Licensing Agreements Ltd.

If you’ve been keeping up with our blog, you’re aware that Wis. Stat. 125 – Alcohol Beverages recently got a major overhaul. The updated statute, effective as of May 1, 2024, brings significant changes, especially in the area of contract manufacturing for beer, wine, and spirits. We’ve already covered Alternating Proprietorships and Recipe Production (aka Recipe Brewer). Today, we’ll explore the third type: Licensing Agreements.

Quick note: while licensing agreements are available to all industry members, this post focuses on brewers.

Licensing Agreements Under Wis. Stat. 125

Licensing agreements are available to two types of brewers:

  1. In-state brewers who already have a permit.
  2. Out-of-state brewers who don’t have a permit to brew in Wisconsin, but do have a permit to brew in their home state.

Here are a couple of scenarios where a licensing agreement might come into play:

Scenario #1: In-State Brewer Needs Extra Capacity

Imagine a Wisconsin brewer (“Guest”) needing additional production capacity but wanting to avoid the hassle of more federal and state permits. The parties could execute a licensing agreement with a production brewery (“Host”), enabling the Host to produce extra barrels (bbls) for the Guest. After production is complete, the beer can be purchased and transferred in bond from Host to Guest.

This sounds great, but there’s a catch. While beer can be transferred in bond between Host and Guest (breweries of different ownership), the Guest must pay the full federal excise tax (FET) on these bbls. The reduced FET rate applies only to brewers involved in the production process. To try and avoid this FET issue, the Host can tax-pay the beer and sell it to the Guest like any other product. However, this workaround might introduce logistical and transactional challenges.

Scenario #2: Out-of-State Brewery Expands into Wisconsin

Consider an out-of-state brewery (“Guest”) with beer that’s popular in Wisconsin that wants to ramp up local production to meet demand during the Summer. The Guest can license its brands to a Wisconsin brewery (“Host”), which then produces and forwards the beer to the Guest’s Wisconsin wholesale\distribution partners. While the statute requires the Guest to buy the beer from the Host, we believe this is largely a paperwork and financial requirement, not a physical transfer of beer ownership\title requirement.

Recommendations and Insights

For Scenario #1

Producing beer for extra capacity within Wisconsin isn’t new. The updated statute legitimizes these practices, but the full FET rate still surprises many clients. If you’re a Wisconsin brewery needing more capacity, we recommend considering an Alternating Proprietorship (for beer that is to be sold in Wisconsin or other states) or at least a Recipe Brewer arrangement (for beer that is to be sold in Wisconsin). It involves more upfront paperwork but offers a cleaner setup without transfer-in-bond FET issues.

For Scenario #2

Licensing agreements could be beneficial for out-of-state brewers looking to boost production in Wisconsin. However, if the beer is to be sold outside Wisconsin, the Host faces hefty logistical and paperwork demands (like obtaining permits in other states, as they often have to under recipe brewer relationships). Thus, unless production is solely for Wisconsin, we still suggest exploring an Alternating Proprietorship.

Stay Tuned

Licensing agreements are evolving, with Department of Revenue rulemaking underway. Keep an eye out for updates. Thanks for reading!