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Thinking About Setting Up Your Own DSP?
Read This First!

by Clark Smith

 

In the two decades following prohibition, it was commonplace for U.S. Bonded Wineries to operate adjacent to their bonded winery premise a distilled spirits plant, or DSP, for the manufacture of saleable brandy, and for wine spirits addition in the production of the then-popular port and sherry dessert wines. When, in the 1960s and 70s, table wine sales eclipsed dessert wines, DSP's became less common.

Ironically, the current desire for less alcohol has many wineries thinking about setting up their own DSP. Technology and market demand now exist with three previously unheard of types of wine production, all of which must be conducted on a DSP. The three categories are:

a) non-alcoholic wine, i.e.: wine in which the alcohol has been reduced below 0.5%;

b) low-alcohol wine, generally in the 3 to 6% range;

c) normal alcohol wine production from high-maturity fruit.

This third category of wine is quite new and requires some explanation.

Many winemakers find that they can obtain richer flavors and softer tannins by allowing grapes to hang to higher maturities, say 24-26o Brix. When vineyard sites are suitable so that the pruney flavors associated with raisining can be avoided, flavor quality is often maximized, except that the excessive alcohol may lend bitterness and astringency in the mouth and its hotness may mask fruit in the aroma.

Unlike European wines, which seem to develop mature flavors at lower Brix, the softened phenolic characteristics of mature California wines are often obscured by the sensory enhancement of elevated alcohol. As it turns out, the bitterness of 14.5% Chardonnay and the harshness of late harvest Zinfandel can disappear when the excess alcohol is removed, and wines of intense flavor and round, supple mouthfeel emerge.

The time-honored (though in California, illegal) practice of diluting the juice with water, while it results in yield increases of 5 to 15%, is now being shunned by many winemakers because of its deleterious effect on flavor. The difference between a 10% water addition and a 1% alcohol removal can be quite startling. Alcohol removal, which concentrates wine components rather than diluting them, results in substantially richer flavor. New as this idea is, it has gained wide acceptance among premium wineries. Alcohol content was adjusted on perhaps five million gallons of California wine in the last year.

Apart from alcohol removal, the next decade may see the implementation of other types of flavor enhancement processes which are currently only in the developmental stages. Although they have not yet received government approval, many of these powerful wine applications, if allowed, will probably require a DSP.

These applications include the removal of reverse-osmosis permeate to obtain wines of concentrated flavor, as well as flavor recovery from pomace, lees, and fermentation volatiles. One general rule seems to apply: if alcohol is removed even as a by-product at greater than 0.5% by volume, even if the alcohol is subsequently discarded, evaporated, burned, denatured, or otherwise destroyed, then that by-product is a distillate, and the operation can only legally be performed on a DSP.

Like any government agency, the Bureau of Alcohol, Tobacco and Firearms receives its share of flack from the industry it seeks to regulate. Nevertheless, ATF is to be congratulated on its responsiveness in clarifying the many issues raised by these new technologies and educating the wine industry concerning required compliance. These new applications and types of equipment have generated a lot of questions, and the Bureau is working diligently to educate applicants concerning this unfamiliar compliance setting.

Types of Licenses and Permits

For these types of operations, it is generally desirable to temporarily convert portions of an existing BW while alcohol reduction is proceeding and to have the flexibility to convert back at will. This type of set-up is called an alternating DSP, and allows any tank or floor space to be changed from one qualification to the other.

In addition to this Federal qualification, you must file for the appropriate state licenses. In California, a Type 02 Winegrower's Permit already qualifies you to distill for use in your own production (for example in making fortified wines). You are also required to register your still (Type 06), and if you intend to sell distillate, you will need an additional permit, probably a Type 03 Brandy Manufacturer, which allows sales in bulk, wholesale bottled goods, or retail bottled goods sales through your tasting room. You can avoid the Type 03 if you use all your alcohol for fortification, and this can include Distilling Material you are already selling.

Some wineries want to use and/or sell denatured spirits for use in sterilizing bottling lines. Special denatured Formulas 3-A (5% methanol) and 3-C (5% isopropanol) have been approved for this use. To produce these, you will need to obtain a Denaturer's permit at no charge. To use Special Denatured alcohol requires a User's permit and Special Occupational Tax Stamp ($250 per year) and inventory records must be maintained. Tax savings at $13.50 per proof gallon (the alcohol contained in one gallon of 50% alcohol v/v) can be substantial. Yearly consumption rates for sterilant are usually too low, however, to merit the expense of a tax stamp in most wineries.

If you store spirits on your DSP, you will need a Warehouseman's Operating Permit. This additional bond coverage and qualification paperwork can be avoided by removing spirits to your BW as you produce them. Since the tax value is much higher than for wine, ATF will be sensitive to the bond and security arrangements you provide for storage of spirits.

Obtaining and operating an alternating DSP

The process of filing for a DSP is similar to filing for a Bonded Winery, and takes about the same amount of time. To speed the process and prevent oversights, many wineries find it beneficial investing in a compliance specialist as an outside consultant. The following list covers the forms that need to be filled out.

Check List of Federal DSP forms

  • Application for Operating Permit (Form 5110.25)

  • Registration of Distilled Spirits Plant (Form 5110.41)

  • Statement of Production Procedure

  • Plat Diagram delineating the premises, in duplicate

  • Application for Basic Permit (Form 5100.24)

  • Environmental Information (Form 1740.1)

  • Water Quality Considerations (Form 1740.2)

  • Distilled Spirits Bond (Form 5110.56)

As with a bonded winery, two types of bond coverage are required, both of which can be handled on Form 5110.56. One is for production within a 15-day period based on the maximum PG production capacity of the still. The other is for the maximum amount of spirits that will ever be stored on the premises.

In addition to filing these forms, you must amend the descriptive section of your existing Application to Establish and Operate Wine Premises (Form 5120.25) to exclude the new DSP areas. Each year, you will be required to obtain a Special Occupational Tax Stamp for $500/year ($1,000 if your gross receipts exceed $500,000), by filing a Special Tax Registration and Return (Form 5630.5). Ongoing operations require filing a Monthly Report of Production Operations (5110.40) and if you warehouse spirits, a Monthly Report of Storage Operations (5110.11).

The following forms are also required for a DSP, but were probably already filed with your bonded winery application:

  • Personnel Questionnaires (Form 5000.9) on principals and key personnel

  • Financial Questionnaire (Form 5030.6)

  • Signing Authority for Corporate Official (Form 5100.1) OR a Power of Attorney (Form 5000.8)

  • Application for Employer ID Number (SS-4)

In filling out your forms, be sure you get good advice here from someone familiar with the regulations and skilled in the art of adapting them to your unique situation and your processing goals. In particular, you will need a carefully crafted Statement of Production Procedure. Here we are trying to apply a maze of rusty regulations to a group of completely new processes for which they weren't really designed. Your local ATF regional office and field office are invaluable resources for clarifying questions as they arise.

Here are a few principles to keep in mind

    1. Distillate (the production of any still, including a reverse osmosis filter's permeate) cannot be used for Wine Spirits Addition unless it was distilled at no less than 140o proof. In process applications such as recombining R.O. permeate or Spinning Cone distillate in-line (closed loop) are not restricted by this law because no distillate is ever produced.

    2. Standard wine cannot receive more than 1% water addition.

    3. Estate Bottled designations are lost if the wine leaves the BW premises even temporarily prior to bottling. (There are some inventive ways of configuring process statements to allow alcohol adjustment of Estate wines.)

 

What to do with the distillate

Ah, there's the rub. That is, apart from rubbing alcohol, there really is no developed market for lucrative sale of alcohol removed from wine. Distillate from alcohol reduction is normally very clean and low in flavor. As such, it can be an excellent choice as a neutral fortifying agent for port and sherry production, so here's your big chance to get in on the ground floor of the promising dessert wine market. (Think that one through.) And if you're thinking of varietal-labelled Chardonnay brandy, under current regulations, such products may be produced for export only. So most likely, you will end up selling your alcohol in bulk. The market for W.S.A. (distilled from wine at 140o Proof or more, and therefore legal for use in Wine Spirits Addition) is currently about $2.50 per PG, certainly no windfall. If you are selling wine distilling material already, the easiest method is to combine the spirit with it for redistillation.

The late Lynn Williams, who taught distillation at UC Davis, used to observe that winemakers didn't realize how lucky they were to be able to sell their waste water along with the alcohol. Even he didn't foresee a day when the alcohol would be the troublesome waste stream. It might have amused him to know that his craft is being reborn as a spectrum of new winemaking techniques which deliver quality options that yesterday simply didn't exist.

 

{Clark Smith's article "Thinking About Setting Up Your Own DSP? Read This First!" was originally published in the November/December 1994 issue of Vineyard & Winery Management magazine}

 

 

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