Starting Your Own Brewery? Here's Your Legal Primer. Find out what legal hoops you'll need to jump through before starting a craft brewing business.

In Start Your Own Microbrewery, Distillery, or Cidery, the staff of Entrepreneur Media Inc. and writer Corie Brown with Zester Daily Contributors explain how you can get started in the craft alcoholic beverage industry, whether you want to start your own microbrewery, distillery or cidery. In this edited excerpt, the authors provide a general overview of the federal regulations you must comply with as a craft brewer.

Extraordinary federal controls on alcoholic bever­ages are as American as Kentucky bourbon. Fortunately for craft brewers, today's regulatory battles are leveling a playing field tilted in favor of large multinational producers and distribution companies with outsized control of national markets. The real financial significance of progress on taxation and regulation reform makes membership in the Brewers Association (BA), American Craft Spirits Association, or the U.S. Association of Cider Makers one of the best business investments an independent producer can make.

The craft beer pioneers and the various groups that have lobbied Congress on their behalf over the past four decades—most notably the Brewers Association—have been remarkably effective in overhauling beer regulations. Without the early and significant federal tax breaks for craft breweries, there might not have been a craft beer revolution. Associations representing craft distillers and cider makers are gearing up for similar congressional battles; tax relief for small spirits and hard cider producers is just as critical to the development of these sectors.

Federal alcoholic beverage laws

The U.S. Alcohol and Tobacco Tax and Trade Bureau (TTB) sets the rules for the production, distribution, labeling, advertising, trade and pricing practices, credit, container characteristics, and alcoholic content of each alcoholic beverage. But, in the main, you need to focus on:

• Operating permits, label approvals, formula approvals
• Distribution
• Taxes

Before you apply for your licenses and permits, know what you want to produce (including recipes), how you want to produce it (equipment and facilities), and how you will market and label it (claims you will make to the public). These must be in final form. You need to be ready to start production with construction completed and equipment purchased and installed. That's a big capital investment to have hanging in the balance while you wait for a stranger to give you a thumbs-up. Do your homework, and don't leave anything to chance. "The problem with the TTB is they are underfunded and understaffed," says Ralph Erenzo, founder of Tuthilltown Spirits in New York's Hudson Valley. "There were 10 craft distilleries in 2003; now there are 700 new distilleries with individual labels for each product to be approved. The delays are holding back the economic power of the sector."

Permits and approvals

Breweries and distilleries report wait-times of six to eight months for operating permits, even though ttb.gov suggests things move along at a faster clip. These permits involve not just a completed application. There are background checks of you and your key employees, field investigations, equipment and premises examinations, and other paperwork requirements. Label and formula approvals are separate and seem to move along a bit faster. And make sure you meet all requirements for bond coverage by covering all aspects of your plans with your insurance agent.

Distribution

To sell products, the federally mandated three-tier distribution system requires licensed alcoholic beverage producers be separate from licensed alcoholic beverage distributors, which are separate from retailers. This was intended to end the practice of producer-owned retailers, which were considered anti-competitive.

Today, it seems an archaic and inefficient system that imposes undue burdens on small producers while giving excessive power to distributors. These state-based businesses have merged into national distribution giants with enormous power. Southern Wine & Spirits, the largest of these distribution giants, dominates alcoholic beverage distribution throughout much of the country. While producers set their own prices, distributors are the gatekeepers to the market and have enormous influence on how various products are sold and at what price.

Taxes

There are separate federal tax rates for each of the three craft alcoholic beverage categories. Whatever happens, do not fail to pay your federal taxes on time and in full. The "revenue man" DNA is still in the federal alcoholic beverage bureaucracy. They pay careful attention to tax receipts. Pay the Taxman, or he will surely shut you down.

Craft brewers making less than two million barrels of beer a year pay federal excise taxes of $7 per barrel (31 gallons) on the first 60,000 barrels they brew. They pay $18 per barrel on every barrel thereafter, which is the tax rate for larger breweries. So far the only craft brewer to outgrow this federal tax break is Boston Beer. The BA is lobbying for an even deeper tax break for very small breweries, and a slightly lower rate for midsize craft breweries.

Craft distillers receive no federal tax break and pay the same $13.50 per proof gallon (100 proof or 50 percent alcohol), or $4 per each 750 ml bottle paid by Diageo and Pernod-Ricard. New York Senator Charles Schumer and others in Congress are pushing legislation to lower the tax rate for craft distillers in a scheme similar to what craft brewers enjoy. Their argument casts craft distillers as job creators, bringing tourism to underpopulated areas, the same argument that worked so well for craft breweries.

By federal law, hard cider must be made primarily of apple juice and, in most instances, is treated like wine, taxed at a rate of $0.21 per 750 ml bottle or $1.07/gallon if less than 14 percent alcohol. But hard cider is naturally fizzy, which moves many artisan ciders into the "naturally sparkling" category, which is taxed at a rate three-times higher: $0.67 per 750 ml bottle or $3.40/gal. In some cases, depending on a technical analysis of the hard cider, a lower rate may be available for small cider houses. Confusion over which tax rate applies can be costly.