THE DIFFERENCES BETWEEN CONTRACT BREWERS AND TENANT BREWERS
Generally, to obtain approval from the Alcohol and Tobacco Tax and Trade Bureau (TTB), a brewery must comply with the federal regulations set forth in 27 CFR part 25, which provides requirements regarding the method and procedure of producing beer. However, when a business’s brewing operations employ an alternate method for producing beer, such as contracting the manufacturing responsibilities to another party, or contracting to manufacture on another party’s premises, the legal implications may differ. Alternate types of brewers, such as those operating with a “contract brewer” or “tenant brewer” status, should be aware of any additional legal obligations their status may incur them.
Contract brewing occurs when a business hires another existing brewery to produce its beer. There are different levels of contract brewing, depending on the extent of duties the business contracts away to the existing brewer. A business such as a retailer or wholesaler may choose to hire a brewery, the “contract brewer,” to do everything from the brewing and packaging to the recipe development. On the other hand, a business such as another brewery may choose to produce an original recipe itself, and then contract the manufacturing and brewing responsibilities to the contract brewer.
Still, sometimes a business may choose to retain all the brewing responsibilities and produce beer via the lease of another, existing brewery’s premises and equipment. In this situation, the business is a “tenant brewer” and it operates through a “host brewer” in an arrangement called an alternating brewery proprietorship. Here, the two parties alternate use of the brewery and both are separately involved in the manufacture of beer.
The benefit of these alternate brewing arrangements is that they allow brewers to save money on fixed costs, such as rent and salaries for additional employees, and spend more money on activities such as marketing. In addition, using an existing brewery may help a brewer meet market demand. If a brewer does not have enough manufacturing capacity itself, leasing the premises of another brewery or hiring another brewery to produce its recipe, will enable further production and increase output.
Yet brewers involved in these arrangements should be cognizant that their status may subject them to different legal qualifications than ordinary brewers. In general, a brewer is defined as “a person who brews beer or produces beer for sale.” 26 USC § 5092. A contract brewer is considered to be a “brewer” within the meaning of this statute. Like an ordinary brewer, a contract brewer has title to the ingredients used to produce the beer. For this reason, a contract brewer must comply with largely the same requirements as an ordinary brewer: those set forth by 27 CFR part 25. After the beer’s manufacture, title passes to the person who has contracted for it to be made. This person need not qualify as a “brewer” under § 5092. This person can be a wholesaler or retailer as well.
On the other hand, both a tenant brewer and a host brewer must have title to the ingredients used to produce the beer and consequently both must qualify as “brewers” under § 5092. Here, the tenant and host brewers are subject to 27 CFR part 25. In addition, both are required to file an alternating arrangement request with the TTB, since this arrangement is not expressly authorized by part 25. The TTB website, states that such a request is reviewed “on its individual merits, based on factors that include physical layout of the brewery premises to be shared, the compliance and business history of each…and the likelihood that the alternation will take place without administrative difficulty or jeopardy to the revenue.” Only an authorization of the proposed alternate method makes an alternating brewery proprietorship possible.
CONTRIBUTED BY COURTNEY MCGEE
© 2013, Law Offices of John P. Connell, P.C.