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At first glance, you might wonder why regulations distinguish between Voluntary Destruction and Losses. The key differences:
- Voluntary Destruction is intentional, pre-planned destruction of spirits
- A Loss is an unexpected discrepancy between book inventory and physical inventory which you reveal through a physical inventory-taking process or by discovering a variance in a tank or gauge
In either case, you’re typically not taxed on the quantity lost/destroyed – but let’s dive in deeper.
Voluntary Destruction
Voluntary Destruction is covered in 27 CFR 19.459, which states:
A proprietor may voluntarily destroy spirits […] or wines on bonded premises as provided in this section. There is no tax liability on spirits […] or wines destroyed in accordance with this section.
Simply put, if you carry out your destruction in compliance with the regulations, you are free of federal excise tax liability. For wine destroyed in your distillery, you have to file a notice with TTB before commencing destruction, however, spirits have no such requirement. All you must do is gauge the spirit to be destroyed (or count bottles/cases if destroying finished goods) and prepare a Record of Destruction.
The Record of Destruction regulations are at 27 CFR 19.617:
Each time that a proprietor voluntarily destroys spirits, denatured spirits, articles, or wines, the proprietor must prepare a record of the destruction that sets forth:
(a) The identification of the spirits […] or wines, including kind, quantity, elements of gauge, name and permit number of the producer, warehouseman or processor, and identity and type of container;
(b) The date, time, place and manner of the destruction
(c) A statement that the spirits had, or had not, previously been withdrawn and returned to bond; and
(d) The name and title of any representative of the proprietor who accomplished or supervised the destruction.
You can meet this regulation’s requirement by notating your batch(es) in DISTILL x 5 or Whiskey Systems, prior to recording their destruction.
Important: If you are sending your product to another facility (off bonded premises) for destruction…
- And you do hold a bond
- Then you must file a consent of surety to cover the off-premises destruction
- And you do not hold a bond (because you have under $50,000/yr in tax liability)
- Then no consent of surety is required before off-premises destruction
The information above about consent of surety was provided by Mary Duncan at TTB.
Losses in Bond
Losses in Bond are covered in 27 CFR 19.462. You are obliged to check for unexplained losses at these junctures:
(1) Each time a tank or bulk conveyance is emptied;
(2) Upon discovery of an accident or an unusual variation in a gauge; and
(3) When required to take a physical inventory.
Although this is not specifically addressed in the regulation, Losses are only taxable in certain scenarios. It is customary to have losses associated with angel’s share, as well as bottling/processing losses and losses due to redistillation. Properly tracked and explained, these losses are a green flag for TTB auditors, because their presence indicates that you are regularly gauging and tracking your tank contents through the production process.
However, there are scenarios where Losses become taxable (and so you must either voluntarily pay the tax, or file for relief from the tax liability). One of those scenarios is Unauthorized Voluntary Destruction; another is Theft/Tampering. There’s a section for “missing packages” (i.e. barrels that you can’t locate). Finally, we have thresholds specified for “Excessive” In-Transit and In-Storage losses:
(b) Losses from theft, tampering, or unauthorized voluntary destruction. Whenever any spirits […] or wines are lost or destroyed in bond, whether by theft, tampering, or unauthorized voluntary destruction, the proprietor may elect voluntarily to pay the tax on the quantity lost. If the proprietor does not elect to pay the tax, the proprietor must promptly report the loss or destruction to the appropriate TTB officer. TTB may require that the proprietor file any claim for relief from the tax in accordance with § 19.263.
(c) Missing packages. When a proprietor cannot locate or otherwise account for any packages of spirits, denatured spirits, or wine recorded as deposited on bonded premises, the proprietor must promptly report that fact to the appropriate TTB officer. In such case the proprietor must either pay the tax on the lost spirits, denatured spirits, or wines or file a claim for relief from the tax in accordance with § 19.263.
(d) Excessive in-transit losses. A proprietor must promptly report excessive in-transit losses to the appropriate TTB officer. As a general rule, when spirits, denatured spirits, or wines are received in bond in bulk conveyances TTB will consider as excessive a loss that exceeds 1 percent of the quantity consigned. However, in the case of transcontinental transfers of wine in bond, TTB will consider as excessive only a loss in excess of 2 percent of the quantity of wine consigned.
(e) Excessive storage losses. A proprietor must pay the tax on excessive storage account losses of spirits unless the proprietor files a claim for remission in accordance with § 19.263 and TTB allows the claim under § 19.268. TTB will consider a storage account loss as excessive when the quantity of spirits lost during a calendar quarter from all storage tanks and stored bulk conveyances exceeds 1.5 percent of the total quantity contained in the tanks and stored bulk conveyances during the calendar quarter.
Breaking this down: theft, tampering, unauthorized voluntary destruction and missing barrels (“packages” is TTB-speak for barrels) are all taxable losses unless you notify TTB and file a claim for relief.
In contrast, In-transit losses are only taxable if they exceed 1 percent of the quantity consigned (i.e. the quantity shown by the sending DSP on their TIB paperwork).
Similarly, losses in the Storage account are taxable if they exceed 1.5% of the total quantity stored during the quarter. To compute this threshold, add your Starting OHBOM PGs for the quarter to the sum of all Receipts into Storage for the quarter, and divide your total quarter’s Loss quantity into this figure. If it exceeds 1.5%, your Storage losses are taxable. Angel’s Share losses from barrels are not typically included in this computation – it refers to losses determined during withdrawal, dumping for mingling and emptying or inventorying storage tanks.
