GETTING THE BOND RIGHT

Next we need to ask: How do we compute the operations
bond, and what are the minimums? Most distillers have
each of the three types of DSP operations – distilling,
Getting
Bond
Right!
the
CARE AND FEEDING OF THE
TTB FORM 5110.56
warehousing and processing spirits. The minimum bond
for all three operations is $15,000, which covers about
1,100 proof gallons of spirits. At 80 proof, that is about
1,375 wine gallons of product.
Ten barrels of whisky, each holding 50 gallons at
120 proof, is 500 wine gallons, or 600 proof gallons.
A 375 gallon tote of 190 proof neutral spirits is 712.5
proof gallons. Three pallets (144 cases) of bottled
product, 80 proof, in cases of 12 bottles each, 750ml
bottles, is 342.4 wine gallons or 273.9 proof gallons.
A DSP with the barrels, the tote, and the case goods
in this example will have 1,586.4 proof gallons to be
bonded, which equates, at $13.50 excise tax rate, to
$21,416.40 in potential government revenue to be subject
to the bond. Many plants have started under the minimum
$15,000 bond, the point here being that the minimum bond is
restrictive, and the planning of product inventory volumes (bulk
WRITTEN BY JIM MCCOY
and bottled) may require the operations bond to be larger, right
from the start.
A
Second, is withdrawal bond coverage, which is in addition
to the above defined operations coverage. It covers deferral of
critical piece of the distiller’s puzzle in establishing their
excise tax from the date of withdrawal “tax determined” until
Distilled Spirits Plant (DSP) is the process of obtaining
the tax is actually paid to the government. A small distiller,
and providing to TTB a perfectly executed Distilled Spirits Bond
projecting to pay less than $50,000 per calendar year, may file
– TTB F 5110.56. The purpose of the bond is to provide the
their Excise tax return (TTB F 5000.24) and pay excise tax on
government with a guarantee that excise taxes will be paid, and
spirits removed from bond on a quarterly basis, otherwise, the
assurance that the distiller will comply with Federal laws and
returns and payments are due semi-monthly (twice a month).
regulations. TTB will not process an application for, nor approve, The tax return and payment must be on time or penalties and
a DSP unless a correctly prepared bond is included in the
interest are due. TTB publishes the due dates on their website.
application package. Also, TTB requires that the Bond form be
A distiller may also pay the tax on or before the date when
original – it must be sent to TTB, not just uploaded as an image
the products are removed, in which case no withdrawal bond is
in the Permits Online program.
needed. This would involve filing of a “Prepayment Return” each
Referring to the bonding requirements in 27 CFR Part 19, the
and every day when products are sold. Removals of products
distiller has two types of coverage to consider. First, operations
include shipments to wholesalers and transfers to your tasting
bond coverage covers the tax value of distilled spirits held on the
and retail premises. If you have those types of operations at
distillery or in the process of being transferred in bond to the
your distillery, remember, they are adjacent to the DSP and not
distillery bonded premises. It also covers the tax value of export
technically part of the DSP. The tax is due on bottled products
shipments that have left the plant but which the distiller has
when removed, unless a withdrawal deferment bond is provided.
yet to provide TTB proof of exportation from the US. In general
If you sell 100 proof gallons per 3 month period, a withdrawal
terms, the operations bond covers spirits on hand, in transit or
bond of $1,350.00 would be required to enable quarterly filing.
unaccounted for. Unaccounted for? That would be spirits lost or In order to set an appropriate withdrawal bond amount, you will
destroyed which have yet to be accepted by TTB as accounted
need to project your taxes due on withdrawals for each tax period,
for by the distiller.
in proof gallons, multiplied by the $13.50 per PG tax rate.
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The
“PRINCIPAL/
OBLIGOR” is the company
covered by the bond; the name
MUST be exactly as it is shown on the
articles of inc/org filed with the state.
For example, if an LLC, the name might be “Jim
Distilling, LLC” – be sure that the comma is
included in the typed name everywhere it
appears. Any punctuation, dashes or
spelling must be exact, or TTB
will return the bond for
correction.
Check
“UNIT BOND”
to cover operations
and withdrawals;
the first bond is an
“ORIGINAL”
bond.
For
“AMOUNT OF
BOND” enter the
TOTAL of the bond.
“ADDRESS OF
BUSINESS OFFICE”
can either be the plant
site, or another address.
The amount is split on page
2, but the TOTAL goes
on Page 1.
If the company office is not at the
plant, be sure this is consistent
with what is entered on the
permit and registration.
“PRINCIPAL/
OBLIGOR” will be
named EXACTLY as it was
in the upper left block, and a
person with authority will sign for
the principal, and that person’s
name and title will be entered
Enter
the company
Employer
Identification Number
(EIN) which is
obtained online
from IRS.
BE SURE THE PERSON HAS THE AUTHORITY
TO EXECUTE AS ESTABLISHED IN THE
ORGANIZATIONAL DOCUMENTS
GIVEN TO TTB.
Have
the surety
company fill “BOND
CATEGORY” in with
their name and
bond number.
The “BOND EXECUTION”
date is entered by the surety
when they execute the bond.
This date is also entered at the top right of page 2,
AND be sure that the surety power of attorney (their
form, required to be attached to the bond) is certified
true/correct/current as of this same date. Usually
the surety POA document has in its last paragraph
a certification that the authority of the person
signing remains current – that certification
should have the same date as the bond
execution date. VERY IMPORTANT!
Beyond the issue
of how much bond
coverage should be obtained
for operation of the plant is the
actual completion of the bond
form itself. Beginning on page 1
of the Distilled Spirits Bond, TTB
F 5110.56, which is available
as a download from the TTB.
GOV website, use the
following guidelines...
Two
witnesses
sign to verify the
principals’ signature.
Surety executes
along the lower left,
showing the name of the
surety company, the ORIGINAL
HAND WRITTEN signature of
their representative, and that
person’s name and title.
The surety will also apply their
embossed seal to the lower
left, where indicated.
If the corporation or LLC has
a seal, the witnesses are not
necessary, just apply the seal
in the lower right where
indicated.
For
“CORPORATIONS/
PARTNERSHIPS, OR LLC
SEALS” be sure to show the state
where the company is organized, and
either apply the company seal, or mark
the “THE CORPORATION/LLC HAS NO
SEAL” and have two witnesses sign.
FAILURE TO CORRECTLY EXECUTE
THIS ITEM IS THE MOST
COMMON ERROR.
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Most
of page 2
is arranged in
columns – this is
where the bond
coverage details
are presented...
Column 1,
enter the name
of the company and
physical address
of the plant.
Column 2,
leave “REGISTRY
NUMBER” blank for
your original bond.
This DSP number will be entered
by TTB and will be needed for
any future bond updates.
Column
3, enter the
“OPERATIONS COVERAGE”
amount, and click the appropriate
operations – “DISTILLER”“WAREHOUSEMAN” – “PROCESSOR”.
The PDF has a drop down that enables you to select
each of the three operations; some distilleries
may have an adjacent bonded wine cellar. That
operation can be covered by this bond, as
well. A small winery has a minimum
$1,000 bond coverage, which
should be added to the
DSP coverage.
Enter the
name of the
“PRINCIPAL/
OBLIGOR” EXACTLY
correct.
The
“EXECUTION
DATE” must
match the “BOND
EXECUTION” date
on page 1.
Column 4, enter
the “WITHDRAWAL
COVERAGE” amount,
and click the appropriate
operations – “DISTILLER”
– “WAREHOUSEMAN”
– “PROCESSOR”
Be sure to
show the total
“OPERATIONS COVERAGE”
and “WITHDRAWAL
COVERAGE” at the bottom of
the respective columns.
The total of these two fields will
equal the AMOUNT OF BOND
shown on page 1.
THE TTB BOND
MUST BE PERFECT OR
IT WILL BE RETURNED
FOR CORRECTION,
DELAYING YOUR
APPLICATION
While TTB rules do allow for a cash or Treasury securities
Establishing the required bond coverage and strengthening it
collateral bond, the most common type of bond is obtained as
as your distillery business grows is a critically important aspect
an insurance policy through an insurance company – “surety.” of compliance with the Federal rules that govern your operation.
Most major companies will provide this coverage, though a local Absent a bond, you are absent a permit to operate! Getting
agent may not be familiar with the form or type of bond if they
your bond documents perfect means that you have significantly
have yet to deal with a distiller, winery or brewery.
increased the likelihood that your DSP will receive a prompt
You may have seen the term “Consent of Surety.” This is an
review and approval. A bond that is not accepted will leave you
extension of the terms of the operations bond for certain reasons, scrambling to get it corrected in time to avoid TTB abandonment
by filing TTB Form 5000.18 – Change in Bond (Consent of of your application. Abandonment means re-filing everything.
Surety). A typical usage of this form is for coverage of tax on
Get the bond right and get your approval faster.
spirits in transit between non-contiguous portions of a DSP
premises. Another extension of the bond is needed to facilitate Jim McCoy is Managing Consultant for J. McCoy Alcohol & Tobacco
alternation of a portion of the DSP premises with a bonded Compliance Consultants LLC in Cincinnati, OH. Jim served over
32 years with ATF and TTB, establishing his consulting firm in
2010 to assist alcohol and tobacco businesses in their efforts to meet
same manner as the bond, and must also be submitted to TTB Federal regulatory and tax requirements. For more information visit
in the original form.
www.jmccoyconsultants.com or email [email protected]
winery or brewery. This form is executed by the surety in the
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