Expansion of production capacity can be capital intensive and finding a location can take some time. One alternative is to use contract brewing to supplement your current production. Contract brewing is a business arrangement where a brewer hires an existing brewery (a “contract brewer”) to brew and package the beer for them. That is a critical point, that the party ordering the beer is a licensed brewery itself. These contractual relationships have many different flavors from pure production according to the brewer’s recipe to actual recipe development, distribution and other services.
For breweries with extra capacity, this can be a great revenue generator and doesn’t require you to market or sell the beer, just make it. It optimizes the efficiency of your existing infrastructure without requiring risky investments with no return. In the contract brewing situation, costs for ingredients and labor will be recouped on the sale of the beer. You won’t be making a product without a guaranty of a sale.
The Internal Revenue Code defines a brewer as a person who brews beer or produces beer for sale. In a contract brewing arrangement, the “contract brewer” has title to the ingredients and beer during production. Title to the beer passes from the contract brewer to the “brewer” after production and removal from the brewery. Removal can be in bond with the brewer paying the excise tax (which can be reimbursed by the “brewer) or after excise taxes have been paid by the “contract brewer.”
The “contract brewer” is responsible for keeping records of beer production and providing operational reports to the TTB. The “brewer” has no responsibility for this aspect of operations unless the beer is transferred in bond as non-tax paid product. It will, however, have to maintain required records about sales and distribution of the beer.
State ABC authorities also regulate the relationship between contract brewer and brewer. Contract brewing agreements are complex agreements with many regulatory, licensing and tax issues associated with commercial brewing. There is no one-size-fits-all business model or contract for contract brewing. Working with an experienced beer contract attorney can assure you the best terms and protection, minimizing legal risk and regulatory non-compliance.