Supreme Court Decision is a Victory for Alcohol Beverage Retailers

Alcohol beverage retailers won a significant victory before the U.S. Supreme Court this morning.  The Court held in Tennessee Wine & Spirits Retailers Association v. Thomas that Tennessee’s two-year durational-residency requirement applicable to retail liquor store license applicants violates the Commerce Clause and is not saved by the Twenty-First Amendment.  In doing so, the Court stated that the 2005 decision in Granholm vs. Heald, which prohibited discrimination against out of state alcohol beverage producers, applied with equal force to discrimination against retailers, settling a long dispute in the courts on the applicability of Granholm to retailers.  The end result is that states must now defend any discriminatory or protectionist alcohol beverage laws without the luxury of relying on the Twenty-First Amendment, giving retailers wishing to ship across state lines a leg-up in future legal challenges.  Today’s decision, however, does not mean that retailers can begin shipping across state boundaries legally.  Additional court challenges or legislative changes are needed to fully open the door to retailer direct-to-consumer shipping.

The question of alcohol beverage retailer direct-to-consumer shipping was not directly at issue in the case.  Instead, the case centered on the constitutionality of Tennessee’s  residency requirements on state licensed alcohol beverage retailers.  Petitioner, a Tennessee retail trade association, argued that the residency requirement must be upheld because the 21^st Amendment grants states broad authority to regulate alcohol within their borders.  The Court rejected that argument and concluded that:

“[Section 2 of the 21^st Amendment] allows each State leeway to enact the measures that its citizens believe are appropriate to address the public health and safety effects of alcohol use and to serve other legitimate interests, but it does not license the States to adopt protectionist measures with no demonstrable connection to those interests.”

Leading up to today’s decision, many hoped the Court would issue a ruling that would not only address the residency requirement question, but also adopt a reading of the 21^st Amendment that would open the door to retailer direct-to-consumer shipping.  Given the Court’s reading and application of Granholm, they may have gotten their wish.  States that allow in-state retailers to ship to consumers but prohibit out-of-state retailers from doing so will find such laws difficult to defend in the face of today’s decision.  To avoid legal challenges, states may choose to adopt statutes that allow all retailers, regardless of where they are located, the right to ship directly to consumers, or prohibit retailers from doing so altogether.

Attention will now shift to other cases directly challenging laws that prohibit out-of-state retailers from shipping to in-state consumers, such as the appeal in Lebamoff Enterprises v. Snyder  before the Sixth Circuit Court of Appeals.  The federal district court in that case ruled that, under the precedent set in Granholm, a Michigan state law that permits in-state wine retailers to ship direct to consumers must also grant the same privilege to out-of-state retailers.  Case No. 17-10191, (E.D. Mich. Sept. 28, 2018).  The appeals court stayed the appeal pending the outcome of the Tennessee Wine & Spirits Retailers case.  Retailers now will have significant support for their argument that such state laws are nothing more than protectionist measures that discriminate against out-of-state retailers.  States, on the other hand, will need to defend those laws as necessary in order to protect the health and welfare of their citizens.  However, given that today’s ruling strips states of any defense under the Twenty-First Amendment for any discriminatory or protectionist laws, retailers have gained a clear upper hand in the legal challenges to come.

The Court’s decision is available through the following link:  https://www.supremecourt.gov/opinions/18pdf/18-96_5i36.pdf .

If you have any questions, please contact Bahaneh Hobel or John Trinidad.

Winery Websites and ADA Compliance

The recent news of lawsuits filed against New York wineries has caused industry members to ask if they face any litigation risk if their websites are not accessible to people with disabilities under the Americans with Disabilities Act (“ADA”).  The answer is “maybe.”  There is considerable ambiguity in the law as to which companies are required to make their websites ADA-compliant and what actually constitutes ADA compliance.

This blog post provides a brief overview of the New York litigation and the current status of federal law governing websites and the ADA.  Wineries should check in with their information technology vendors to determine what, if any, accessibility features are currently part of their websites, not only to avoid potential claims, but also to make sure their businesses are open to all consumers.

What’s the New York case all about?

The lead plaintiff in these actions is legally blind and uses screen-reading software to access website content.  That software only functions correctly if the website incorporates certain screen-reading compatible features, such as alternatives text for images and videos.  Plaintiff claims that the ADA requires the winery to make certain information on their websites accessible to visually impaired persons, including:  e-commerce features, wine club membership instructions, ability to book or make reservations, hours of operation, and location of the winery.  Plaintiff ultimately claims that Defendant’s failure to remedy such accessibility barriers is a discriminatory practice against blind and visually impaired people, in violation of the ADA and certain New York laws.  Plaintiffs are seeking injunctive relief on their ADA claim and an order requiring the wineries to take “all the steps necessary” to make their websites compliant with the ADA.

This type of case is not unique to the wine industry.  Over the past two years, there have been a slew of cases filed against businesses for allegedly violating the ADA by not making their websites accessible to people with disabilities.

What is the ADA?

The ADA is a federal civil rights law that prohibits discrimination based on disability.  Under Title III of the ADA, any place of “public accommodation,” such as businesses generally open to the public, must provide individuals with disabilities full and equal enjoyment of goods, services, facilities, and accommodations.  Places of public accommodation include shops and facilities serving food or drink.

States have also adopted their own laws that require businesses to provide access to persons with disabilities.  For example, New York State’s Civil Rights Law and California’s Unruh Civil Rights Act set forth those states’ accessibility requirements.  Local governments may have their own regulations, too.  Plaintiffs in the New York winery lawsuits have claimed that the wineries are also in violation of the New York City Human Rights Law because they operate a physical location in the city.  Note – this blog post focuses solely on the ADA requirements, and compliance with state and local laws regarding accessibility are beyond the scope of this article.

Do winery websites need to be ADA compliant? 

Here’s where things get confusing.  Courts have been all over the board on which businesses must make their websites ADA compatible.

 In general, websites that service places of public accommodation are required to make their websites accessible to visually impaired persons.  In the wine industry context, this means that, wineries that have tasting rooms, or that allow for tours, tastings, and on-site purchases, likely need to make their website accessible to the visually impaired under the ADA.

Wineries that have no physical location of their own for customers to visit, taste, or purchase wine are less at risk from an ADA claim.  The Ninth Circuit Court of Appeals has held that a website that is not tied to a place of public accommodation or that is attached to a place that does not qualify as a public accommodation is not subject to the ADA. (eg. Weyer v. Twentieth Century Fox Film Corp., 198 F.3d 1104 (9^th Cir. 2000)). That being said, there are cases in which courts have concluded that a stand-alone website service without a physical location can itself be considered a place of public accommodation, and subject to ADA requirements.  Moreover, in 2014, the DOJ entered into several settlements agreements with online-only vendors, requiring each time, compliance with the WCAG (see below).  In other words, not having a physical location may not be enough.

How do I make my website ADA-compliant? 

Ready for even more confusion?  Currently, there are no federal guidelines for how to make a website ADA compliant.  The Department of Justice (“DOJ”) had contemplated adopting a new rule to outline how private companies’ websites can comply with the ADA.  But in 2017, the department decided to halt its proposed rulemaking activity on this front.

Although the DOJ failed to issue guidance on website accessibility requirements, the World Wide Web Consortium, an international standards organization, has published coding standards for accessibility, the Web Content Accessibility Guidelines, often referred to as WCAG 2.0 AA.

While there is nothing in federal law that states that implementation of WCAG 2.0 AA automatically means a website is ADA compliant, the complaints filed against the New York wineries all seek relief that would require the wineries to comply with WCAG 2.0 AA.  Moreover, the DOJ has previously argued in ADA enforcement actions that companies can comply by making their websites and mobile apps conform to WCAG 2.0 AA standards.

 Action Items for Wineries

Given the fluid state of the law surrounding the application of the ADA to websites, there is no clear answer as to which businesses must make their websites ADA-compatible, or even what is required for a website to be considered ADA-compatible under federal law.

Wineries should check in with their IT vendors and professionals to determine if their websites, apps, and mobile sites have implemented accessibility features per the WCAG 2.0 AA, and if not, assess if the cost of doing so would cause hardship to the company.  Implementing such features may not only help stave off legal actions, but would also signal that your winery is accessible to all consumers.

 For more information about these issues, please contact John Trinidad or Louise Mercier.

UPDATE (11/13/2018):  The Wine Institute recently circulated additional information regarding the ADA and winery websites.

A Bridge too Far for Granholm? Florida Importer Challenges California Three-Tier System

A Florida-based wine  importer is hoping to shake up the California three-tier system.  If successful, any importer or wholesaler in the U.S. may be permitted to sell directly to California retailers.

Earlier this year, Orion Wine Imports, LLC filed a lawsuit against the director of the California Department of Alcoholic Beverage Control arguing that licensed wine importers and wholesalers in California and in other states must be given the same right to sell and deliver wine directly to California-licensed retailers.  Orion Wine Imports, LLC v. Applesmith, Case No. 2:18-cv-01721-KJM-DB (E.D. Cal.).  Orion argues that, under the U.S. Supreme Court’s decision in Granholm v. Heald, state laws that discriminate against out-of-state importers and wholesalers are unconstitutional.

This argument may sound familiar.  In Granholm, the Court invalidated state direct-to-consumer shipping laws that discriminated against out-of-state producers.  Since then, a number of lawsuits have been filed arguing that the Granholm holding should also apply to laws that discriminate against out-of-state retailers.  As we reported a few weeks ago, the Supreme Court will be hearing a case that may answer that question.

Defendant in the Orion case is likely to argue that applying Granholm to the wholesale tier is a bridge too far.  Plaintiff’s are looking to invalidate long-standing provisions of the state’s three-tier licensing structure. The challenged statutes, adopted by the California legislature in 1953 as part of the state’s post-Prohibition codification of the Alcoholic Beverage Control Act, are core to the establishment of the state’s three-tier system.

Orion is also facing opposition from its fellow wholesalers.  Two industry trade associations, California Beer and Beverage Distributors and the Wine and Spirits Wholesalers of California, have filed an amicus brief in support of defendant’s position.

The court has scheduled a December 21, 2018 hearing in Sacramento on defendant’s motion to dismiss.

For more information regarding the three-tier system, please contact John Trinidad.

Federal Court Rules in Favor of Wine Retailer DTC Shipments

Wine retailers received a double dose of good news last week.

As we reported earlier, on Thursday, the U.S. Supreme Court agreed to hear an appeal by the Tennessee Wine and Spirits Retailer Association in a case challenging Tennessee’s state residency requirement for persons or entities that hold a state alcohol beverage retail license.  Tennessee Wine & Spirits Retailers Ass’n v. Byrd, No. 18-96 (6^th Cir., 883 F. 3d 608; cert. granted Sept. 27, 2018).  In determining the constitutionality of the state’s residency requirement, the Court may also weigh in on a key question that could have a big impact on direct-to-consumer shipping by wine retailers:  does the Supreme Court’s 2005 decision in Granholm v. Heald, which prohibited state from discriminate against out of state wine producers, also prohibit state laws that discriminate against out-of-state retailers.

On Friday, a federal district court in Michigan answered that very question in favor of retailers, and concluded that if the state permits in-state wine retailers to ship direct to consumers, it must also grant the same privilege to out-of-state retailers.  Lebamoff Enterprises v. Snyder, Case No. 17-10191, (E.D. Mich. Sept. 28, 2018).  The Michigan law in question allowed in-state wine retailers that held a “specially designated merchant license” to ship to Michigan consumers, but prohibited out-of-state retailers from so doing.  The court held that the law was not protected by the the 21^st Amendment and unconstitutional in light of the Supreme Court’s holding in Granholm.  In granting plaintiff retailer’s motion for summary judgment, the court concluded:

“Michigan is … operating an unjustifiable protectionist regime in its consumer wine market, a privilege unsanctioned by the Twenty-first Amendment and forbidden by the dormant Commerce Clause.”

As a remedy, the court opted not to nullify the offending law, but instead extended its shipping privileges to out-of-state retailers.   Unless the state legislature repeals the law, then out-of-state wine retailers will be allowed to either apply for the state’s specially designated merchant license or a comparable out-of-state license.

U.S. Supreme Court Decision May Open the Door (Or Slam it Shut!) On Direct to Consumer Shipping by Retailers

The Supreme Court of the United States has agreed to hear the appeal in a case that could drastically change the landscape for direct to consumer wine shipments by retailers in the United States.

On Thursday September 27, 2018, the Supreme Court granted the appeal in Tennessee Wine & Spirits Retailers Association v. Byrd. Specifically, the Court will consider whether Tennessee’s alcoholic beverage regulations, requiring in-state retail license applicants to satisfy minimum in-state residency requirements, discriminate against out-of-state residents and thus violate the Dormant Commerce Clause of the Constitution. (The Dormant Commerce Clause is a legal doctrine that prohibits states from discriminating against interstate commerce in favor of in-state commerce).

While not apparent on its face, the Court’s decision in this case has the potential to open the door to direct to consumer shipping by retailers, or slam it firmly shut.  This is because, in answering the question above, the Court will likely have to address whether its 2005 decision in Granholm v. Heald  (summarized below), which prohibited states from discriminating against out-of-state wineries, also prohibits discrimination against out-of-state retailers.

The Supreme Court held in Granholm that if a state allows in-state wineries to ship their wines directly to consumers within the state, the state must also permit out-of-state wineries to ship wines to consumers in the state on even handed terms.  While the decision did not require states to allow direct-to-consumer shipping by wineries, in practice, post-Granholm, most states decided to permit direct to consumer shipping by both in-state and out-of-state wineries.

Since 2005, the question of whether Granholm’s equal treatment holding applies to only alcohol beverage producers, or whether it should be applied more broadly to retailers and wholesalers, has been hotly contested with little consensus.  This has resulted in a type of stalemate for direct-to-consumer shipping by retailers, with only 13 states allowing such shipments.

If the Supreme Court does finally take up this question as part of its analysis (which, of course, it does not have to!), it paves the way for big changes for retailer direct-to-consumer shipping.  If the Court holds that Granholm is limited to alcohol producers, that would effectively kill the prospects for direct to consumer shipping by out-of-state retailers.  If, on the other hand, the Court holds that Granholm also prohibits laws which discriminate against out-of-state retailers (which, from a legal precedent standpoint, would make sense), the doors to direct-to-consumer shipping by retailers would swing wide open. Of course, as history has shown us with wineries, major work would still have to be done to enact legislation to give out-of-state retailers such rights, but the option would at least finally be there to do so.

We will be watching with interest to see where this goes, but the shipping landscape for wine could soon be changing!

For questions about the above case or about direct to consumer shipping, please contact Bahaneh Hobel at DP&F.

Deadline Approaching for New Liquor License Applications in California

The California Department of Alcoholic Beverage Control recently announced authorization for the issuance of new on-sale general and off-sale general licenses in various counties throughout California, as well as authorization for the inter-county transfer of on-sale general and off-sale general licenses.  Such general licenses allow the service of beer, wine and spirits for on and/or off premises consumption by consumers (as applicable).  Counties in which new liquor licenses are available include Napa, Sonoma, Santa Barbara and Monterey.  A full list of counties is listed below.

For counties where such licenses are being made available, applications are still being accepted and may be submitted through next Friday September 21, 2018 at the applicable district office of the ABC.   Only one priority application will be accepted from any one applicant per county for each type of license.  A fee of $15,384 is to be paid when filing an application for a new original on or off sale general license and a fee of $6,000 is to be paid when filing a priority application for the intercounty transfer of an on or off sale general license.  Only a certified check, cashier’s check or money order will be accepted for payment of the application fee, which should be made payable to Alcoholic Beverage Control.

In most counties, where ABC receives more applications than there are licenses available, a public drawing or “lottery” will be held to determine the lucky license winners! After the lottery, applicants have 90 days to complete a formal application for their specific premises.

Note that, pursuant to the regulations allowing these new licenses to be issued, conditions and restrictions may apply to some (but not all) of the available licenses. For example, on-sale general licenses in a certain county may be limited to use only at bona fide restaurants (not bars) that accommodate at least a set minimum number of diners. Such conditions should be verified before application is made to ensure that the proposed operations comply with applicable requirements.

If you have any questions about applying for a new on or off sale general license or applying for an intercounty transfers, please contact Bahaneh Hobel.

TTB Extends Alternate Procedure For Excise Taxes Credits through 2019

Today TTB announced in Industry Circular 2018-1A that it is extending until December 31, 2019 the ”Alternate Procedure” under which wine producers can tax pay wine stored at bonded tax wine cellars (“BWC”) without having to physically transfer their wine back from the BWC in bond.  This update to TTB’s prior procedure is a welcome extension to the previous deadline of June 30, 2018 that had many in the industry scrambling.

For background—effective January 1, 2018—the federal Tax Cuts and Jobs Act (Public Law 115-97) (“The Act”) changed various provisions of the Internal Revenue Code related to alcohol beverages.  Included in these changes were new tax credits[i] for wine (“New Credits”) that will be in place through 2019.  The New Credits are available for all domestically produced wines removed from the producer’s own bonded premises in 2018 or 2019 regardless of when the wine was produced.  During this time, the small producer tax credit is suspended, as are the provisions that allow for the transfer of such credits.

While the New Credits are welcome news for the industry, a number of issues arose in implementing them that led to a good deal of confusion and stress. One of the main problems was that the Act did not provide a mechanism (similar to what had previously existed) for a producing winery to transfer the New Credits to other facilities to be used on its behalf.  Under the Act, a winery can only receive the benefit of the New Credits for wines it produces if it tax pays and removes those wines from its own bonded premises.   Any wines that are removed from a BWC or other bonded premises—for example, where a winery may be storing its wines—are not eligible for the New Credits. A winery therefore would have to engage in an absurd exercise to be able to claim the New Credits on wines in storage at a BWC- the winery would have to physically transfer the wines back to its premises before tax paying the wines.  Clearly, this was not ideal.

In light of the above, TTB issued Industry Circular 2018-1 setting forth an Alternate Procedure that allows wine producers to do a paper “transfer” of wines in bond at a BWC “back” to the producing winery’s own premises, tax pay the wine, and then apply the New Credits without physically returning the wine to the winery’s own bonded premises.  However, the Alternate Procedure was only available until June 30, 2018, leaving wine producers and warehouses scrambling to meet the deadline.

By extending the Alternate Procedure until December 31, 2019 (when the New Credits are set to expire), TTB has provided the industry with some flexibility and time to deal with implementation and application of the New Credits. This extension will allow producers to take advantage of the New Credits, as intended, on wines they produced but may have stored elsewhere, without having to engage in a shell game of sorts, physically transferring product back and forth between bonds or rushing to meet a looming deadline.  TTB also expanded the reach of the Industry Circular to apply to wines stored at other bonded wineries.

While this is good news for the industry, there are still issues with the Act that remain outstanding.  For example, wine producers still cannot transfer the New Credits to BWCs as they could with the small producer credits.  Wineries that want to take advantage of the New Credits must tax determine and tax pay the wines themselves from their own premises.

What does this mean in practice?  It means that wineries that typically don’t pay excise taxes directly to TTB (because they are paid by the BWC) are suddenly responsible for doing so.  And while wineries have always had to report movements in bond on TTB Form 5120.17, they will now have to report when the wines are tax paid.  Further, the Alternate Procedure does not change the fact that the New Credits are only available on wines produced by the winery itself, and cannot be used for wines custom crushed for the winery by another winery.

Finally, the Alternate Procedure is not available for any wines that have previously been tax paid by a BWC on behalf of a winery in 2018.  Unfortunately, any such wines will be subject to the full standard tax rates and cannot retroactively take advantage of the New Credits or the Alternate Procedure.

For any questions on the excise tax changes discussed above, please contact Bahaneh Hobel.

[i] For new tax credits, see 26 U.S.C. 5041(c)(8).

Grapegrowing and FSMA Compliance

As of 2018, winegrape growers are now required to adhere to the burdensome requirements of the Food Safety Modernization Act (FSMA) Produce Safety Rule when selling winegrapes to wineries for processing.  However, most winegrape growers will qualify for an exemption from the FSMA rule (see FDA flow chart for rule and exemption applicability).

For winegrape growers with more than $25,000 of annual produce sales, the applicable exemption is based on the intended commercial processing- winemaking- that will adequately reduce pathogens.  Growers who produce less than $25,000 in annual produce sales are not covered by the Produce Safety Rule.  Growers may only benefit from the exemption if they adhere to the following notice, assurance and recordkeeping requirements upon delivery of grapes and after winery processing (21 CFR 112.2(b)(2)-(6)).

Beginning in 2018, growers of winegrapes must:

2. Disclose in documents accompanying the winegrapes that the grapes are “not processed to adequately reduce the presence of microorganisms of public health significance;” and
3. Annually obtain written assurance from the grape processor that the processor has established and is following procedures that adequately reduce the presence of microorganisms of public health significance.

All records required to maintain compliance with the exemption, as identified above, must also include:

3. The name and location of the vineyard from which the grapes were harvested;
4. An adequate description of the covered produce, such as the specific variety of the grapes; and
5. The location of the growing area within the vineyard (i.e. the specific block where the grapes were grown).

Growers utilizing the commercial processing exemption will be required to retain the notice and assurance records above for two years for all loads delivered.

Although certain produce is broadly excluded from the applicability of the FSMA, including, but not limited to, asparagus, various bean varieties, sweet corn, eggplant, ginger, potatoes and cranberries, winegrapes and hops are not exempted by statute even though they are almost certainly consumed without processing less frequently than the ginger we put in our green juice.  California Association of Winegrape Growers (CAWG) has requested the FDA add winegrapes to the exempt “produce rarely consumed raw” list, in which case the notices and recordkeeping described above would no longer apply.

China To Add 15% Tariff on U.S. Wine

As discussed in our previous post, Steel and Aluminum Tariffs Could Impact U.S. Alcohol Beverage Producers, retaliatory tariffs presented a risk to goods unrelated to those subject to U.S. tariffs.

Now, China has indicated it will retaliate against U.S. tariffs on $60 billion of Chinese goods by imposing an additional 15% import tariff on U.S. wine imported to China, among other measures.  China will also target other iconic U.S. agricultural products, including pork, fruit and nuts. China is among the largest U.S. wine export markets, importing $79 million of California wine alone last year according to the Wine Institute.

At least for now though, the much larger U.S. wine export markets of the European Union and Canada — accounting for nearly $1 billion in California wine exports combined — have been excluded from new U.S. tariffs.  Those larger markets have not enacted any retaliatory tariffs at this point.

Steel and Aluminum Tariffs Could Impact U.S. Alcohol Beverage Producers

As has been widely reported, the President of the United States has proposed enacting steep tariffs on U.S. imports of steel and aluminum.  These tariffs could both directly impact U.S. alcohol beverage products that use those materials such as beer, and result in retaliatory tariffs targeting U.S. goods nominally unrelated to steel and aluminum, including U.S. wine and spirits.

The direct impacts on the costs of steel and aluminum containers, particularly in canned beer and the growing canned wine segment, could obviously impact the competitiveness of U.S. beer and wine. Major beer manufactures have expressed strong objection to the tariffs and projected job losses throughout the industry.  As the Wall St. Journal reported, some industry experts have speculated that this cost increase may push consumers away from beer and towards other alcohol beverages typically packaged in glass.

But Washington Post reporting suggests U.S. wine manufacturers, especially those that export their products, should temper any expectations of a gain from such a shift.  Retaliatory tariffs are a distinct possibility, including from some of the U.S.’s historically strongest trade partners.  The E.U. has already threatened retaliatory tariffs against Kentucky bourbon.  Canada, the largest exporter of steel and aluminum to the U.S. and the second largest export market for U.S. wine behind the European Union, may follow suit.  One Canadian trade lawyer, Lawrence Herman, has suggested a tariff on U.S. wine exported to Canada as a first response: “‘Canadian consumers are not going to be prejudiced’ because there are many alternative sources of wine in the world.”

A number of affected alcohol beverage industry groups have already spoken out on their plans to contact the Commerce Department to voice their concerns. It remains to be seen whether the tariffs will actually be implemented, and if so, whether they will apply to all countries, or exclude favored trading partners.

New TTB Guidance on Excise Tax Credit / Transfer of Wine To Bonded Wine Cellar

TTB issued new guidance earlier today regarding the Craft Beverage Modernization and Tax Reform components of the Tax Cuts and Jobs Act, specifically in regard to the application of the new excise tax credit to wines that are transferred from a winery to a bonded wine cellar.  We have excerpted some of the relevant language below, and encourage clients that have wine stored in bond at a premise other than their bonded winery to review TTB’s guidance carefully.

If you have any questions about the new excise tax credit, please contact John Trinidad or Bahaneh Hobel.

FROM THE TTB WEBSITE – https://www.ttb.gov/alcohol/craft-beverage-modernization-and-tax-reform.shtml

W7: I am a Bonded Wine Cellar (BWC) and I do not produce my own wine. How does the new law affect my ability to take a tax credit on wine that I hold for other wineries that produced the wine?

The new law that went into effect January 1, 2018, set forth new tax credits for wine (referred to as the “Special Rule”) and suspended, through the end of calendar year 2019, the previous tax credit for wine.  The statutory provisions that allowed for a transfer of tax credits are also suspended, as they apply specifically only to the tax credit that has now been suspended by the new law.  There is no provision in the new law that provides for a transfer of the new tax credits that apply to wine removed in 2018 and 2019.  (See the addition of the “Special Rule” at 26 U.S.C. 5041(c)(8), stating that the tax credit provisions of 26 U.S.C 5041(c)(1) and (c)(2) do not apply after December 31, 2017 and before January 1, 2020, and the provisions of section 5041(c)(6) providing for the transfer of the credit by any person eligible for the credit under section 5041(c)(1).)

As a result, for calendar years 2018 and 2019, any wine that is removed from a wine premises that did not produce the wine is not eligible for the new tax credits.  See FAQ G6 for additional guidance on credits and reduced rates for products transferred in bond.  See FAQ W8 for what activities are considered “production” for purposes of the new tax credit.

While the Special Rule is in effect (that is, calendar years 2018 and 2019), a winery can only apply the new tax credits to wine produced by the winery.  During this time, if wine is being held at premises that did not produce the wine, the producing wine premises can bring the wine back to its premises and remove the wine taxpaid from its premises in order to apply the new tax credits to the wine. Otherwise, a BWC or other wine premises that removes wine that it did not produce must tax pay the wine at the applicable tax rate, without application of credits that would otherwise be available to the producing wine premises under the Special Rule.

The Act was signed into law on December 22, 2017, and its provisions became effective within 10 days, on January 1, 2018.  TTB recognizes that the exceptional circumstances of the short period between passage of the new law and its effective date limited the ability of businesses to adjust to the provisions in the new law, and that the transfer of wine from a BWC back to the producing winery may be expensive and burdensome, particularly for small wine producers.  Based on these unique circumstances, TTB is authorizing an alternate procedure, applicable for a limited period of time, by which the wine producer may tax determine and tax pay the wine without physically returning the wine to its premises. See Industry Circular 2018-1.

W8: The Act says I may take a credit on wine I “produce” and remove. For purposes of taking the new tax credit, what activity counts as “produced”? May I take the new tax credit on wine that I’ve sweetened or blended? May I take the credit on wine that I’ve received in bond?

For the purpose of taking the credit allowed by the Act, the activities considered to be “production” that are set forth at 27 CFR 24.278(e) will apply.  These are the activities that were used prior to the Act to determine whether a person’s production of wine was within the production limit for the currently-suspended small domestic producer credit at 26 U.S.C. 5041(c)(1).  In addition to the entire volume of wine produced by fermentation, a winery may count as production wine that has undergone the following activities, if undertaken in good faith in the ordinary course of production, and not solely for the purpose of obtaining a tax credit:

Sweetening – Sweetening material is added after fermentation for the purpose of sweetening the wine.

Addition of wine spirits – Certain brandy or wine spirits authorized to be used in wine production are added.

Amelioration – Water, sugar, or a combination of both is added to wine to adjust the wine’s acid content.

Production of formula wine – Formula wine includes wine that may contain added flavoring or wine treating materials.

The entire volume of wine that has undergone one of these production activities would be considered “produced” for purposes of applying the new tax credit. Blending that does not involve one of the operations listed above is not considered production.  The eligibility for the new tax credit is also subject to controlled group and single taxpayer rules similar to those in section 5051(a)(5), which may further limit the wine eligible for the new tax credit.  See 26 U.S.C. 5041(b)(4).

FROM THE TTB INDUSTRY CIRCULAR – https://www.ttb.gov/industry_circulars/archives/18-1.shtml

Through this Industry Circular, TTB is authorizing an alternate procedure, in effect through June 30, 2018, under which wine producers will be allowed to tax determine and tax pay wine of their production stored untaxpaid at a BWC without the wine producer being required to physically receive its wine back from the BWC in bond.  Rather, this alternate procedure will allow such wine producers to “receive” their wine “in bond” solely through documentation and reporting.  The wine producer will report the wine on the TTB F 5120.17temp, Report of Wine Premises Operations, as “received in bond” and “removed taxpaid,” and the wine producer must then invoice the wine as taxpaid back to the BWC.  The transfer documents used for this special procedure must be clearly marked with reference to this alternate procedure.  These “transfers” through documentation, including invoicing the BWC, must be concluded so that all of these documented removals from bond occur on or before June 30, 2018, and the wine must be taxpaid by the due date for the wine producer’s first applicable tax return covering the date of such removal.  (Wine producers who file the tax return and submit the report of operations annually must invoice the BWC showing the wine as “taxpaid” on or before June 30, 2018, but may report the “receipt in bond” and the “taxpaid removal” on the next annual submission of TTB F 5120.17temp and pay the tax with the next annual return following the invoicing.)  Wine producers may take advantage of this alternate procedure without seeking TTB approval.

After the wine producer completes this process, including providing the invoice of the wine as “taxpaid” back to the BWC, the BWC will record, store, and ultimately remove that wine as taxpaid. The wine changes status from untaxpaid to taxpaid via transaction records only.  On its next regular Report of Wine Premises Operations after June 30, 2018, the BWC will (1) report any wine it “transfers” to a wine producer under this alternate procedure on TTB Form 5120.17temp in Part I, Section A, on line 15, and/or in Part I, Section B, Line 9, and (2) list the names of any wine producer for whom the BWC is storing taxpaid wine under this alternate procedure on TTB Form 5120.17temp in Part X, Remarks.  At the BWC, once the wine changes status, the wine must then clearly be shown in the BWC records as taxpaid and, if the BWC has a taxpaid area, the wine must be moved to that area.  In instances in which the BWC does not already have a taxpaid area, the BWC will not be required to file an amendment to designate one solely for the storage of products “taxpaid” under this procedure, unless the BWC intends to store taxpaid wine other than in connection with this procedure.  Rather, the BWC who does not already have a taxpaid area must clearly identify the wine in the records as “taxpaid” and must mark the outermost packaging of taxpaid wine in such a way that it is readily identifiable as taxpaid.  This allowance applies only to wine covered under this alternate procedure.

DP&F’s Katja Loeffelholz Presented at Vancouver, BC, International Wine Festival Law Seminar

Dickenson Peatman & Fogarty attorney Katja Loeffelholz  presented “USA Wine Labeling Regulations” to the Wine & Liquor Law Seminar  held in conjunction with the Vancouver International Wine Festival this past Monday.  The seminar was the Ninth Annual Wine & Liquor Law gathering of wine and liquor industry professionals and covered new wine and liquor regulation, enforcement and business trends.  A copy of Katja’s presentation is attached.

If you are interested in learning more about the Wine & Liquor Law Seminar or have branding questions please contact Katja Loeffelholz.  If you have any questions about U.S. wine labeling regulations, please contact John Trinidad.

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:
https://www.sla.ny.gov/system/files/SGWS_SLA_announcement_release_December_20_2017.pdf

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.

TTB Information

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.

Other Resources

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 protected].

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 (9^th 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 [email protected].

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.