I recently wrote a post about one of the potential compliance side effects related to this years high yield harvest. Afterwards, while I was talking to a client I was reminded of another potential compliance issue. He asked about the topic of bond coverage and what happens if wineries go outside their limits.
First, let me put all of that into laymans terms and how it ties into this years high volume harvest. All wineries have specific bond coverage (TTB requirement) which is an insurance policy that covers the total tax liability for wines they have on their site at any given time. If their total volume goes over that coverage amount in the event of an accident or an audit they would be outside their coverage amounts on their TTB reports. In both cases something they can be fined for or worse, held responsible for tax liability on wine that accidentally was lost.
The next question you may be asking is how do I find out what my bond coverage is? Hopefully this is something you can easily track down in your hard copy files as it should live with all of your TTB permit materials. Your TTB bond coverage has two parts, your operations and deferral coverage amounts. For purposes of this blog post I'll just focus on operations, which is what corresponds to any wines on your site that you have not paid federal tax on. Your bond form is easy to spot once you locate it, since it states, "Wine Bond" right at the top. You'll find your coverage amount immediately under your winery name & address on the left side.
OK, so you've located your current bond details and know what your operations coverage dollar amount is, how do you then figure out whether that's enough for the volume of wine you have (or will have) on your site after all your 2012 wines finish fermenting?
The best way to explain that is with an example.
Say your current bond operations coverage is for $10,000. This amount of coverage is enough for a total volume of a little over 6,300 gallons of over 14% alcohol wine. (at the full tax rate of $1.57/gallon)
So at the beginning of harvest this year you currently had 2,000 gallons of pre-2012 over 14% alcohol wines on your site. Then after receiving in this years bounty of fruit (well above a normal year for you) post fermentation you wound up with an additional 6,000 gallons of over 14% 2012 wines, bringing your total volume on site to 8,000 gallons. 8,000 X $1.57 = $12,560. You would then be 2,560 gallons over your bond coverage.
So how to rectify this situation at this point? Update your bond coverage. This can be done with what the TTB calls a strengthening bond to update your original. Most wineries still go through an insurance office for their bond filings, so if that is the case you just need to contact your agent and let them know what amount you want your coverage to be adjusted to and have them update your policy.
For any of you who'd like to thoroughly double check their math on calculating their bond coverage here's a link to the TTB's form: http://www.ttb.gov/forms/f512036worksheet.pdf
This is actually a task I recommend wineries do on an annual basis.