A Cautionary Tale: TTB Change of Control Rules for Alcohol and Tobacco Permits

As noted in a previous blog, those in the alcohol production and distribution business already know that merely receiving Federal TTB alcohol permits and then operating a business can be a daunting task for even the most experienced in the industry. The alcohol industry is governed by a myriad of complex federal laws and regulations under the jurisdiction of the Alcohol and Tobacco Tax and Trade Bureau (“TTB”). To start with, distilled spirits producers, wineries, cider makers, and brewers are all required to first obtain a basic permit from TTB or otherwise qualify with the agency before operations can begin. The same can be said for alcohol importers and wholesalers, and even tobacco producers and others must receive TTB authorization.

However, the very recent D.C. Circuit Court decision of Gulf Coast Maritime Supply, Inc. v. United States, No: 16-5350 (D.C. Cir. Aug. 11, 2017) made it abundantly clear that matters can become even more challenging when the existing alcohol or tobacco business experiences changes in its business structure.

The Gulf Coast Supply case addresses a situation where a company with TTB alcohol and tobacco permits experienced a change in ownership of stock but did not report the change to TTB. The company had been in the business for several decades, and as explained by the court, the company’s stock was owned by a husband and wife, each with 45% stock ownership. The husband died in 2013, and as a result his 45% interest was transferred to his surviving spouse.

Years later, TTB discovered the change of control and issued a letter to the company which stated that the company’s TTB permits had automatically terminated due to the unreported change of control. Additionally, the notice stated that continued operations could subject the company to civil and criminal penalties. To make matters exceedingly worse, TTB also informed the company that it owed nearly eight million dollars in back taxes, penalties and interest for operating without a valid tobacco permit due to the unreported change of control.

In response, Gulf Coast Supply filed a claim in Federal district court seeking injunctive and declaratory relief. The district court ruled against Gulf Coast Supply and dismissed the case on the grounds that the “tobacco permit remedies were barred by the Anti-Injunction Act . . . and that the district court lacked jurisdiction to review the alcohol permits’ automatic termination.” Id at 3. On appeal, the D.C. Court of Appeals affirmed the district court’s dismissal of the case. The court noted that the failure “to report any change in ownership, without an application for a new permit within 30 days of the ownership change, results in the permit’s automatic termination. See 27 U.S.C. Section 204(g) (alcohol permit), 27 C.F.R. Section 44.107 (tobacco permit).” Id at 2.

The facts of the Gulf Coast Supply case above indicate that if your alcohol or tobacco business is contemplating a change to its business structure, it would do well to first become familiar with the area of the area of the law involving TTB changes of control and changes of proprietorship. Such rules can place unsuspecting business owners in situations where their TTB permit has terminated without them even being aware of it! Sometimes such changes of control can happen even in the most passive of ways. As can be seen from the above case, this can lead to disastrous consequences. Among other things, this case illustrates the potential excise tax pitfalls in change of control situations. For example, for smaller alcohol producers who enjoy the small producer rate for wine or beer production, TTB may disallow the small producer rate and instead impose and assess taxes at the much higher rate of $1.07 per wine gallon for wine or $18.00 per barrel for beer production. Even for small producers this imposition of the higher tax rate could result in TTB’s assessments of very large tax liabilities.

Moreover, as can be seen from the above, a failure to timely comply with TTB’s change of control and change in ownership/proprietorship requirements can result in severe consequences: the automatic termination of the TTB permits, ceased operations, and even significant tax consequences. Again, alcohol business entities, such as breweries, wineries, cider makers, and distilled spirits producers need to be very vigilant when it comes to identifying and reporting to TTB changes to their business structure.