The term “bonded winery” holds a unique significance in the U.S., encapsulating a complex web of regulations and economic advantages. At the crux of it, a bonded winery is a designation granted by the Alcohol and Tobacco Tax and Trade Bureau (TTB), marking compliance within a meticulous regulatory framework.
The framework has to do with several Prohibition-era regulations that resulted in heavy tax liability on wineries. Bonding a winery is one of the ways to alleviate some of the uncertainty associated with those tax implications.
Here, we shed light on the concept of a bonded winery in the U.S., plus the obligations and benefits of having this unique status.
But First, A Quick History on Excise Taxes
Excise taxes are taxes on any goods and services, such as alcohol, and have existed almost as long as the United States itself. The first excise tax on alcohol was in the late 18th century, though Thomas Jefferson quickly abolished it in 1802. These taxes went up and down throughout the 1800s as incomes and tariffs fluctuated. It wasn’t until the Great Depression in 1929 that excise taxes became a permanent and increasing fixture in the American tax system. That moment coincided with the end of Prohibition in 1933, which meant the increased tax rates immediately applied to alcohol.
What Is a Bonded Winery?
Technically, every winery operating legally in the United States is a bonded winery. It means the winery requested and received approval for a permit with the TTB. That permit allows anyone producing wine to sell that wine for profit, no matter the size or scale. The first bonded winery in the U.S. was Pleasant Valley Winery in the Finger Lakes in 1860, before Prohibition and during a time when there were no excise taxes.
Today, however, at a certain production level, a winery has to take out an insurance policy to help cover excise taxes to the federal government. The insurance policy is known as a “bond” or “bond coverage.”
The TTB requires wineries to establish bond coverage in the amount they believe the excise tax will be. That’s right. The federal government imposes an excise tax on wineries and then requires wineries to insure themselves to make sure they pay that tax.
There are more than 17,000 bonded wineries in the United States. About one-third of those wineries (6,100) are in California. The only other state with over 1,000 bonded wineries is Washington, which has nearly 1,300. According to TTB data referencing bonded wineries between 1999 and 2023, emerging regions hold the highest recent growth in bonded wineries, with Virginia, Texas, Michigan, and New York all in the top 10.
While all wineries must be bonded via the TTB, not every winery must have bond coverage. In 2015, the Obama Administration signed the Consolidated Appropriations Act, which allows smaller wineries producing a smaller quantity of wine to be exempt from holding a bond. Wineries who expect a tax liability to be less than $50,000 do not have to hold a bond. Unfortunately, like most tax laws, determining that amount is a little complicated.
Calculating Bonds
Bond coverage is based on the likely total cost of excise taxes, calculated from the total amount of wine a winery produces in a given year. These taxes work a lot like an individual’s income taxes.
For instance, if a winery produces 200,000 gallons of wine in a year. The first 30,000 gallons is taxed at seven cents per gallon, or $2,100. The next 100,000 gallons (from 30,000 to 130,000) are 17 cents per gallon, or an additional $17,000. The remaining 70,000 gallons cost 53.5 cents per gallon, or $37,450. In total, a winery that produces 200,000 gallons of wine will pay $56,550 in excise taxes. Since the winery will likely owe more than $50,000, they need bond coverage to cover that amount. Once they do that, they are a bonded winery with the U.S. government.
Comparing Winery Paths
Navigating TTB regulations involves understanding the differences between a bonded winery and three other key entities: alternating proprietorship, custom crush operations, and bonded wine cellar.
A bonded winery is a physical facility authorized by the TTB to produce, cellar, and bottle wine. In contrast, an alternating proprietorship sees multiple wineries operating under a single bond. Each entity (or alternating proprietor) receives specific production rights within the premises. While this arrangement allows for cost-sharing and flexibility, each proprietor must still meet TTB regulations independently.
Unlike bonded wineries and alternating proprietors, custom crush operations involve a facility providing winemaking services for grape owners who may want to avoid the cost of maintaining their own facility. The facility, known as the “custom crush,” processes and ferments the grapes on behalf of the client, who retains ownership of the finished product.
Finally, a bonded wine cellar is a facility that focuses primarily on storing and aging wine. While it does not typically engage in the entire winemaking process, it still falls under TTB regulations. This option allows wineries to specialize in aging and storage while leveraging shared winemaking facilities with other bonded entities.
Understanding these distinctions is crucial for aspiring winemakers, as each option presents unique opportunities and responsibilities within the intricate framework of TTB regulations.
Things To Think About
Much of the information on bonded wineries is available via legal entities and the federal government. For new wineries, there are a few things to consider when becoming bonded:
- How much will the winery produce? Production levels are the most important thing to estimate correctly. Over-insuring the winery means overpaying, but under-insuring could lead to penalties from the government.
- What is the winery/vineyard’s likelihood of attrition? This is where most wineries risk a flag by the TTB, specifically if gallonage totals are significantly different than anticipated. If there is a mishap along the way, wineries need to report it. Accounting for potential attrition will also help avoid these challenges.
- What’s the structure of the business? Often, wine businesses comprise multiple wineries or brands. If those brands are bonded separately, their taxes will also be separated and could be subject to discounts as smaller entities.
Consulting a lawyer is the best step toward becoming a bonded winery, particularly given the complexities of the U.S. alcohol industry. However, plenty of information is available on the TTB website.
