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Alternating Proprietorship Vs Contract Manufacturing

Person Manufacturing Alcohol

The Alcohol and Tobacco Tax and Trade Bureau (“TTB”) and the New York State Liquor Authority each allow manufacturers to share their licensed facilities with other manufacturers. Manufacturers who share the same facilities are known as alternating proprietors.  Each of the proprietors must have its own TTB permit and state license. 

Small producers are entitled to certain excise tax breaks under the law.  For instance, there is a small domestic wine producers tax credit available to wineries who do not produce more than 250,000 gallons of wine per year. Each qualifying alternating proprietor is entitled to its own credit.  On the other hand, if a winery contracts to make wine for a wholesaler, no additional credit is available.  Primarily to make certain that the proper tax is being paid, the TTB examines alternating proprietor arrangements to see if there are really different permit holders operating a single facility as opposed to a contract manufacturing arrangement disguised as an alternating proprietorship.

When it examines an alternating proprietorship application the TTB may review the history of the operations between the parties. If one of the parties had previously been action as the contract manufacture for the other, the TTB will look to see if there has been substantive changes in the relationship between the parties. If from a practical point of view, nothing significant is changing, the TTB may deny the application of the proposed “tenant” manufacturer. 

In addition, other factors the TTB may take into consideration when it determines if an applicant should be licensed as a wholesaler rather than as a manufacturer include:

  • The business plan of the applicant. Is it primarily to market the beverage with little or no involvement in production?
  • How much of the manufacturing process will actually be performed by the applicant?
  • Are the contracts based on the quantity of product produced, rather than on such things as the space and equipment to be used, and
  • Do the agreements indicate an alternating proprietor will have minimal involvement in its own operations?

 While a “tenant” producer can enter into agreements with an option to hire the services of the “host” proprietor’s staff, the TTB may review the way in which the parties operate to see if the “tenant” producer has really taken control and is overseeing the operation of the facility when the product in question is being manufactured. 

In each instance, the question to be answered is, “Which entity is the true producer?” The answer to that question will determine which entity is required to have a manufacturing permit, obtain the Certificates of Label Approval, pay the taxes, and maintain the required records.

Keven Danow is an attorney representing members of all three tiers of the Beverage Alcohol Industry and member of The Danow Group, 605 Third Avenue, New York, NY 10158.  (212 3703744). Website: thedanowgroup.com; email:kd@thedanowgroup.com 

This article is not intended to give specific legal advice.  Before taking any action, the reader should consult with an attorney familiar with the relevant facts and circumstances.

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Keven Danow

Keven Danow

Founding and Senior Partner
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