When an alcohol beverage brand does not own its own production facility, there are generally two ways to get product made: become an alternating proprietor at someone else’s facility, or hire an existing producer to make the product for you under a contract manufacturing arrangement.
From the outside, the two can look almost identical. The same tanks, the same bottling line, and sometimes even the same people may be involved. From the Alcohol and Tobacco Tax and Trade Bureau’s (“TTB”) perspective, however, they are very different structures with different permits, responsibilities, and tax consequences.
We have previously written about alternating proprietorship vs. contract brewing and custom crush vs. alternating proprietorship. This post looks at the question across wine, beer, and distilled spirits, and focuses on how a brand owner can decide which structure fits its business.
The short answer: In an alternating proprietorship, the tenant is its own TTB-qualified producer: it holds title to its product, keeps its own records, obtains its own COLAs, and pays its own federal excise tax. In contract manufacturing, the producer makes the product for the brand owner and carries those obligations, while the brand owner usually needs a wholesaler or importer basic permit instead.
What Is an Alternating Proprietorship?
An alternating proprietorship is an arrangement in which two or more separately owned businesses take turns using the same production premises and, often, the same equipment.
In a typical arrangement, an established producer (the “host”) rents space and equipment to another producer (the “tenant”). The key feature is that the tenant is a producer in its own right. TTB describes a brewery alternating proprietorship, for example, as one in which the tenant brewer produces its own beer, keeps its own brewery records, labels the beer with its own name and address, obtains its own COLAs, and pays tax when its beer is removed. TTB also notes that the tenant has title to the beer at all stages of the brewing process.
Wineries and distilled spirits plants can operate alternating proprietorships as well, with commodity-specific requirements.
What Is Contract Manufacturing?
In a contract manufacturing arrangement, the brand owner hires a qualified producer to make the product on its behalf. Depending on the industry, this may be called contract brewing, contract distilling, custom crush, or co-packing.
Here, the producer—not the brand owner—is the regulated manufacturer. For wine, TTB explains that in a custom crush arrangement only the wine producer must register as a bonded winery, that the producer and bottler keep the required records and file the operational reports, and that the bottler obtains any necessary COLA. (TTB Industry Circular 2008-4)
The brand owner often still needs its own federal basic permit—commonly as a wholesaler or importer—depending on the commodity and how the brand owner will sell the finished product.
What Is the Difference Between an Alternating Proprietorship and Contract Manufacturing?
| Question | Alternating Proprietorship | Contract Manufacturing |
| Who is the producer for TTB purposes? | The tenant (each proprietor is its own producer) | The contract producer |
| Who holds the title during production? | The tenant | Generally the contract producer |
| Who keeps production records and files reports? | Each proprietor, for its own operations | The contract producer |
| Whose name appears as producer/bottler on the label? | The tenant | The contract producer, with the brand owner’s brand name (a DBA name may appear instead of the contract producer, if applicable) |
| Who pays federal excise tax on removal? | The tenant | The contract producer |
| Brand owner’s federal permit | Producer-level qualification (e.g., bonded winery, brewer’s notice, DSP) | Often a wholesaler or importer basic permit |
Why Does the Structure Matter to TTB?
1. Permits and Qualification
An alternating proprietor must qualify with TTB as a producer at the host’s premises, just as a standalone facility would. A contract manufacturing client generally does not, but may need other federal and state permits to buy and sell the finished product.
2. Control Over Production
In an alternating proprietorship, the tenant directs and controls its own production. In a contract arrangement, the producer makes the product to the brand owner’s specifications but remains the responsible manufacturer.
If a brand owner wants to make its own production decisions, an alternating proprietorship may be the better fit. If the brand owner would rather leave production to an experienced producer, contract manufacturing may be simpler.
3. Recordkeeping, Reporting, and Labeling
An alternating proprietor takes on the full set of producer obligations: production records, operational reports, excise tax returns, and its own COLAs. In a contract arrangement, most of those obligations sit with the producer.
4. Excise Tax
Because an alternating proprietor is the producer and taxpayer for its own product, its tax position—including eligibility for reduced rates under the Craft Beverage Modernization Act—may be evaluated based on its own production. In a contract arrangement, the producer removing the product pays the tax.
TTB scrutinizes arrangements that appear designed primarily to obtain tax benefits improperly. The structure should reflect how the parties actually operate.
5. Responsibility When Something Goes Wrong
If there is a labeling problem, a recall, or a Market Compliance inquiry, TTB will look to the responsible producer. In an alternating proprietorship, that is often the tenant. In a contract arrangement, it is often the producer—which is one reason a well-drafted contract production agreement matters.
Can You Call a Contract Arrangement an Alternating Proprietorship?
One of the most common mistakes is calling an arrangement an “alternating proprietorship” when, in practice, the host is making the product for the brand owner.
TTB can look at how the operation actually works. Relevant factors include who owns the raw materials, who directs production, who holds title to the product, and whether the tenant has genuine, independent access to and use of the premises. An agreement that says “alternating proprietorship” will not, on its own, make an arrangement unless the two parties are actually operating as a tenant and host.
It is therefore important to choose the structure before production begins—not to try to recharacterize it later.
How Do You Choose the Right Production Structure?
Choosing the right production structure truly depends on the company’s goals and needs. Here are some questions to consider:
- Do you want to direct production yourself, or have someone else make the product?
- Do you have (or plan to hire) people who will actually conduct production at the facility?
- Are you prepared to take on producer-level recordkeeping, reporting, and excise tax filing?
- Does the host or producer have the space, equipment, and willingness to support your preferred structure?
- How will you sell the finished product, and which federal and state permits will that require?
- Do you plan to build your own facility eventually, and which structure better supports that path?
Don’t Forget State Requirements
Federal approval is only one part of the analysis. State licensing laws may treat alternating proprietors, contract producers, and brand owners differently, and some states have their own rules on who may manufacture, label, or sell a product. In New York, for example, the arrangement may also need to be addressed with the New York State Liquor Authority.
Frequently Asked Questions
Does a Tenant in an Alternating Proprietorship Need Its Own TTB Permit?
Yes. The tenant must qualify with TTB as a producer at the host’s premises—for example, as a bonded winery, a brewer under a Brewer’s Notice, or a distilled spirits plant. See our post on required documentation for alternating proprietorships.
Who Pays Federal Excise Tax in Contract Brewing?
The contract brewer. TTB explains that the contract brewer pays tax on removal and retains title to the beer at least until it is tax paid or removed from the brewery.
Does a Contract Manufacturing Client (Brand Owner) Need a TTB Permit?
Often, yes. A brand owner that resells product made for it under contract generally needs a federal basic permit, commonly as a wholesaler or importer, depending on the commodity.
Can an Alternating Proprietor Pay Reduced Excise Tax Rates?
Possibly. Because the tenant is the producer and taxpayer for its own product, its eligibility for reduced rates is generally based on its own production. TTB closely reviews arrangements that appear designed to split a larger producer’s volume to claim lower rates.
How Lindsey Zahn P.C. Can Help
Lindsey Zahn P.C. helps alcohol beverage brands, hosts, and producers evaluate which production structure fits their business. We can review the proposed operations, identify the applicable TTB and state requirements, prepare permit applications, and draft or review alternating proprietorship agreements and contract production agreements.
Contact Lindsey Zahn P.C. to discuss whether an alternating proprietorship or a contract manufacturing arrangement is the right fit for your brand.
📩 Email us at info@zahnlawpc.com 🔗 Visit our Contact Page to get started.
Disclaimer: This article is provided for informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. Because every situation is unique, you should consult qualified legal counsel regarding your specific circumstances.
This post is for general information purposes only and is not legal advice. Reading it does not create an attorney-client relationship.