Contract Distilling? Sure, We Can Do That!

Friday May 12, 2023 was a big day here at the office. Thanks to the efforts of City Brewing and Wisconsin Brewing Company, the Department of Revenue issued a declaratory ruling that approved contract production (through Alternating Proprietorships, or straight contract) between distilleries (and by extension and our reading of the statute, wineries too). This is huge for any distillery with capacity, as well as upstart distillers looking to dip a toe in the industry prior to committing the many hundreds of thousands of dollars it takes to build a DSP from scratch. Now, rather than sitting idle, additional capacity at distilleries can be deployed to produce spirits for other licensees, much like host brewers and their contract guests are already doing throughout the State.

Prior to Friday’s ruling, the Department interpreted Wis. Stat. Sec. 125 to prohibit contract production arrangements of any kind between distilleries because allowing such an arrangement would be equivalent to allowing the guest (customer) to utilize the permit of the host distiller, which is generally prohibited across all of the three-tiers and throughout the statute. In other words, Chapter 125 has many prohibitions against “strawmen” – the person utilizing the permit, must be the actual person named on the permit documentation. (You can’t apply for a permit on behalf of Al Capone, because Al is not allowed to have a distillery permit). For a lot of reasons we don’t necessarily need to go into, the Department’s view of agency or “acting as an agent for another” in the specific language cited as a basis for the prohibition in Chapter 125 was…expansive. Additionally, it was not consistent with the TTB’s view on this issue – or rather – non-issue – because contract manufacturing (Alt. Props. etc.) are permitted at the federal level.

So what does this mean – in practice.

First, the next time you see your friends from City Brewing and Wisconsin Brewing Company – buy them a beer. Without their efforts, these changes may not have happened.

Second, the Department is going to have to implement this decision with additional rulemaking, and how that will shake out is unknown and likely to take some time. It seems very clear from the decision that all guests will have to be permitted by the Department in order to contract with a host distillery. That means a permit at the Federal and State level of some kind (our bet would be a DSP\Basic Permit via an Alt. Prop with the TTB, and a Manufacturer\Rectifier permit at the host’s address from the DOR).

Third, if you are a distiller looking to get into contract manufacturing, now is a great time to start getting things ready. Regardless of the DOR’s forthcoming rules, any host distillery will have to make sure their recordkeeping is all in order, they have production contracts and back office support for guests, and are prepared to deal with the extra responsibilities that come with having a new customer, this time, a fellow distillery.

If you’re interested in reading the full decision – the nine pager is here in all its glory:

Thanks for reading.