(1) Contract manufacturing occurs when a manufacturer utilizes its licensed premises and equipment to produce and/or package alcoholic beverages for another manufacturer to sell, called the client.

(2) The contract manufacturer and the client must be licensed by the department to manufacture the alcoholic beverages to be produced and/or packaged.

(3) The contract manufacturer and client must seek the department's approval prior to engaging in a contract manufacturing arrangement. To apply, the contract manufacturer and client shall submit a complete application to the department.

(4) The department shall notify the contract manufacturer and client in writing of its approval or denial of the contract manufacturing arrangement within 15 business days of receiving all requested information.

(5) The sale and distribution of alcoholic beverages manufactured by the contract manufacturer may only be conducted as follows:

(a) a contract manufacturer is prohibited from selling, providing, or distributing the product, with or without charge, in the contract manufacturer's sample room, on its licensed premises, or elsewhere;

(b) the contract manufacturer may only sell the product to the client; and

(c) once the client holds title to the product, the client must adhere to all applicable distribution requirements in the Montana Alcoholic Beverage Code, the same as though the client produced the product.

(6) The contract manufacturer and client shall maintain control over their separate business records at all times. The department may make an examination of the records of the contract manufacturer or client.

(7) In addition to all other requirements imposed by this rule, where the client is a brewery:

(a) for purposes of the tax imposed by 16-1-406, MCA:

(i) wholesalers shall pay the tax due on beer purchased from the client; and

(iii) the client shall pay the tax due on beer sold directly to consumers and retailers;

(b) for purposes of the tax imposed by 16-1-406, MCA, the small brewery 60,000 barrel production cap set forth in 16-3-213 and 16-3-214, MCA, all beer produced by the contract manufacturer for the client shall be considered as part of the client's annual nationwide production; and

(c) a client with an annual nationwide production between 100 and 60,000 barrels may provide, with or without charge, beer in its sample room only if the beer was brewed and fermented at its premises. This restriction includes a prohibition against a client providing beer in its sample room that was brewed or fermented at a contract manufacturer's premises. A client that brewed and fermented beer at its premises and then had the beer packaged at a contract manufacturer's premises may provide that beer, with or without charge, in the client's sample room.

(8) In addition to all other requirements imposed by this rule, where the client is a winery:

(a) for purposes of the tax imposed by 16-1-411, MCA:

(i) wholesalers shall pay the tax due on wine purchased from the client; and

(ii) the client shall pay the tax due on wine sold directly to consumers and retailers; and

(b) the client may provide, with or without charge, wine for consumption on its licensed premises only if the wine was produced by the client. This restriction includes a prohibition against the client providing wine that was produced by a contract manufacturer. A client that produced the wine at its premises and then had the wine packaged at a contract manufacturer's premises may provide that wine, with or without charge, for consumption on its licensed premises.

(9) In addition to all other requirements imposed by this rule, where the client is a distillery:

(a) for purposes of the taxes imposed by 16-1-401 and 16-1-404, MCA, agency liquor stores shall pay the tax due on liquor purchased from the department;

(b) for purposes of the taxes imposed by 16-1-401 and 16-1-404, MCA, and the microdistillery 200,000 proof gallon production cap set forth in 16-4-310, MCA, all liquor produced by a contract manufacturer for the client shall be considered as part of the client's annual nationwide production; and

(c) a client with an annual production of 200,000 proof gallons or less may provide, with or without charge, liquor in its sample room only if the liquor was produced at its premises. This restriction includes a prohibition against a client providing liquor in its sample room that was produced at a contract manufacturer's premises, subject to the production exception in ARM 42.13.802.

(10) Except as provided in (11), a contract manufacturing arrangement may only be conducted in accordance with the provisions of this rule. Failure to abide by the provisions of this rule may subject the contract manufacturer and client to administrative action, including revocation of their manufacturing licenses.

(11) The department may approve a contract manufacturing arrangement that does not fit within the bounds of this rule only if the proposed arrangement is not prohibited by federal and state alcoholic beverage regulations. This may include a contract manufacturing arrangement where the client is not located in Montana.