In order to pay for the American Civil War, the United States Government placed a tax on distilled spirits. Originally, the government looked to simply put a tax in place similar to the two previous taxes of 1791 and 1814. This would have been a tax on all distilled spirits made, paid as the spirits were produced. The problem was that American whiskey had become an aged spirit since 1814, when a distiller places whiskey, rum or brandy in wood, they immediately lose three gallons of spirits to absorption into the wood. Additional losses happen due to evaporation as the spirits ages, thus, Distillers would have been taxed for whiskey they could not sell. The solution to the problem was the creation of Bonded Warehouses, where whiskey could be stored for a period before the taxes were paid. A government gauger would come into the warehouse after a set amount of time and then measure the amount of whiskey to be taxed, and give the whiskey a tax stamp for the barrel to show that the tax was paid. This system started on August 1, 1862. The period of time set for aging was one year before taxes were paid.
The government set up a registration for these bonded warehouses and assigned a gauger to make the measurements and collect the taxes. The first registered warehouses were in Maryland and Pennsylvania, states that were firmly under the control of the United States government.
In 1879, the bonding period was increased to three years. In the meantime, there was a huge scandal in the industry called “The Whiskey Ring”. Corrupt gaugers, working for the Republican Party, would under-report the amount of whiskey being placed in bond and the distiller, the gauger and the Republican Party would split the profits when the whiskey was sold at the taxed price. The scandal led all the way to Washington and President Grant was implicated, but never convicted in this crime. The scandal resulted in tighter regulations on Bonded Warehouses and distilleries as a whole. Every pipe in a distillery had to be made where the gauger could see it to be sure the whiskey was not being diverted in any way. Two locks were placed on the warehouses and distillery with one lock held by the distillery and the other by the gauger so that the distillery and warehouses could not be opened without both parties being present.
The government produced a “Gauging Manual” that set the limits of the amount of evaporation that was anticipated in the barrel during a period of time. If the barrel had less spirits in it than the manual indicated, the distiller still had to pay the amount the manual listed. If there were more spirits in the barrel than the manual listed, the distiller still paid the taxes on the existing amount.
In 1894, the bonding period was increased to eight years. After eight years, the taxes had to be paid. The result of this bonding period increase was that there were very few whiskeys or brandies made in America that were aged over eight years. Some distillers got around this by shipping the barrels overseas and then paying the import tax, which was only on the spirits being brought into the country. The import tax was less than what they would have paid after eight years aging in the United States and then aging longer with the losses due to evaporation. In fact, most whiskey was sold after aging it about four years. When glass bottles became economical due to the invention of machine blown glass, a bonded area was added to the bottling line for the storage of the cases of bottled spirits until the tax was paid and the brands delivered to the customers.
The Bottled-in-Bond Act of 1897 took advantage of the existing warehouses to create Bottled-in-Bond Spirits. The law stated that the spirits were to be made by the same distillery, during the same season (Spring ran from January 1 to June 30 and Fall ran from July 1 to December 31), aged for at least four years in a government bonded warehouse, and bottled at 100 proof with nothing but pure water added to adjust the proof. With government gaugers already on site, there was no additional cost to produce bonded spirits.
Prohibition threw the Bonding period out the window. All warehouses were still bonded, but the distillers only paid the taxes when they bottled their medicinal spirits. With repeal, the bonding period of eight years returned. This would change in 1958, when some distilleries, mostly Schenley, overproduced in the 1950s. They were worried that the Korean War would force the distillers into the production of high proof alcohol for the war.
They filled their warehouses and when the war did not cause an interruption in production, they were stuck with warehouses full of whiskey and a massive tax bill that would be due at the end of eight years. Schenley backed a bill in Congress, the Forand Act, which would extend and for most purposes, eliminate the bonding period by making it indefinite. Companies that did not overproduce opposed this since the decision to overproduce was simply a bad business decision. A compromise was reached extending the bonding period to twenty years. The Forand Act was passed on September 2, 1958 and went into effect on July 1, 1959. This allowed for spirits older than eight years to be marketed without the tax burden of additional evaporation of whiskey which had already been taxed.
Bonded warehouses are still with us today. They provide for the aging of whiskey without a tax burden on the absorption into the wood and evaporation during aging. The modern distilled spirits industry depends upon these warehouses and every distillery has to have one for the storage of their spirits while aging, or pay the taxes off the still.
Photos Courtesy of Rosemary Miller