grains and a little raspberry.
 
On the other hand, “wine” cannot contain any grains, which oddly includes molasses, but sugar can be added before and after fermentation.  As you can see, fermenting sugar and juice together can be either beer or wine, depending on the ratio: 51% sugar and 49% juice is “beer” while 51% juice and 49% sugar is “wine”.  But for today’s discussion we are going to stick with the products that meet the definition of “beer”.  That is: fermented from at least 51% sugar, with or without grains or juice added.
 
Now that we have that cleared up, let’s move on to the second set of TTB definitions.  The FAA Act doesn’t use the term “beer”, instead it uses “malt beverage”.  The full definition can be found at 27 CFR 7.10, but the short version is a fermented beverage that must contain malt and hops.  This is a much narrower definition than “beer”, but for beverages like ale, lager, stout, IPA, etc. it doesn’t make a difference – these are both “beers” and “malt beverages”.  But lately there have been a variety of products that are classified as “beer” but not “malt beverage”, such as gluten free beers made from alternative grains, many kombuchas, hard seltzers and similar beverages.
 
So, what does it mean to have a beer that isn’t a malt beverage?  Well, since malt beverage is the definition that is used in the labeling and advertising law and regulations, the main impact is that these beverages are not labeled the same way ale and lager is.  The federal malt beverage labeling and advertising rules, in 27 CFR Part 7, do not apply to beers without malt and/or hops.  This means no COLAS are required!  I’m sure this is a relief to many, but there is a catch – whenever the FAA Act labeling requirements don’t apply the FDA rules do.  This includes having things like ingredients and nutrition facts on the labels.
 
Nothing in alcohol regulations is simple, so before we look at the FDA requirements, I need to remind you that TTB has some labeling requirements that are not based on the FAA Act, and therefore still apply.  These are known as the mandatory labeling requirements because, well, they are always required for beer.  This includes a few things that are based on the IRC, and are found in 27 CFR 25.142, including the name and address of the packager, net contents and “nature of the product” (i.e. “beer”).  Also required is the government health warning statement (27 CFR Part 16).  In fact, this could be considered the most important part of any alcohol beverage label because the mandatory fine for non-compliance is over $20,000 for each time the faulty label is used in a packaging run.  Eek!
 
In addition to these TTB requirements, beers that are not malt beverages must be labeled like foods, per FDA regulations.  The FDA has put together some guidance that you might find helpful:

• Beer specific guidance:  https://www.fda.gov/regulatory-information/search-fda-guidance-documents/guidance-industry-labeling-certain-beers-subject-labeling-jurisdiction-food-and-drug-administration
  • This was written before there were many alcoholic kombuchas or hard seltzers on the market, so these types of beverages are not mentioned specifically, but this applies to any beverage that is classified as beer but not malt beverage.
• Food Labeling Guide:  https://www.fda.gov/regulatory-information/search-fda-guidance-documents/guidance-industry-food-labeling-guide
  • This is rather long, but the first few pages are the most applicable.
• Info on the Small Business Exemption for the nutrition info:  https://www.fda.gov/food/labeling-nutrition-guidance-documents-regulatory-information/small-business-nutrition-labeling-exemption-guide
  • A new Nutrition Facts Panel is being phased in over the next few years; info can be found here:  https://www.fda.gov/food/food-labeling-nutrition/changes-nutrition-facts-label

 
In summary:

• A fermented beverage that is made from at least 51% sugar, with or without added grains or fruit/juice, is classified by TTB as “beer”.
• “Beer” that doesn’t contain malted barley and/or hops is not a “malt beverage” and therefore does not need to be labeled according to the federal labeling regulations based found in 27 CFR Part 7, including not needing a COLA.
• Beer that is not a malt beverage must be labeled with the TTB mandatory items, including the government warning statement, and in compliance with the FDA labeling regulations.
• Note:  any beverage classified as beer must be made in a facility covered by a Brewer’s Notice, and the federal beer excise taxes apply.  Formula approval may also be required.  See 27 CFR Part 25 and www.ttb.gov for full details.
• TTB has a Kombucha page:  https://www.ttb.gov/kombucha/index.shtml.  Most of this also applies to hard seltzers and sodas.

 
 
State Issues
 
Where to begin with the state issues?  With the fact that 50+ different state and local regulatory systems keeps people like me gainfully employed?  That’s probably not what you want to know…
 
Here’s the problem – each state has its own set of definitions so how products like hard seltzer and alcoholic kombucha are handled depends on the state.  Some have a definition like the one TTB has for “beer”, while others are more like TTB’s definition of “malt beverage”.  The net result is that in some locations these products are treated like beer while in others they fall into “wine”.  And some states have never heard of kombucha and don’t know how to classify it.
 
Let me give you two examples:  Washington and Oregon.  Washington statute has the following definition: 
 
RCW 66.04.010   (26) "Malt beverage" or "malt liquor" means any beverage such as beer, ale, lager beer, stout, and porter obtained by the alcoholic fermentation of an infusion or decoction of pure hops, or pure extract of hops and pure barley malt or other wholesome grain or cereal in pure water containing not more than eight percent of alcohol by weight, and not less than one-half of one percent of alcohol by volume. For the purposes of this title, any such beverage containing more than eight percent of alcohol by weight shall be referred to as "strong beer."
 
The WSLCB has interpreted “other wholesome grain or cereal” to essentially mean the same thing as TTB’s “malt or malt substitute”.  In other words, sugar counts as a grain or cereal so the products we are talking about are treated as beer in WA.
 
Oregon, on the other hand, has the following definition:
 
ORS 471.001 (6)(a) “Malt beverage” means an alcoholic beverage obtained by the fermentation of grain that contains not more than 14 percent alcohol by volume.
 
Notice that it mentions grain, but only grain.  No substitutes, no other cereals or materials.  This means that the OLCC considers the products in question to be wine.   Unless your products contain some type of grain, like barley, wheat, millet, etc. your hard seltzer, kombucha or soda will be wine in OR.  If you are making it in OR then you need to have an OLCC Winery license, even if have a TTB Brewer’s Notice rather than a Wine Basic Permit.  The wine privilege taxes also apply, rather than the malt beverage taxes, which may or may not be an advantage.  Small wineries in OR are exempt from the privilege tax, while no similar small brewer advantage exists.
 
If you are going to make or sell products like these in other states, you will have to contact the state to determine how they will classify them.  Be prepared to explain the materials used and them method of production.  In some cases, I have seen states ask for a copy of the TTB approved formula.  Most states require label approval or brand registration, regardless of whether or not TTB requires a COLA.  Pretty much all states understand this situation now because of the popularity of hard cider.
 
Whether the state considers your products to be beer or wine is going to impact things like:

• What license you need (both for in-state production and sales from out-of-state) and what type of license your distributors need.
• Whether or not you can self-distribute.
• Whether you need to sell through the state’s control system (this also depends on the alcohol content).
• Tax rates.
• Label registration and price posting requirements.
• Franchise law restrictions.

 
I strongly suggest giving yourself extra time to work through the issues before you develop or expand distribution of a “beer but not malt beverage product”.  And don’t be surprised if you need to hold the hands of the regulators in places that aren’t familiar with the type of beverages you are making.
 
Feel free to reach out to me if you need additional information.  And if you are looking at making a fruit/juice-based seltzer, spritzer or whatever, the rules for wine and hard cider will apply.
     

Just want to let everyone know that my second video is now live!  It is Required Records:  Wine and Cider, located here:  vimeo.com/ondemand/graceregconsult.  This course covers key record keeping requirements for both TTB and FDA, including examples, another pop quiz and some horror stories from the field to help you understand why these records are so important!

Next up...brewery basics.  

Enjoy,

Janene

Happy Summer!  I've had a busy last few months and haven't been able to share some of the information I had planned to write about.  But I do have something very special to announce - I now offer regulatory compliance training videos.  You can link to these on my new Videos page or go directly to my video site at: vimeo.com/ondemand/graceregconsult.  I only have one video at the moment, on federal excise taxes for wine and cider, but I am already working on the next one: record keeping for wine and cider.

Once I get a number of these put together I will be introducing a subscription service, but for now they are selling individually.  I am definitely not an expert on making videos or dealing with anything on the internet so things may be a bit clunky at first, but hopefully I will work out some of the kinks over time.

Please let me know if you have suggested topics, questions or comments.  I want this to work for my clients so your feedback is essential.

​Enjoy!

​As promised, here is some additional information regarding the impact of the upcoming change in the definition of Hard Cider.  (See my last blog post for further information.)  This time I want to bring your attention to a potential glitch that some of you might face regarding your TTB permit/registration. 

Registrations, Bonds and Basic Permits

In order to secure TTB approval to make wine or cider you may be issued up to 3 documents: bond, registration and basic permit.  The bond and registration are required by the Internal Revenue Code and must be secured if you are producing, blending, bottling or storing (non-taxpaid) wine or cider.  In other words, if you are operating a commercial cidery you need to have a bond and registration approved by TTB.

The basic permit is required by the Federal Alcohol Administration Act (FAA) and is required if you are producing or blending “wine”.  The catch here is that “wine”, according to the FAA, contains “not less than 7 percent and not more than 24 percent alcohol by volume”. (27 CFR 1.10) This means that if you are only going to make ciders with less than 7% ABV you don’t need a basic permit, just the registration and bond. 

Because I don’t like creating unnecessary restrictions I have always recommended that cideries get a basic permit so they have more flexibility.  This upcoming change to allow “hard cider” to contain up to 8.5% ABV is a perfect example of when this flexibility comes in handy.  In order to take advantage of the upcoming increase in allowable ABV you must hold a basic permit.
​
What concerns me is that some cider makers may not hold a basic permit, and they may not be aware of the problem.  A little pet peeve of mine is the following question from Permits Online:

As I'm sure most of you know by know, the Cider Act passed late last year and will go into effect on January 1, 2017.  This is the law that is changing the definition of "Hard Cider" for tax purposes.  (The bill itself can be found here:  https://www.congress.gov/bill/114th-congress/house-bill/2029.  The Cider Act portion is embedded in this larger bill.)

The quick explanation of this new law is that as of next year, the Hard Cider tax rate of $0.226 per gallon will expand to include ciders that contain less than 8.5% ABV, not more than 0.64 grams of CO2 per 100 milliliters, and contains no fruit or fruit flavoring other than apple or pear.  While this may sound simple, if you happened to have attended the TTB sessions at last week's CiderCon you know this isn't as simple as it sounds.

To help clear things up I will be providing information here.  To start, I have created some flow charts to help you figure out how your products are classified now, and how they will be classified next year.  Keep in mind that TTB still has to write regulations based on this legal change so some questions will remain unanswered until they finish the rulemaking process.

For starters, here is a chart showing the current tax classification system.  (Sorry if these are blurry - I'm not very technologically skilled.  If you want clearer copies of these send me an email and I will send you pdf's.)

Now that you know how your cider should be classified at the moment, here is the chart for after the new law goes into effect on January 1, 2017:

This next chart isn't about tax classifications, but since so many questions were asked at CiderCon about labeling, COLAS and package size requirements I thought I'd throw this in as well.  Keep in mind that the Cider Act doesn't have any impact on the labeling rules; what it does is create confusion for Hard Ciders between 7-8.5% ABV.  At the moment, if you have a product that qualifies for the Hard Cider tax rate then you do not need a COLA and can use any size bottle, can or keg.  As of next year, you may have products that qualify for the Hard Cider tax rate but need a COLA and must be packaged according to the metric standards of fill.  In other words, starting next year it may be best to think of Hard Cider between 7-8.5% ABV as a slightly different animal than Hard Cider below 7%.

I hope these help.  If you have any questions, or have suggestions on what to cover next let me know.  Thanks,  Janene.

Last week TTB announced they accepted an Office in Compromise from Miller Coors regarding a violation of the consignment sales regulations.  Here are my thoughts on the case.  For further information on consignment sales please see my blog on the Crafting a Strategy website:  http://craftingastrategy.com/.

Ramifications for the Industry

I am somewhat relieved to see TTB take action on what has become an extremely common practice in the beer industry.  As is too often the case when regulations aren’t being sufficiently enforced, certain key players bend the rules, which leads to the expectation that everyone must play by these bent rules.  This was a routine issue at my former employer – wholesalers and retailers insisted that we buy back old beer regardless of whether it was legal or not.  If we didn’t follow the regulations we were at risk of penalties from TTB and the state in question.  If we didn’t do what the wholesalers and retailers asked then they would buy less of our products in the future.  Of course, we couldn’t change wholesalers if one was playing hardball because franchise laws had us trapped.  Hopefully this offer in compromise will send a message to the industry and relieve some of the pressure placed on brewers from their trade partners.

On the other hand, this citation raises the question:  are the exemptions listed in the regulations for the “ordinary and usual commercial reasons” to return alcohol sufficient?  It only took TTB about 77 years to realize that beer is a perishable product that should have a shelf life exemption, but are malt beverages the only perishable alcoholic beverages out there?  I’m pretty sure that pre-mixed eggnog doesn’t get better with age.

What about seasonal products?  TTB explicitly states that the return of seasonal products “does not constitute a return for ‘ordinary and commercial reasons’”. (27 CFR 11.46)  So your Oktoberfest beer that is intended to be sold for 2 months has a 6 month shelf life, and it sells slower than intended.  Since you can’t take it back, your accounts continue to sell what they have in stock well into the season for your winter ale.  Now the winter ale sales are out of sync and the cycle continues.  I’m not sure I agree that having Oktoberfest beer on store shelves at Christmas constitutes an “ordinary and commercial” practice.

Regardless of your opinion of the consignment sales regulations, remember that TTB is watching. Keep in mind: 

• Alcohol manufacturers in the US cannot make any offer to buy back product from wholesalers.  The same applies to sales between wholesalers and retailers.
• Limited exemptions apply; be sure that any returns based on these returns are properly documented.
• Only malt beverages can be returned if they are out of date.  The containers must be date coded, the shelf lives clearly communicated and the expired product may not be re-sold.  Wholesalers and retailers may not be required to meet any criteria to be able to return out of date malt beverages.
• Each state has its own rules regarding the return of alcohol, and these rules may be stricter than TTB’s.
  

For more information on consignment sales, or any other regulatory issues, please feel free to contact me at janene@graceregconsult.com.  Thank you.

A few of weeks ago TTB’s weekly newsletter covered a number of items about the FDA  (http://www.ttb.gov/newsletters/archives/2015/ttb-newsletter073115.html).   This raises a commonly asked question about the role of the FDA in alcohol regulation, and their relationship with TTB, so let’s take a look at that.  In a nutshell, TTB is responsible for enforcing federal alcohol laws:  the alcohol portions of the Internal Revenue Code and the Federal Alcohol Administration Act.  FDA, on the other hand, is responsible for enforcing the federal food and drug law: the Food, Drug, and Cosmetic Act.  But since beverage alcohol is also a food, how is this line drawn? 

History

I’m a history buff, so let me share a brief history lesson.  The US government first got involved in alcohol regulation in 1791 when our country’s first tax, on distilled spirits, was implemented to help pay for the Revolutionary War.  (This resulted in the Whiskey Rebellion, when tax collectors were literally tarred and feathered.  I’m very happy that public sentiment changed by the time I started working for TTB.)  This tax was eventually rescinded, but a new alcohol tax was put into place to help fund the Civil War.  Alcohol has been taxed ever since then, even during Prohibition.  After Prohibition new federal laws were written (the aforementioned Federal Alcohol Administration Act) that addressed issues such as permits, labels, advertising and trade practices.  So although taxes are no longer the sole concern of federal alcohol laws, taxes are the one overriding constant, and the reason alcohol laws and regulations are enforced by an agency of the Treasury Department.

The FDA has a completely different history.  The US government dabbled in food regulations in the 1800’s, but the Pure Food and Drugs Act of 1906 was the real beginning of the FDA.  This Act, and its predecessors, were enacted to prevent adulterated food and drugs.   This was, not coincidentally, also the year that Upton Sinclair wrote The Jungle which exposed some very disturbing practices in the meatpacking industry.  With its focus on safety and consumer protection, rather than taxes, the FDA is part of the Department of Health & Human Services.

Current Relationship

OK, so TTB is about taxes and the FDA is about food safety*, but what about the safety of alcoholic beverages?  This is where the two agencies work together, via a Memorandum of Understanding (MOU).  (http://www.ttb.gov/main_pages/memo-understanding.shtml)  The gist of this MOU is that TTB relies on the FDA for matters related to health and safety.  For example, if you submit a formula to TTB for a specialty distilled spirit containing an unusual ingredient that isn’t readily recognized as food, TTB will require that you provide FDA documentation certifying that the ingredient is Generally Regarded as Safe (GRAS) for use in alcoholic beverages.

For those of you that remember the brouhaha over caffeinated malt beverages a few years ago, there is a reason that the FDA was the one to pull the plug on these products.  Many people thought that TTB dropped the ball on this one by not acting sooner, but they had no authority to do so because this was a health and safety matter.  TTB did work closely with the FDA on this one, behind the scenes.

So what does this mean for alcohol manufacturers?  Historically, it meant that the average alcohol manufacturer had little do with the FDA, but this has changed considerably with recent law changes, such as the Bioterrorism Act and the Food Safety Modernization Act.  Here are some issues where alcohol manufacturers will have to interact with the FDA:

• Registration of food facilities.
  
• Food safety compliance programs, such as recall procedures.
  
• Formula approvals with unusual ingredients (as mentioned above).
  
• Menu labeling (still on hold).
  
• Labeling of wines and ciders containing less than 7% alcohol by volume, and beers that do not contain barley or hops.
  
• Facility inspections.
  

I hope this helps clear up the relationship between TTB and the FDA.  As an alcohol manufacturer you will have to comply with both agencies. Don’t assume that if you are compliant with one agency that you will be compliant with the other.  Because they have different missions, and different laws to enforce, compliance will not necessarily overlap.

Please reach out to me if you have any questions about the role of the FDA in your business, or need help with things like the food facility registration or labeling of cider labels.  Thank you – Janene.

*This is an oversimplification, these agencies are more complicated than this.  It is the government, after all.