Since before the category became the subject of public adoration, small beer manufacturers have been utilizing contract brewing to produce their products. In many instances, it was due to financial necessity; in other cases, the production values and profit opportunities were too great to do otherwise.
Admittedly, however, except to the extent required by federal labeling laws, many of these contracting brewers preferred not to publicize the contractual nature of their production. Whether justified or not, the fear exists that consumers will view beer produced under contract as something that is neither unique nor genuine.
these perceptions are not necessarily justified, and in many instances they can be rebutted effectively. While each case is different, there is a strong argument in favor of contract brewing, especially within the craft beer segment.
Many craft brewers who are creative, productive and passionate about their beer-making lack the capital to finance a brewery capable of matching their potential. Contract brewing is an option to cover that gap until the brewer's beer can develop a reputation that speaks for itself, and attracts the necessary capital to make an independent, self-owned brewery a possibility.
Another option for the craft brewers who cannot afford their own production facility is to utilize the legally-recognized "alternating proprietorship." This is a term used to describe an arrangement in which two or more people effectively take turns using the physical premises of a brewery.
Generally, the proprietor of an existing brewery, the "host brewery," agrees to rent space and equipment to a new "tenant brewer." Alternating brewery proprietorships allow 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.
In order to qualify for this alternating proprietorship option, the tenant brewer must file the appropriate documents with the U.S. Alcohol and Tobacco Tax and Trade Bureau (TTB), and obtain appropriate licensure from the state where the brewing takes place as a brewer (or, in some states, a "small brewer" or "micro-brewer").
Under an alternating proprietorship, the tenant brewer:
- Produces beer;
- Keeps appropriate brewery records;
- Labels the beer with its own name and address;
- Obtains the necessary COLAs from TTB;
- Pays tax at the appropriate rate upon removal of its beer from the hosting brewery; and
- Arranges for registration of its beer brands with applicable state authorities.
Both the tenant and host brewer must submit a series of forms and documentation to the TTB’s National Revenue Center in order to qualify for an alternating brewery arrangement. For more information, access the TTB’s Web site to review Industry Circular 2005-2 for a complete list of application requirements.
Note that under an alternating proprietorship arrangement, the tenant brewer has legal title to the beer at all stages of the brewing process. Legally, and otherwise, the beer produced under this relationship is the craft brewer's beer.
From the vantage of public perception, beer produced under an alternating proprietorship relationship is equally, if not more, attractive than beer produced under contract.
This article is published in the March 2015 issue of Fintech Focus. For more information, click here.
Author - Richard M Blau, Chair GrayRobinson’s Alcohol Industry Team