It is not uncommon these days for spirits companies to work with a Contract distillery who will distill, bottle, and label the actual spirits product. This is a great arrangement for companies that want to get into the spirits industry but do not want to front some of the equipment, licensing, or administrative costs. Working with a contract distillery to produce spirits can be a good option for certain companies, but there are still some important considerations companies should take into account. Here are some of the top questions you should make sure you have the answers to.
What is a Contract Distillery?
Contract distilling is a type of relationship where one business hires another to distill or produce spirits. In some instances, the contract distillery may source bulk spirits from another company and simply blend ingredients at the contract distillery and then bottle the final product. The company that is distilling or bottling the spirits product is generally referred to as the “Contract Distiller.” This company will be responsible for producing spirits (generally from raw ingredients) and bottling the spirits product on its premise. Again, the alternative is that the distillery may source bulk spirits from another distillery and use the bulk spirits in combination with other ingredients to blend and bottle a final product. (This is especially common with distilled spirits specialties, which often have a spirit base, multiple flavors or juices, colors, and other ingredients added to them.) The contract distiller is also responsible for many regulatory requirements, such as submitting label and formula applications to TTB.
The contract distiller will have title to the raw materials or ingredients used to make the spirits as well as the spirits product itself. Title to the spirits product generally only passes to the contract distillery client after the spirits is produced, taxes are paid, and the final, bottled product is removed from the bonded area of the contract distillery’s premise.
The actual company that hires the contract distillery does not necessarily need to have its own distillery or equipment or facility (although it can, but in this type of relationship, the contract distillery that is hired will produce the spirits product; sometimes companies that have their own distillery license hire outside companies to contract distill their products if they’ve run out of space at their own facility, are in the middle of relocating, are in the process of applying for a distillery license, or otherwise have need to outsource production).
While this arrangement is popular and favorable for many smaller companies or rapidly expanding companies that can no longer keep up with demand, it’s important to consider a few things before entering into this type of relationship.
Questions to Ask When Entering a Contracting Distilling or Co-Packer Relationship
- Does my company need a license? Even though the distillery is required to obtain a federal permit and state license, your company may need to obtain a permit with the TTB and a license with your state liquor agency. For federal purposes, this will ultimately depend on whether or not your company is purchasing the final product (i.e., the bottled product) from the distillery. Generally, if your company is purchasing the product and plans to either distribute the product or sell the product to wholesalers and/or retailers, your company will need a federal wholesaler permit with the TTB (in addition to state licenses). The fact that the spirits product is distilled or bottled by a distillery that has its necessary permits and licenses does not necessarily foreclose your company from need its own permit and license.
- Who is responsible for obtaining label and/or formula approvals from TTB? Generally, the company that is bottling the finished product is responsible for obtaining label and/or formula approvals from TTB. The label and formula applications will need to be submitted on the permit of the contract distillery.
- Do you have a contract and does it protect your brand sufficiently? Does your contract clearly state that your company owns the intellectual property, the brand, the artwork, etc.? Does the contract mention who is responsible for keeping records and reporting excise taxes and any state or sales tax? The company actually distilling and bottling the spirits product is responsible for all production, record keeping, reports, labeling, formulations, and payment of taxes.
- Is the contract distillery or co-packer registered with the FDA for food facility registration purposes and does the distillery or co-packer have all the required state or local licenses with respect to health and safety? The facility should, at minimum, be registered with FDA and will also likely need to be registered on the state or local level.
- Is the contract distillery or co-packer facility flexible to handle either small or large scale production?
- Has the contract distillery or co-packer filed a DBA/trade name with TTB? Often, companies like to have their name in the “Bottled by:” section of the label. Unless a trade name or DBA name is on file with the TTB under the distillery’s permit, the label cannot use your company’s name as the trade name or DBA. The label will need to state the actual name that appears on the distillery’s TTB permit or other DBA names on file (if applicable).
The above is just a summary of the general things a company working with a contract distillery should consider. There are, of course, more specific details depending on the exact relationship with the distillery as well as the product. E-mail us at [email protected] to find out more about how we can help you from the outset of your relationship with a contract distillery or co-packer. We can also help guide you with respect to completing the necessary permit or license applications, as well as advise you on any requirements that may be important or necessary depending on your business model.
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