July 16, 2014
In Part 2 of our series exploring brewing partnership relationships, Hop Law talks contract brewing.
A contract brewing arrangement, as defined by the Alcohol and Tobacco Tax and Trade Bureau (TTB), is a business relationship in which one person (wholesale or retail dealer or brewer) pays a brewing company (contract brewer) to produce beer for him or her. In some cases, the contracting company does not brew any of its own beer at its own premises, utilizing contract brewing relationships for all of its production needs. In other cases, the contracting company will enter into a contract brewing relationship in order to produce additional beer that it may not have space for at its own brewing facility.
The contracting company is often responsible for recipe development, marketing, sales, and distribution of the product. The contract brewer, on the other hand, is responsible for producing the beer, keeping appropriate brewery records, labeling the beer with its name and address, obtaining necessary label approvals (COLAs), and paying taxes upon removal of beer from the brewery. The contract brewer retains title to the beer at least until the beer tax is paid or until the beer is removed from the brewery. The TTB considers contract brewing arrangements to be ordinary commercial arrangements.
In a contract brewing arrangement, only one person, the contract brewer, must qualify as a brewer. This means that the person on whose behalf the beer is brewed may be a wholesaler, a retailer, or another brewer. If the person on whose behalf the beer is brewed resells the beer to a retailer, however, then that person must hold a wholesaler permit.
Contract brewing has come under fire by many in the craft beer industry for the seemingly “hands-off” approach of the contracting company to the production process. Contract brewing relationships get significantly more criticism than their cousins, the alternating proprietorship arrangements. We’ll discuss alternating proprietorships in more detail later in this series, and compare the pros and cons of each arrangement.