New Wine Excise Tax Credit Raises Questions
While many in the industry have celebrated the passage of the Craft Beverage Modernization and Tax Reform components of the Tax Cuts and Jobs Act of 2017, there are a lot of lingering questions about how TTB will interpret these new laws.
Many wineries, for capacity reasons or otherwise, have wine made at a facility other than their own bonded winery. Up through December 31, 2017, such wine was eligible for a small producer tax credit because the law stated that the credit was available for wine “produced at qualified facilities in the United States” provided that other prerequisites were met. 26 U.S.C. Sec. 5041(c)(1). TTB interpreted this statute in a manner that allowed a small winery to apply a tax credit on wine produced for it at another bonded winery, so long as that wine was transferred in bond to the small producer and removed from that bonded facility.
Under the new law, wines “which are produced by the producer” and removed from bond in 2018 and 2019 are eligible for a tax credit. 26 U.S.C. Sec. 5041(c)(8)(A). It is unclear if, in drafting the law in this manner, Congress intended to prohibit a winery from claiming a tax credit on wines produced for it at another winery. To date, TTB has not issued any guidance on this front.
In short, if you are a winery that has some wine made at a winery other than your bonded premise, that wine may not be eligible for a tax credit under the new law, though further action from TTB is needed to say so conclusively. We’ll be sure to keep our readers informed of any developments.
NOTE – Hat tip goes to Liz Holtzclaw of Holtzclaw Compliance, who raised this issue in a comment on the WineBusiness.com website!
New York Imposes $3.5 Million Penalty Against Wine Wholesaler
The New York State Liquor Authority announced a $3.5 million civil penalty against Southern Glazers Wine & Spirits arising from an investigation into the wholesaler’s business practices in New York. The NYSLA concluded that Southern had provided illegal gifts and services to retailers to induce them to carry Southern products in violation of state tied house restrictions, and that the wholesaler had engaged in discriminatory sales practices in violation of the state’s price posting regulations.
According to the NYSLA, Southern representatives engaged in a practice commonly called “credit card swipes” where they would have the retailers charge their cards for a certain dollar amount, but not receive anything in return. The result was a payment to the retailer that would lower the cost of products purchased from Southern and “incentivize additional purchases.”
This is yet another example of increased federal and state enforcement actions against “Pay to Play” and other tied house infractions that we have reported on over the past year.
Click on the link below to read the full NYSLA announcement:
Governor Signs Executive Order Granting Some Relief to Licensees Affected by Fires
Yesterday, the Governor signed an Executive Order that could provide some relief to alcohol beverage licensees whose premises were damaged or destroyed by the recent fires in Napa and Sonoma Counties.
The California ABC Act typically allows alcohol beverage licensees whose premises have been destroyed as a result of fire or other causes to temporarily relocate their business operations for a period up to 6 months to a location within 500 feet of their premises, while their premises is being repaired or rebuilt.
Pursuant to Executive Order B-43-17, the ABC now has the discretion to waive the 500 foot limitation and 180-day time period described above for any businesses that have been forced to relocate as a result of the wildfires. The ABC also have the discretion to waive transfer fees beyond the time limitations set forth in the ABC Act related to such transfers.
Note that because this Executive Order only deals with California licenses, in practice, it will only allow the relocation of premises such as tasting rooms or offices, where a federal permit is not required at the premises. Thus, moving winery production facilities would not be possible under this Executive Order, since such operations would require that the licensee hold a federal winery permit at any facility where production was occurring.
For questions or more information on how to relocate your licensed operations as a result of damage from the fires, please contact Bahaneh Hobel.
TTB and County of Napa Info for Businesses Affected by Wildfires
Our hearts go out to our friends and neighbors who are dealing with damage and destruction caused by the California fires. Although there are certainly more pressing concerns, we wanted to provide some information that may prove useful in the days and weeks ahead.
The U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) announced that it will waive late filing, payment, or deposit penalties for those impacted by the California wildfires on a case-by-case basis. This waiver is available to taxpayers with businesses located in, or whose records are stored in, areas declared as Major Disaster areas, which includes Mendocino, Napa, and Sonoma Counties. Please go to the TTB website for additional information: https://www.ttb.gov/announcements/waiver-excise-tax-penalties-businesses-affected-california-wildfires.shtml
Also, in 2015, TTB issued guidance for wineries impacted by wildfires which has helpful information on (1) reporting losses at bonded premises, (2) filing claims for refund or credit of federal excise tax on wine lost in a wildfire; (3) handling untaxpaid wine damaged during a wildfire; and (4) moving wine in bond to another bonded wine facility for temporary storage. We have been in touch with TTB, and the Bureau may be issuing an updated version of this prior guidance in response to the current wildfires. We will be sure to let you know if so.
Napa County Agricultural Commissioner Office
For those of you in Napa County that are looking to conduct harvest or other agricultural activities in areas that have been evacuated or wherein access is restricted, please be advised that the County has established a protocol for approving requests for access to engage in such activities. That protocol can be found through the Ag Commissioner’s website and Facebook page. The initial protocol was issued on Saturday evening, and revised on Sunday evening, so we encourage you to revisit the Commissioner’s Facebook page for any updates.
Also, the Ag Commissioner’s notice states: “According to CalFire officials, grapes that have been contacted by flame retardant are not safe for humans and should not be harvested.” We asked the Ag Commissioner’s office how growers are supposed to determine that their grapes have been in contact with fire retardants. They responded that the retardants are a very noticeable bright pink / red color, and that it should be evident even after flaking off of the grapes.
Finally, the Napa Valley Vintners, Sonoma Valley Vintners and Growers, and the Wine Institute have created pages with some very helpful information for wineries in wildfire affected areas. Those links are below.
- Napa Valley Vintners 2017 Fires Resources
- Sonoma Valley Vintners and Growers 2017 Fire Resources
- Wine Institute Wildfire Resources
If you have any questions regarding the above topics, please contact John Trinidad at email@example.com.
Tied House Enforcement: TTB Cracks Down on “Pay to Play” Schemes
The federal crackdown on “pay to play” arrangements in the alcohol beverage industry continues. In a press release issued on Friday, the U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau announced that it was conducting a joint operation with the Illinois Liquor Control Commission to look into alleged “pay-to-play” in Chicago, the Quad Cities, and Peoria. Illinois is no stranger to these types of tied house violations: in 2009, 10 Illinois wine distributors paid over $800,000 as a result of a TTB investigation into payments made by distributors to retailers for shelf space.
There has been a recent uptick in tied-house enforcement actions by TTB. Just a few months ago, the TTB launched a coordinated effort with the Florida Division of Alcoholic Beverages in what it described as “the largest trade practice enforcement operation that TTB has initiated to date.” The Illinois and Federal joint federal-state efforts come less than a year after the TTB reached a $750,000 settlement with a Massachusetts distributor that had spent approximately $120,000 in payments to Boston retailers in exchange for favorable product placement and shelf space.
Under federal tied-house law, it is unlawful for an alcohol beverage supplier to “induce,” directly or indirectly, any alcohol beverage retailer (e.g. bottle store, bar or restaurant) to purchase any products from that supplier to the “exclusion,” in whole or in part, of other suppliers’ products. Inducement under federal law can arise from a supplier furnishing or giving retailers anything of value anything of value, subject to various exceptions. “Pay-to-play” schemes generally involve payments by an alcohol beverage supplier to an on- or off-premise retailer for tap or shelf space.
California Tied House Law Upheld by Federal Appeals Court
An en banc panel of the U.S. Court of Appeal for the Ninth Circuit (the federal appeals court with jurisdiction for the nine western states) has rejected a First Amendment challenge to California’s tied house laws. In so doing, the court overturned an earlier decision by a three-judge panel that had applied a more rigorous standard for regulations that restrict commercial speech and, thereby, raised questions about the state’s ability to enforce certain laws that restrict supplier-sponsored advertisements at alcohol beverage retail premises. The case is Retail Digital Network v. Prieto, Case No. 13-56069 (9th Cir. June 14, 2017).
The case involved a company, Retail Digital Network (“RDN”), that installed and operated digital displays in wine and spirit retail stores. RDN sold advertising space on those displays to companies, and RDN shared a portion of its advertising revenue with retail stores. Alcohol beverage manufacturers were wary of buying advertising on the RDN displays in light of California ABC Act Section 25503 which prohibits alcohol beverage manufacturers, importers, and wholesalers from “paying money” or providing “anything of value for the privilege of placing or painting a sign or advertisement…on or in any” alcohol beverage retail premises. RDN filed suit, claiming that Section 25503 impermissibly restricted commercial speech in violation of the First Amendment.
The Ninth Circuit concluded that Section 25503 did not violate the First Amendment, holding in pertinent part that the regulation directly advances the government’s interest in preventing the undue influence of manufacturers and wholesalers over alcohol beverage retailers, and that the regulation was not more extensive than necessary to serve that interest.
If you have any questions regarding tied house laws, please contact John Trinidad at firstname.lastname@example.org.
TTB Issues Guidance for Cider Producers
On May 17, 2017, the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) issued additional guidance for cider producers on federal excise tax, labeling and formula requirements through Industry Circular 2017-2 (“Amendments to the Criteria for the Hard Cider Tax Rate and Information on Other Requirements that Apply to Wine that is Eligible for the Hard Cider Tax Rate”).
This guidance explains in detail the modified criteria for the hard cider tax rate described in our previous blog post, “Federal Rule Changes Make More Products Eligible for (Lower) Hard Cider Tax Rate.” Of particular note, the guidance makes clear that some effervescent ciders may now be eligible for the small producer tax credit even though wines classified as “champagne and sparkling wines” are not eligible.
The criteria set forth under the temporary rule have not changed; rather, TTB is providing this additional information to assist industry members in understanding how existing requirements may apply to their cider or perry products. If you have any questions about this modified definition of “hard cider” and the potential tax benefits for your business, please contact Katy Stambaugh via email or by phone at (707) 252-7122.
New Bill Targets California Alcohol Delivery Services
California lawmakers are considering legislation that would regulate companies offering alcohol delivery services, such as Instacart and Drizly.
Senate Bill 254 stops short of requiring “delivery network services” from obtaining a license from the Department of Alcoholic Beverage Control (“ABC”), but does require that the ABC review and approve of their “system” before they engage in alcohol deliveries. The delivery services company’s “system” would have to meet certain criteria, including ensuring that consumers and delivery personnel were over age 21. If passed, SB 254 would also prevent delivery network services from delivering to locations on college or university campuses.
To date, many of these delivery service companies have adopted models that closely follow the third party provider guidelines issued by the ABC in 2011 and have not had to submit a summary of their system for ABC review. If passed as currently drafted, SB 254 may require these companies to suspend operations until such time as the ABC has reviewed and approved of the company’s system. Also of note, SB 254 does not appear to apply to other third party marketers that do not engage in delivery of alcoholic beverages, but instead forward orders to wineries or retailers who are ultimately responsible for delivery.
For more information on alcohol beverage laws and regulations for third party marketers and delivery services, please contact John Trinidad.
TTB Pumps the Brakes on CBD Infused Alcohol
Despite a slew of news reports on Cannabis-wine/beer/spirits over the past year, recent actions by the Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) have brought into question whether CBD-infused alcoholic beverages can be legally produced in the United States, even in states that have legalized cannabis for adult use.
Last fall, a Colorado brewery, Dad & Dudes Breweria, announced that it had secured TTB formula approval for a CBD-infused beer to be marketed as General Washington’s Secret Stash, and that it planned to distribute the beer nationwide. But in December, after the Drug Enforcement Agency concluded that marijuana extracts that contain cannabinoids are considered a Schedule I drug, TTB asked the Breweria to surrender the formula. The parties have since entered into negotiations as to next steps and the Breweria has agreed to (at least temporarily) stop producing the CBD-infused beer.
California newspapers have recently reported on in-state breweries and wineries that are making CBD-infused products. Given TTB’s treatment of Dad & Dudes Breweria, however, it is clear that the federal government believes that any such product requires a TTB-approved formula. Moreover, given recent statements by the U.S. Attorney General, it seems unlikely that the current administration would permit TTB to grant formulas for the production of a product that involves the infusion of a Schedule I drug. Producers engaged in making CBD-infused alcohol products absent a formula may be putting their federal licensing at risk until such time, at least, as the DEA changes its mind about the classification of marijuana extracts.
We reported on Oregon Liquor Control Commission’s guidance on marijuana-infused alcohol earlier this year. For more information regarding alcohol beverage production and ABC/TTB issues, please contact John Trinidad at email@example.com.
Recent Uptick in Tied House Enforcement Actions by State and Federal Agencies
Clients often ask us about enforcement of the various alcohol beverage regulations and tied house laws that apply to industry members. “Tied-house” laws generally prohibit supplier-side licensees (including producers and wholesalers) from giving, directly or indirectly, any premium, gift, or “thing of value” to retail licensees, unless a specific exception applies.
Over the past year, we have seen an increase in enforcement actions by the California Department of Alcoholic Beverage Control (“ABC”) and the federal Alcohol and Tobacco Tax and Trade Bureau (“TTB”) in connection with state and federal tied house laws. These actions serve as important reminders that the agencies are both monitoring the activities of industry members and taking action to ensure that the rules and regulations are complied with.
Last month, ABC announced a $400,000 settlement with Anheuser-Busch, LLC wholesalers for the wholesaler’s engagement in marketing practices prohibited under California’s tied house laws. Approximately 34 retail licensees were also sanctioned. The settlement and related sanctions arise from an investigation by ABC’s Trade Enforcement Unit that found that the wholesaler paid for, or at least partially financed, refrigeration units, television sets and draught systems on behalf of various Southern California retailers. ABC’s settlement with Anheuser-Busch, LLC is the largest monetary penalty in ABC history.
As we highlighted in a blog post last year, TTB has issued guidance regarding the extent to which “category management” practices by wholesalers are permissible under federal tied house laws. In that ruling, TTB stated unequivocally that any “category management” services provided by wholesalers to retailers beyond the development of a shelf plan or schematic constitute tied house violations if the services result in the exclusion of competitor products. While this ruling was not surprising considering the language of the regulation that allows wholesalers to provide retailers with shelf plans, suppliers and retailers had long been engaging in practices aimed at optimizing the promotion of a particular “category” of products for years that exceeded the scope of this regulation. Read more about TTB’s ruling here.
We have also seen an increase in ABC’s investigation of supplier-side events occurring at retail premises.
Considering this increase in focus and enforcement of trade practice issues by both ABC and TTB, supplier-side licensees should seek legal counsel prior to planning events at retail premises or engaging in any other marketing activities that involve a retail licensee.
Cannabis Wine? Not so fast, says Oregon Liquor Control Commission
With the legalization of marijuana spreading across major wine producing states, including Washington, Oregon and (most recently) California, many believed that it was only a matter of time before licensed cannabis retailers would stock their shelves with marijuana-infused wines.
But earlier this month, the Oregon agency in charge of regulating the sale of alcohol and recreational marijuana in the state, the Oregon Liquor Control (OLCC), issued guidance that prohibits the sale of marijuana-infused alcohol beverage products. Under Oregon Rev. Statute 471.446(2), OLCC may “prohibit any licensee from selling, any brand of alcoholic liquor which in its judgment …contains injurious or adulterated ingredients.” OLCC concluded that any alcohol beverage that contains “marijuana or marijuana items” (including extracts) should be deemed adulterated and, therefore, prohibited the sale of such products. OLCC, however, created an exception for alcoholic beverages produced using industrial hemp (as that term is defined under ORS 571.300) so long as the U.S Alcohol and Tobacco Tax and Trade Bureau has issued a formula for that product and the product’s label complies with TTB requirements.
California may adopt a similar view of the sale of marijuana-infused alcohol beverage products. Under California law adopted pursuant to Prop 64, a licensed marijuana retailer will be the only entity that could sell products infused with marijuana for recreational use (such as marijuana-infused wine). However, in order to do so, that retailer would also have to hold an alcohol beverage retail license issued by the Department of Alcoholic Beverage Control, and laws adopted under Prop 64 specifically prohibit a party from holding both licenses. Thus, unless new rules are enacted that allow either an alcohol beverage retailer or a licensed marijuana retailer to sell marijuana infused alcoholic beverages, there is no legal sales outlet for such products in California.
There is also a serious question as to whether such products could be legally produced by a state licensed and federally bonded winery. Those concerns are entirely separate from, and in addition to, concerns as to whether the current administration will impede state-sponsored efforts to legalize adult-use marijuana.
In short, cannabis wine entrepreneurs should proceed cautiously.
Federal Rule Changes Make More Products Eligible for (Lower) Hard Cider Tax Rate
The start of the New Year brought federal tax relief to certain cider producers. The PATH Act of 2015 made various changes to the Internal Revenue Code, which took effect on January 1, 2017. Included in the changes was a modification of the definition of products eligible for the “hard cider” tax rate. Under the new rule, more hard cider products can qualify for this tax rate and enjoy a much lower rate per gallon than the rates that might otherwise apply.
In order to meet the “hard cider” definition and be eligible for the lower tax rate, the product in question must meet certain criteria related to carbonation, alcohol content and contents. The modified definition of “hard cider” under the PATH Act allows for an increased carbonation level (up to 0.64 grams of carbon dioxide/100 milliliters versus the previous 0.392 grams/100 milliliters), increased alcohol by volume (up to 8.5% versus the prevision limit of 7%) and the use of pear and pear concentrates, rather than just apple and apple concentrates. Similar to the previous definition, the product may not contain any fruit product or flavoring other than apple or pear.
If a hard cider product does not meet the foregoing criteria, it will be taxed as a wine, for which there are various classifications and corresponding tax rates. For example, a hard cider that contains more than 0.64 grams of carbon dioxide/100 milliliters is considered an effervescent wine and will be taxed as either a sparkling wine or artificially carbonated wine (depending on the source of the carbon dioxide). The producer would pay $3.40/wine gallon if the product is classified as “sparkling wine” or $3.30/wine gallon if the product is classified as an “artificially carbonated wine.” If, however, the product qualified as a “hard cider,” the applicable tax rate would be only $0.226/wine gallon.
On January 23, 2017, the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) published a temporary rule to implement these changes to the definition of “hard cider” under the Internal Revenue Code. TTB is also imposing a new labeling requirement which requires the statement “Tax Class 5041(b)(6)” on any container of wine for which the hard cider tax is claimed. TTB is providing a one year grace period for this rule, but products removed after January 1, 2018 must include the statement “Tax Class 5041(b)(6)” in conjunction with the designation of the product as “hard cider.” This statement may appear anywhere on the label.
TTB is currently soliciting comments on the temporary rule within Docket No. TTB– 2016–0014 on the regulations.gov website. If you have any questions about this modified definition of “hard cider” and the potential tax benefits for your business, please contact Katy Stambaugh via email or (707) 261-700.
Taking Advantage of the New Law Allowing Service of Beer and Wine by Salons & Barbershops
As of January 1, 2017, California beauty salons and barber shops in good standing with the State Board of Barbering and Cosmetology are permitted to serve their customers, where local zoning permits, no more than 12 ounces of beer or 6 ounces of wine by the glass for no charge.
Many of our winery, brewery and retail clients have asked whether they are permitted to sell wines and beer directly to salons and barber shops under this new rule. Because salons and barber shops do not hold alcohol beverage licenses, they are treated like consumers under the California ABC Act and are only permitted to purchase wine and beer directly from persons who can legally sell to consumers, such as licensed retailers or licensees with retail privileges.
Licensed wineries and breweries in California luckily do have retail privileges, and thus they have the right to sell their products directly to consumers in California. As such, they can sell wine and beer directly to salons and barbershops in the state, just as they would to a consumer. Similarly, retail licensees with off-sale privileges may sell wine and beer to qualified salons or barbershops. Note, however, that licensees holding a type 17/20 license combination may only sell wine (and not beer) to consumers, including salons and barbershops.
For all such sales to salons and barbershops, licensees must ensure that they charge and collect sales tax and report such sales and taxes to the California State Board of Equalization.
For any questions, please contact Bahaneh Hobel.
Supporting Non-Profits through Cause-Related Marketing
The start of 2017 has seen an outpouring of support from the business community for non-profit groups, including marketing campaigns that promise a certain percentage of sales or profits will be donated to particular charities. Such practices are often referred to as “cause-related marketing.” Here’s an example: ABC Winery wants to support a national nonprofit organization, and decides to launch a marketing campaign saying that 50% of profits will be donated to that cause.
While ABC Winery should be applauded for their efforts, they will also need to comply with state laws and regulations aimed at protecting consumers, promote transparency, and ensuring that charities are indeed receiving the funds that are being promised in the cause-related marketing campaign. These laws vary state by state, but typically include reporting, contracting, disclosure, and/or registration requirements for the commercial entity promising to donate a portion of sales (a “commercial co-venturer”).
In California, a commercial co-venturer must (a) have a written contract with a charity prior to making any cause marketing representation, (b) transfer any funds received as a result of the representations every 90 days, and (c) provide a written accounting to the charitable organization sufficient to determine that any cause-related representations made by the co-venturer have been “adhered to accurately and completely” and said accounting must also be sufficient for the charity to prepare its periodic charitable solicitations reports filed with the California Attorney General. Alternatively, if the co-venturer decides not to follow these steps, it must register annually with the California Attorney General’s office, pay an annual fee, and submit annual reports.
In addition, cause-related marketing claims are considered “sales solicitations for charitable purposes” under California law, and are subject to the disclosure requirements under Cal. Bus & Prof. Code Sec. 17510 et. seq. This law requires disclosure of the following information:
- Name and address of the combined campaign, each organization, or fund on behalf of which all or any part of the money collected will be utilized for charitable purposes;
- If there is no organization or fund, the manner in which the money collected will be utilized for charitable purposes;
- The non-tax-exempt status of the organization or fund, if the organization or fund for which the money or funds are being solicited does not have a charitable tax exemption under both federal and state law; and
- The percentage of the total gift or purchase price which may be deducted as a charitable contribution under both federal and state law.
If sales and marketing efforts are made outside of California, then those state laws and regulations regarding cause-based marketing may also apply.
TTB ISSUES GUIDANCE ON ELIMINATION OF BOND REQUIREMENTS FOR SMALL PRODUCERS
As we discussed in our earlier blog post, as of January 1, 2017, TTB-licensed breweries, distilled spirits plants and wineries that owed less than $50,000 in excise taxes in 2016, and expect to owe less than $50,000 in 2017, will no longer be required to hold a bond. TTB started off the new year by issuing some additional guidance regarding the elimination of the bonding requirement for such producers. You can find the industry circular at this link.
Please note: if you are an existing, licensed, and bonded producer and you feel you are eligible for the bond exemption, TTB will not begin processing your request until it has received your final tax payments for 2016 excise taxes.
Don’t Forget – Starting January 1, Eligible Licensees Can Amend TTB Permits To Eliminate Bonds
As of January 1, 2017, if you are currently licensed with TTB as a brewery, distilled spirits plant or winery and owed less than $50,000 in excise taxes in 2016, and expect to owe less than $50,000 in 2017, you will no longer be required to hold a bond. This is great news for all the small producers out there!
This change, however, does not take place automatically and requires an amendment to your existing TTB permits. As such, after January 1, 2017, if you owed less than $50,000 in excise taxes in 2016 and expect to owe less than $50,000 in excise taxes, you will be able to amend your TTB permits to request exemption from the bond requirements. This amendment can be done online for any licensees that obtained their permits through Permits Online or on paper for any licensees that originally obtained their permits with paper applications.
Note that the bond exemption is applied a bit differently with respect to new permit applicants. Any new applications to operate breweries/brewpubs, distilled spirits plants, or wineries submitted to TTB before January 1, 2017 are still required to include a bond, even if the applicant expects to be eligible for the bond exemption. TTB will review the application and return any bond-related materials if they grant the bond exemption.
Applications submitted after January 1, 2017 for eligible small producers (i.e., those who do not expect to owe less than $50,000 in excise taxes in 2017) will not require a bond.
For further information or for assistance amending your TTB permits, please contact Bahaneh Hobel.
Protecting Wine Origins is Pro-Consumer and Pro-Industry
TTB’s attempt to put an end to an inherently misleading labeling practice and protect the AVA wine origin labeling rules has garnered significant reaction from certain commentators and some in the industry. In order to shed some light on the proposed amendments to federal labeling rules and why Napa Valley Vintners, the Wine Institute, over 50 members of Congress and others have supported TTB’s Notice of Proposed Rulemaking 160, we have prepared the following summary.
I. Current regulations allow certain wineries to employ misleading labeling practices.
Producers selling wine in interstate commerce must obtain a Certificate of Label Approval (“COLA”) and comply with federal regulations aimed at protecting consumers from misleading labeling practices. This includes federal standards for using vintage date, grape variety designations, and wine origin designations such as county, state, and country appellations and American Viticultural Areas (“AVAs”).
Wineries wishing to avoid enforcement of these federal truth-in-labeling standards can do so simply by filing for a COLA exemption and noting on the wine bottle that the wine is “For Sale Only” in the state in which the producing winery is located. This leads to the potential for misleading wine labeling practices. For example, federal regulations require that an AVA wine sold in interstate commerce with a 2015 vintage date must be made from at least 95% grapes grown in that vintage. But those regulations do not apply, and therefore would not prevent, a wine with a certificate of label approval exemption from using a lower percentage of 2015 harvested grapes and still being labeled as “2015.” Wines with certificates of label approval can be labeled with a varietal name, such as Pinot Noir, if it is made from at least 75% of grapes of that variety, but get an exemption and slap on a “For Sale Only” sticker, and then there is no obligation under federal regulations that the wine meet that 75% requirement.
Certain wineries have taken advantage of this COLA exemption loophole to designate their wine with an AVA while not complying with federal standards governing wine origin labeling, specifically, 27 C.F.R. Sec. 4.25 which requires that wine labeled with an AVA (a) be derived 85 percent or more from grapes grown within the boundaries of that AVA, and (b) be fully finished within the state in which the AVA is located. This “fully finished” federal requirement ensures that California wine production and labeling laws apply to wines that are identified with a California appellation or AVA.
These federal appellation labeling rules assure consumers that when they buy an appellation-designated wine, they are buying a product wherein both the grape source and the place of production are closely tied to the named place. Absent such rules, retail shelves could be stocked with wine labeled as “Burgundy” that was made in Sweden, “Barolo” that was actually produced in Slovenia, or “Sonoma Coast” made in Alaska.
II. TTB’s Notice 160 Proposes to Close the Loophole By Requiring All Wines to Follow the Same Vintage, Variety, and Appellation Labeling Standards.
In September 2015, 51 members of Congress wrote to TTB with a fairly simple request: “ensure that all wines bearing AVA terms—regardless of where they are sold—meet the clear and understandable American Viticultural Area rules.”
On June 22, 2016, the U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) responded by issuing Notice of Proposed Rulemaking 160, in which the agency proposed eliminating the COLA-exemption loophole by requiring COLA-exempt wines to comply with federal standards for vintage, varietal, and wine origin designations and to keep records to support such labeling claims. TTB subsequently granted a 90-day extension on September 8, 2016 and, in so doing, requested “comments regarding whether any geographic reference to the source of the grapes used in the wine could be included on a wine label in a way that would not be misleading with regard to the source of the wine” (emphasis added).
III. NVV and Wine Institute Support Notice 160 to Put an End to Misleading Labeling Practices.
Napa Valley Vintners (NVV), a non-profit trade association with over 500 members and our client, issued a comment letter supporting Notice 160, pointing out that the COLA exemption loophole was being used to mislead consumers and allow COLA-exempt wines to “unfairly benefit from the goodwill and brand recognition of appellation names without having to comply with the appellation regulations.”
NVV also pointed out that out-of-state wineries passing off their products as California wines by using the names of California appellations on their wine labels were able to avoid compliance with state laws regarding wine production and labeling. For example, wines produced outside of California but labeled with the name of a California AVA have no obligation to follow the state’s conjunctive labeling, wine composition and production, or misleading brand name statutes.
Similarly, wines produced outside of Oregon but using the name of an Oregon AVA, would have no requirement to follow the much stricter Oregon varietal composition (requiring at least 90% for most varieties) and appellation of origin (requiring 100% from Oregon and 95% for all other appellations). As David Adelsheim, founder of Oregon’s Adelsheim Vineyard, pointed out in his support of Notice 160, “the reputation of Oregon’s AVAs, hard won through years of experimentation and work” would suffer as a result of allowing COLA exempt wines to avoid enforcement of state wine-related laws.
After significant consultation, Napa Valley Vintners (NVV) and Wine Institute, a public policy advocacy association representing over a thousand California wineries and affiliated businesses responsible for 85 percent of the nation’s wine production and more than 90 percent of U.S. wine exports, issued a joint letter in further support of Notice 160, noting that the proposed amendments “put an end to the inherently misleading practice of using a Certificate of Label Approval … exemption to avoid compliance with federal labeling laws.” Sonoma County Vintners also issued a letter in full support of the NVV and Wine Institute position.
IV. NVV and Wine Institute Put Forward a Proposal that Allows For Optional Grape Source Information for COLA Exempt Wines.
In their joint letter, NVV and Wine Institute directly respond to TTB’s request for information as to whether grape source information could be included on COLA-exempt wines in a manner that was not misleading as to wine origin designations. The joint proposal directly addresses concerns that Notice 160 would prevent producers from providing consumers with truthful information regarding where the grapes used to make the wine came from, and at the same time protects AVA names as designators of wine origin. It also addresses concerns raised by wineries that had previously used COLA exemptions suggesting that they could continue to label their wine with truthful vintage and variety designations..
The NVV / Wine Institute proposal permits wineries to provide the following “Grape Source Information” on their wine: (a) the name of the county(-ies) and state(s), or just the state(s), where all of the grapes are grown; (b) the percentage of the wine derived from grapes grown in each county or state shown on the label; and (c) the city and state, or just the state, where the wine was fully finished. In order to avoid any confusion with wine origin designations, no name of an AVA (other than a county or a state) could be used as part of the Grape Source Information, and the wine itself would have to be designated using the “American” appellation. By using the American Appellation, (under current Federal regulations), the wine could also be designated with the vintage and grape varietal.
In short, NVV and Wine Institute are in favor of truthful labeling practices that protect the integrity of the AVA system. The goal of the joint proposal is simple: when consumers come across a wine labeled with an AVA name, they should be assured that the wine actually meets the legal standards for AVA labeling.
V. Support for Notice 160 comes from Industry Members That Believe Protecting Wine Origin Labeling is both Pro-Consumer, Pro-Grower, and Pro-Vintner.
Notice 160 is supported by a broad swath of industry members that believe the integrity of wine origin labeling regulations is essential to the U.S. wine industry. Regional associations (including the New York Wine Industry Association and Washington Wine Institute) and industry members from well-established as well as up-and-coming wine growing regions have written to TTB to note their support for the proposed amendments.
For example, Andy Beckstoffer, a noted grape grower with vineyards in Napa Valley as well as the Red Hills Lake County AVA wrote TTB to voice approval of Notice 160, stating:
It is vitally important to grape growers that the integrity of the AVA system be maintained, and I applaud TTB’s efforts in ensuring that all wine labeled with the name of an AVA meet the well-established federal wine labeling requirements. Grape growers, whether they farm vineyards in well established AVAs or in newer AVAs, benefit greatly from regulatory efforts to protect those place names.
This sentiment was shared by the High Plains Winegrowers Association, a group of winegrowers and vintners from the Texas High Plains AVA. They feared that the current COLA exemption loophole “is detrimental to Texas wineries that support locally grown wine grapes,” and further concluded that “[f]ailing to uniformly treat the labeling of all wine—whether distributed in-state or in interstate commerce—results in inequitable treatment within the same industry.” Douglas Lewis, a Texas Winemaker, also supports Notice 160 because it “helps consumers get more accurate information [about wine origin] by closing the loop hole.” And Andrew Chalk, a Dallas based wine writer, noted that by eliminating the COLA exemption loophole, TTB would be “remov[ing] the biggest impediment to the Texas wine industry’s growth.”
Notice 160 has caught the attention of industry members since it was first issued back in June, over 170 days ago, as more than 100 comments have been submitted to TTB on this matter. TTB will consider those comments as it comes to a decision on whether: (a) the COLA exemption loophole should continue to exist; and, (b) additional and truthful grape source information can be included on such wines in a way that does not undermine the AVA system for wine origin designation.
Wine industry members and consumers who believe that wine is a product of place and that place names are worthy of protection should support Notice 160. Although certain individuals may benefit financially from the COLA-exemption loophole, that is no reason for the federal government to allow an inherently misleading labeling practice to continue unabated. Moreover, elimination of the COLA-exemption loophole does not necessarily prohibit wineries from providing additional truthful, non-misleading information about grape sourcing. Any regulation that allows for such information, however, must also be crafted in a manner that maintains the integrity of the AVA regulatory system. The joint NVV / Wine Institute proposal does just that.
Furthermore, if the U.S. allows U.S. wineries to skirt the rules for proper use of American appellations and American Viticultural Areas, then the U.S. will be in no position to insist that other countries require that their wineries also follow the rules in respect of American appellations and American Viticultural Areas. Undoubtedly wine production is less costly in countries outside the U.S., and if wine grapes from Napa Valley can be shipped to Texas and the wine produced in Texas is allowed to use the “Napa Valley” AVA on the label, there is no basis to object to a Chinese or Canadian winery producing a “Napa Valley” wine from Napa Valley grapes shipped to those countries. Not only is that bad for the U.S. industry, but it diminishes the value of the AVA and harms all consumers.
NOTE – DP&F serves as outside counsel to several regional wine trade associations including Napa Valley Vintners with interests in protecting the integrity of regional appellations.
CA ABC Issues Warning About Potential Scam
The California Department of Alcoholic Beverage Control has issued a warning that licensees are being targeted by a possible scam. Apparently, licensees have been receiving calls from someone claiming that, as a result of an ABC violation, the licensee must pay a fine. In short, the ABC does not operate in this manner, and if you receive such a call, check in with your local ABC office before submitting any payment or credit card information. Also, the ABC is asking licensees to help uncover these fraudsters. If you are contacted by these scammers, asking for their name and contact information, and pass that information on to the ABC.
If you need to find the contact number for your closest ABC office, it is available at this link.
TTB Proposes to Shut Down COLA Exemption Appellation Labeling Loophole
The U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) has proposed amendments to federal wine labeling laws that protect the integrity of the appellation of origin labeling system in its Notice of Proposed Rulemaking No. 160 (NPRM 160). If adopted, the proposed amendments would close off a loophole that allows certain wines to be labeled with the name of an appellation of origin, including the name of an American Viticultural Area (AVA), even though those wines do not meet the strict legal requirements for appellation labeling.
A winery wishing to sell AVA-labeled wines in interstate commerce must meet strict criteria. Specifically, not less than 85 percent of the wine must be derived from grapes grown in the AVA and the wine needs to be fully finished in the state (or in the case of a multi-state AVA, in one of the states) in which the AVA is located. 27 C.F.R. §4.25(e)(3)(iv). The second prong of this test ensures that wines that carry an AVA name also comply with the laws of the state in which the AVA is located regarding wine production, composition and labeling – laws that state legislatures adopted in order to protect and promote their local wine growing regions.
However, under the current system, wineries that choose to sell wine solely within their home state can apply for a Certificate of Label Approval (COLA) exemption for that wine, and benefits from the use of an appellation name to market their wine without having to comply with the federal and state requirements mentioned above. TTB’s proposed rule would eliminate this loophole and thereby create a uniform system for the use of appellations of origin and AVAs on wine labels.
By creating one set of rules that all wineries must follow in labeling wines with appellation names, the proposed amendment not only prevents unfair competition among wineries, but also protects against consumer confusion. Let’s say an Indiana consumer comes across a wine labeled with the Napa Valley AVA, produced and by an Indiana winery and sold in Indiana pursuant to a COLA exemption. Because the wine is marketed and sold under the Napa Valley AVA, the consumer is led to believe that the wine meets all the criteria necessary for the use of the Napa Valley AVA. But that’s not the case. That wine, even if made from 85% Napa Valley grapes, was not fully finished in California, which is a requirement for use of the Napa Valley AVA, and it was not subject to California’s production, composition, and labeling laws. TTB’s proposed amendments would ensure that when consumers are evaluating wines carrying a certain AVA name, they are assured that those wines have all met the same standard.
Furthermore, the proposed rule protects the significant investment states have made in promoting and regulating the use of their regional wine appellations which provide significant financial contributions to their state economies. If the TTB were to continue to allow wineries in other states to use appellations in disregard of the TTB rules and flout the rules of the states in which the appellations are located, the U.S. would have very little recourse in objecting to the foreign use of those same appellations if the grapes were shipped to other countries and the wine produced overseas. Surely the U.S. wine industry does not wish to see a wine labeled with the name of a U.S. AVA or appellation produced in China or Australia and shipped throughout the world in direct competition with such same domestically produced wines. Such a result would severely undermine the integrity and “brand value” of U.S. AVAs and appellations of origin around the world and impair the ability of U.S. wineries to compete in the global wine market.
The adoption of regulations aimed at closing off a loophole will invariably have an impact on those that have relied on the existence of that loophole as part of their business plan. But that alone is not sufficient to reject reforms needed to create a uniform standard and protect against potential consumer confusion. The AVA system has been a fundamental component of the growth of the U.S. wine industry, and TTB’s proposed amendments are necessary to protect the integrity of that system.
NOTE – DP&F serves as outside counsel to several regional wine trade associations with interests in protecting the integrity of regional appellations
Napa’s New Winery Compliance Rules Preceding Strict Enforcement
Earlier this month, the Napa County Board of Supervisors completed their review of the Agricultural Protection Advisory Committee’s (APAC) recommendations to improve agricultural protection, primarily by imposing new restrictions and limitations on wineries (See approved list of Board actions on APAC recommendations). One of the recommendations approved by the Board was to implement a phased, self-certification compliance program in order to assure wineries are complying with the terms of their use permits and provide greater consistency in how the County enforces code compliance. The Board still needs to formally approve the specifics, but staff anticipates the new three-phase program would go into effect in early 2018.
Phase One: This phase will require all wineries to report their annual production and grape sourcing data to the County. To properly ascertain this data the County will evaluate a winery’s production reports to the Alcohol and Tobacco Tax and Trade Bureau and California Department of Food and Agriculture. The County has taken the position that production related information is confidential and not subject to Public Records Act requests; however, it is likely that certain members of the public will continue their cries for greater code compliance and transparency and seek access to any available data.
In preparation for Phase One, wineries should review the County’s definition of “Production” and its own operations to determine whether they are in compliance with their use permit production limits (See Napa County worksheet regarding interpretation of winery production) and, if applicable, the 75% grape sourcing rule (See Napa County Code § 18.104.250 [“at least 75% of the grapes used to make the winery’s wine . . . shall be grown in Napa County”]). It is important to note that these production calculations are not based on maximum allowed production, but rather on the actual amount of wine made.
Phase Two: The second phase would encourage wineries to meet with County officials for a voluntary review of their use permit. According to the County, the purported purpose of the review is to: “(1) streamline existing use permit conditions of approval; (2) determine existing vested rights; (3) clarify the scope of permitted activities; and (4) consider alternative measures to accommodate marketing activities.” The exact meanings of the stated purposes are difficult to understand right now and the County has not defined any of the terms. However, officials have stated that the reviews would not involve any change to a winery’s legally established vested rights.
How one defines “vested right” could potentially result in disagreement between winery owners and County staff. For example, staff could take the position that if a winery has not fully utilized its permitted production the winery would have vested rights only to that amount actually produced. Determinations of vested rights is highly fact-specific so it is difficult to make any general conclusions, but this could be a significant issue for some wineries that currently feel they are not at risk because they have not reached their visitation or production limits. We also anticipate other issues will arise related to interpreting a winery’s historic use permits as the County’s forms and standards have changed over time.
During Phases One and Two, the County will continue to its current practice of randomly auditing 20 wineries per year. Each year the County audits wineries and reports the results of those audits to the Board of Supervisors at the end of each year. Again, it is unclear how the County the audit may evolve based on the new compliance process.
Phase Three: County officials plan to transition to a practice of strict code enforcement whereby the County will require violators to immediately comply with all applicable requirements. In the past, the County has allowed wineries not operating within the conditions of their use permit to continue such activities if that winery seeks a use permit modification to come into compliance. But now some decision makers have stated that those days “of forgiveness” are over.
While the proposed self-certification program may not go into effect until 2018, Napa County’s wineries should understand the terms of their use permit and any applicable vested rights.