The conversation usually starts like this: “I’m a little behind on my monthly TTB reporting and I’m not sure how to get caught up.” Or “Our compliance manager has left the company and I’m not sure where we are at with reporting.” Then there is the classic “I haven’t filed any reports or taxes for the last three years… can you help?” The latter is surprisingly common.
It is incredibly easy to get behind on the legally required Tax and Trade Bureau (TTB) monthly reporting and excise tax returns. The daily pressure to manage the distillery, keep up with orders, launch new products, and ensure a steady supply of raw materials can force monthly reporting to the back burner. Although the consequences of not filing on-time operations reports may not feel as immediate as running out of inventory, the potential penalties are significant. The good news is that if a distiller can do some internal reflection and identify that they have made mistakes in the past, the issues can be fixed voluntarily. The steps to correct past operations reports and excise returns begins at the CORE:
Critically evaluate the compliance issues.
Organize and collect the past data.
Resubmit amended reports and returns.
Evolve and invest in a sustainable system.
Critically evaluate the compliance issues
For distilleries both large and small, there are three operations reports that must be filed each month; Production, Processing, and Storage. The Production Report summarizes what went into and what came out of the still. The Storage Report summarizes how many proof gallons were in bonded inventory at the beginning of the month, how much was added to inventory, what was removed from inventory and what was remaining at the end of the month. The Processing Report summarizes what was blended, bottled, and how many proof gallons of finished case goods were withdrawn tax-paid from bonded inventory. The TTB wants visibility into the movement of spirits from grain to bottle and every step in between.
In addition to the monthly operations reports, all distilleries are also required to file a Federal Excise Tax Return. Through the tax return, the distillery pays excise tax for the proof gallons withdrawn tax determined from bonded inventory. Most small craft distilleries pay their federal excise tax every quarter. However, if a distillery pays more than $50,000 in federal excise tax in one calendar year, they must pay this excise tax every 15 days. A distillery paying excise tax semi-monthly combined with the three monthly operations reports will file over 60 separate federal reports each year, not including any locally required state reporting. Getting behind is all too easy.
For many distilleries, the first awareness of compliance issues comes from a letter or surprise visit from the TTB. For other distilleries, something has happened inside their organization and the owners or remaining officers are stuck with a mess that they don’t know how to unscramble. Some distilleries decide to finally put their foot down and make a concerted effort to do what it takes to be in full compliance.
Once a distiller has determined they may not have been in full compliance with the TTB on past reporting or past tax returns, it is important to evaluate the scope of the problem. Have all the past monthly reports been filed (Production, Storage, and Processing)? Is there confidence that the reports were submitted accurately with the correct numbers in the right boxes? Did the end of last month’s storage inventory match what was physically at the distillery at the start of this month? Have all the required Excise Tax returns been submitted since the DSP application was approved, including zeros prior to production? Was the accurate amount of excise tax paid? If audited tomorrow, are all the supporting documents available? Sometimes the issues can be as small as putting the wrong numbers in the wrong place on a past report. Sometimes the scope can be enormous, such as having no monthly reports filed and no excise taxes paid for years.
Organize and collect the past data
Once the scope of the issues has been identified, it is time to collect as much past data as possible. Collect any available records including fermentation records, distillation yields, barrel fill and dump logs, bottling records and a list of all cases removed from bond. These production and operations daily records are the source documentation for what goes into the monthly operations reports and excise tax payments. If audited, these documents will need to be on hand and available.
When asked, many distillers can provide mountains of paperwork on their distillation runs including vapor temperatures, heads and tails cut proofs, time stamps, specific gravities and other variables important to running the stills and making quality spirits. But when asked, “How many proof gallons of hearts did you distill on each run?” many distillers’ notebooks come up short. Even basic information like “How many cases did you fill of each brand?” are recorded as a passing thought, if recorded at all.
Organizing and collecting all the critical data into a concise and usable electronic document is key and is absolutely the hardest part of the cleanup process. Try organizing all the data in a way that mimics the Operations Reports. For example, summarize how much spirit was made, stored, lost, bottled and shipped by type. The most common issue is missing records or conflicting records where it’s just not clear what happened in the past. In that instance, reaching out to a consultant or a third party to help piece together what plausibly happened is a sound investment.
Resubmit amended reports and returns
Once the data has been collected and reconciled, it is time to submit amended monthly reports. Voluntarily amending and submitting corrected operations reports wipes the slate clean. By amending a past operation report, the distillery is requesting the TTB to ignore the previously submitted “Original” report and to replace it with the new “Amended” version. If the distillery is mailing paper copies, make sure to write “Amended” in the margins of the reports above the date. If filing electronically via Pay.gov, there is a button to check if the report is “Original,” “Amended” or “Final.” Be careful NOT to check the “Final” button as that indicates that this is the last and final report submitted from the distillery and signals the termination of the distilled spirit plant.
Amended Excise Tax returns are a bit trickier, as the distillery could be liable for interest and penalties on any tax differences. There is an interest penalty of 5% per month (up to 25%) on any unpaid tax liability. For example, if a distillery withdrew from bond cases and owed $1,000 in federal excise tax that was due two months ago, they will owe 10% interest for a final bill of $1,100. If a distillery owed $1,000 that was due over 5 months ago, they will owe $1,250 plus any penalties the TTB may issue. If the delinquency is complicated, it is worth looking into an alcohol-focused law group like Beverage Law (bevlaw.com) for help.
The statute of limitations for past operations reports and returns is three years. 3 years x 12 months/year x 3 operations reports/month = 108 operations reports + 12 to 75 federal excise tax returns to submit if all the past reports were incorrect (or never originally submitted).
Evolve and invest in a sustainable system
The definition of insanity is doing the same thing over and over and expecting different results. Once all the past reports and returns have been amended and cleaned up, it is crucial to evolve and make an investment in a production-tracking system that is sustainable and easy to use. If a homegrown system is not delivering the data needed, look for a better system. If your current solution is complicated where people stack up paperwork to enter in “eventually,” seek out a system which the team will not procrastinate on data entry. Keeping up-to-date will pay dividends in reduced frustration and time saved when the reports are due.
If a distillery is audited and numerous compliance issues are found, the TTB will expect to see that the roots of the problems are fixed with an action plan to ensure the problems do not return. Giving the TTB agent confidence that every effort will be taken to stay in compliance going forward is key. It is also safe to expect a follow-up visit to ensure that the distillery is making good on their commitments toward full compliance.
If a distillery hasn’t been officially audited or contacted by the TTB, it is still important to evolve to a system with repeatable processes where bad habits won’t cause issues going forward. After all the effort to voluntarily clean up past reporting is done, it’s important to invest in a system where history will not repeat itself.
Everyone makes mistakes. Every distiller has holes in their compliance armor. Whether there are small issues with past reports or there is a fundamental issue with staying in full compliance, it is crucial that distillers start problem solving at the CORE. Critically evaluate the current system, organize and collect past data, resubmit the corrected reports, and evolve with an investment to ensure compliance issues do not surface again.