Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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495.0000 SALE

Annotation 495.0449


495.0449 Sale of Bulk Wine on Bonded Premises. A producer and wholesaler of wine owns and operates a bonded winery where it ages and stores bulk wine pursuant to a federal permit. In accordance with federal law, as long as the wine resides on bonded premises, no consumption of the wine is permitted, nor can any bulk wine be sold out of bond for the purposes of consumption. After bottling, the wine is then ready for resale and thereafter sold and removed from the bonded premises through the regular distribution channels.

At the beginning of the aging process shortly after the harvest, and while the wine is still in storage tanks, the producer/wholesaler transfers property interest in a quantity of bulk wines to outside buyers, generally individuals, but sometimes to groups of individuals. In some cases, the interest transferred is an undivided gallonage portion of the contents of a specific storage tank with the other portion of the gallonage remaining with the producer/wholesaler. Transfers are of 1000 gallons or more. In accordance with the agreement transferring the interest, the producer/wholesaler remains in possession and is employed as custodian to properly manage the aging and processing of the bulk wine. After the transfer, the buyers are to reimburse the producer/wholesaler for the substantial cost incurred in aging and processing the wine in which they have an interest. Loss from shrinkage is borne by the producer/wholesaler during the first year of tank storage and by the transferees thereafter. The buyers of the bulk wine have the right to resell the wine at any time but this is subject to the producer/wholesaler's option to match the purchase price and thereby become the purchaser. In this situation, the producer/wholesaler is always the purchaser.

The above transfers constitute taxable retail sales. These conclusions are based on the following:

These transfers are not merely nontaxable transfers of something less than a transfer of title for sales tax purposes, i.e., in the nature of a transfer of a security interest. A substantial beneficial interest is transferred. While the transferees do not receive possession, they pay the going market price specifically to purchase the raw bulk wine gallonage. They have clear title, are assured that there are no liens of any kind, bear most of the risk of loss, and have authority to sell the bulk wine. The written contracts state that they are the beneficial owners of the wine upon making payment in full. The above contains the elements of a sale as set forth under section 6006(a).

The purchasers do not acquire the wine for the purpose of resale in the regular course of a business sales activity. The bulk wine is to be accounted for as an inventory item and the purchasers do not have the federal permits required for the alcoholic beverage sales activity. Moreover, while the purchases by the transferees helped the producer/wholesaler carry out the manufacturing process, the purchasers were analogous to an investment in such speculative items as coins, bullion, and works of art. (Regulation 1599(c).) 5/23/82.