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.
Monterey County Wines Subject to New Conjunctive Labeling Requirements
Are you planning on bottling and labeling any wines with the name of a Monterey County AVA in the new year? Then you’ll need to comply with a new conjunctive labeling requirement. See Cal. Business and Professions Code Sec. 25247.
In 2015, the state legislature passed a law requiring wine labeled with the name of an AVA that is entirely within Monterey County to also include a “Monterey County” designation. This includes the Arroyo Seco, Carmel Valley, and Santa Lucia Highlands AVAs. The law applies to wines bottled on or after January 1, 2019.
The law does not apply to AVAs that straddle Monterey County and any other county. For example, the Chalone AVA bridges Monterey County and Benito County, so a wine labeled with the Chalone AVA is not covered by Sec. 25247.
There is one other exception to the conjunctive labeling requirement: wines labeled with the Monterey AVA. This is where things get a little confusing. Under federal law, a wine can carry the name of a county as an appellation of wine origin. AVAs are also considered appellations, but in order to carry the name of an AVA, a higher percentage of the grapes must come from that AVA. In both cases, the wine must be fully finished in the state in which the county or AVA is located (assuming the AVA is entirely within one state).
Federal regulations recognize both a “Monterey County” appellation, as well as a Monterey AVA. The Monterey AVA is located in Monterey County, but does not cover all of Monterey County (see map below). Any wine that is labeled with the Monterey AVA is exempt from the California conjunctive labeling requirement found in Cal. Business and Professions Code Sec. 25247.
For more information regarding conjunctive labeling or wine labeling regulations, please contact John Trinidad.
International Wine Law Conference Comes to Napa
DPF’s Richard Mendelson and Scott Gerien presented at the International Wine Law Association‘s annual conference held in Napa this past week. During the two day conference, wine law experts from around the world addressed key issues that impact the wine industry, including climate change, regulatory enforcement, international trade barriers, and mergers and acquisitions (click here for the full conference agenda). The event took place at CIA-Copia and drew over 110 participants.
Mr. Mendelson chaired a panel discussion titled “Climate Change Adaptation and Mitigation,” and Mr. Gerien spoke on the use of geographical indications on products other than wine.
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 (6th 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 21st 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.
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.
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.
ABC Provides Guidance on Passport Events
On March 4, 2016, the California Department of Alcoholic Beverage Control (“ABC”) published an Industry Advisory providing guidance to licensees, marketing companies and winegrower associations participating in “passport” marketing events.
Most passport events have the same format – consumers purchase an identifiable event glass, wrist band, passport or punch card from a marketing company or winegrower association organizing the event, which provides the consumers access to various experiences and tastings at the premises of participating manufacturer licensees (beer, wine or spirits). The experiences and tastings are then provided to the consumers by the participating manufacturer licensees at their licensed premises to the extent such experiences and tastings are permitted under their existing licenses. So, for example, tastings by wineries, breweries and distilleries as part of such passport events are permissible, since such licensees have the right to conduct such tastings under their licenses (subject to restrictions set forth in the ABC Act). However, Type 17/20 licensees would not be able to provide tastings as part of any such passport event, since such licensees are not permitted to conduct consumer tastings.
While these events have been occurring for many years throughout California, ABC district offices throughout the state were dealing with licensing for these events in different and inconsistent ways (i.e., if a license was required at all, if one license could cover the whole event at all locations, if a separate license was required at each location, etc.). As such, ABC provided the Passport Event Guidelines which set forth the conditions under which these events can be held without a license.
In order for a marketing agency or a winegrower association to organize a Passport Event without obtaining its own ABC license(s) for the event, the Passport Event has to satisfy all of the following requirements:
- The marketing organization or winegrower association is only marketing the event which is actually put on by the participating manufacturers.
- The organization sells only access to the experiences or activities that the manufacturer licensee may lawfully provide free of charge to consumers (such as tastings).
- The manufacturer licensees involved are doing no more than providing tastes of wine, beer, or distilled spirits to participating consumers under the authority of their license (which allows such manufacturer licensee to give or sell such tastes).
- There is no commingling of funds or sharing of revenue between the marketing organization and manufacturer licensee (i.e., all proceeds for the sale of the passport go to the organization, and revenue from sales of alcoholic beverages to consumers separate and apart from the tastes given during the marketing event are not shared with the marketing organization).
Events that fall outside of these parameters will require a license for the marketing company (if a license is even possible under the ABC Act), or the nonprofit winegrower association. Thus, for example, Passport Events that include a gala dinner or tasting event where wines from multiple wineries are being poured at one location will require a temporary daily license held by the event organizer. Or, where the tickets being sold by the organization include alcohol (in excess of the “tastings” permitted at a licensed manufacturer’s premises under the ABC Act), a temporary daily license will be required. Note that because not all organizations are eligible for temporary daily licenses under the ABC Act (as such licenses are typically limited to nonprofit or other charitable organizations), event organizers should contact counsel or the ABC while organizing their event to determine if a license, if required, is even available to the event organizer.
For more information on licensing and other questions related to passport or other events at licensed premises, please contact Bahaneh Hobel, Partner in DP&F’s alcohol beverage law group, or Katy Barfield, Associate in DP&F’s alcohol beverage law group.
TTB Provides Guidance on Category Management Practices
On February 11th, the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) issued a new ruling regarding the extent to which “category management” practices are permissible under federal tied-house laws.
The “tied-house” laws promulgated under the Federal Alcohol Administration Act (the “FAA Act”) generally prohibit industry members from giving “things of value” such as supplies, money, or services to a retailer to induce the retailer to purchase their products to the exclusion of others. In 1995, TTB adopted an exception to these tied house prohibitions (27 CFR Sec. 6.99(b)) allowing industry members to stock, rotate and affix prices to their products at a retail account, provided that the products of other industry members are not altered or disturbed. The exception also states that the provision of a shelf schematic or plan by the supplier to the retailer does not constitute “a means to induce” within the meaning of the FAA Act.
Over the past few years, suppliers and retailers have engaged in certain practices commonly referred to as “category management” which are aimed at optimizing the assortment, price, shelf presentation and promotion of particular “category” of products found at a retail location. Recently, industry members asked TTB to clarify its position with respect to the scope of the Sec. 6.99(b) exception to federal tied house laws to determine if such category management practices by alcohol beverage industry members fall under the exception.
In its ruling, the TTB took a very narrow reading of that exception. Unsurprisingly, TTB held that furnishing retailers with a shelf plan or shelf schematic, as stated unambiguously in the exception, is permissible and in and of itself not an inducement. However, additional services provided by suppliers to retailers beyond the mere provision of the shelf plan or schematic exceed the bounds of the exception and may constitute a tied house violation if the practice results in the exclusion of competitor products. Practices that may result in TTB scrutiny include, but are not limited to:
- Assuming, in whole or in part, a retailer’s purchasing or pricing decisions, or shelf stocking decisions involving a competitor’s products;
- Receiving and analyzing, on behalf of a retailer, confidential and/or proprietary competitor information;
- Furnishing to the retailer items of value, including market data from third party vendors;
- Providing follow-up services to monitor and revise a shelf schematic where such activity involves an agent or representative of the industry member communicating (on behalf of the retailer) with the retailer’s stores, vendors, representatives, wholesalers, and suppliers concerning daily operational matters (such as store resets, add and delete item lists, advertisements and provisions);
- Furnishing a retailer with human resources to perform merchandising or other functions, with the exception of stocking, rotation or pricing services of the industry member’s own product.
As noted above, in order to find that a federal tied house violation had occurred with respect to such “category management” practices, the agency would have to find that the practice in question had the effect of excluding a competitor’s product.
Avoid Penalty Flags from the ABC During Super Bowl 50
In anticipation of Super Bowl 50 on Sunday, February 7 in the Bay Area, and given the large number of both retail and supplier-side licensees that are participating at the Super Bowl, and in events and promotions in the week leading up to the game, the California Department of Alcoholic Beverage Control has issued an advisory providing guidance to licensees participating, selling and/or serving alcoholic beverages at Super Bowl related events.
The takeaway from ABC’s advisory? All the same rules apply. If you were not permitted to do something before, you are not permitted to do it now just because it’s Super Bowl.
However, a little reminder from the ABC about the rules never hurts, so here is a brief summary of their do’s and don’ts to help you avoid penalty flags during Super Bowl week.
- The Super Bowl is not a “time out” for licensees. All current laws and regulations remain in effect during Super Bowl and no new laws have been passed regarding the sale, service, consumption, or marketing of alcoholic beverages for Super Bowl.
- Just because it’s the Super Bowl doesn’t mean after parties are allowed at licensed locations. It is still illegal (a misdemeanor) to sell or serve alcohol between the hours of 2 a.m. and 6 a.m. ABC guidelines also specifically say that purchasing alcohol ahead of time or in bulk to be served after 2 a.m. on a licensed premises is not permitted.
- In case you forgot, it is unlawful to serve alcoholic beverages to minors under the age of 21 (even if they look like football players) and it is unlawful to serve alcoholic beverages to obviously intoxicated persons (even if they look like football players that just won the Super Bowl). Make sure to keep checking IDs and monitor your customer’s behavior before selling or serving them any drinks.
- All of your sales and service activities, and your location, need to be licensed, even though it might be a lot more fun to do something different “because its Super Bowl.” You can only sell and serve alcoholic beverages in the areas covered by your existing licenses. And you can only sell alcoholic beverages if you are licensed to do so. This includes charging admission fees or pre-selling tickets that include alcohol in the admission or ticket price.
- You can only sell what you are normally allowed to sell. You are not permitted to sell an amazing Super Bowl inspired Vodka cocktail at your licensed premises if your license only permits you to sell wine or beer.
ABC is out and about, especially during big events like the Super Bowl, so just operate in accordance with the rules and regulations that are normally applicable to your license to ensure that you and your employees don’t fumble.
Super Bowl will bring a lot of business and potential new customers to industry members. Keeping the above tips in mind will help ensure a winning Super Bowl for all involved (except maybe the losing team).
New Alcohol Beverage Regulations Give Licensees Expanded Rights and Privileges in the New Year
Beginning on January 1, 2016, new provisions of the California ABC Act will go into effect that will, among other things, provide industry members with additional rights and privileges related to marketing, events and promotions, and will also create a new Craft Distiller License. A summary of a few of these important new statutory provisions is included below.
Retailer and Non-Retailer Sponsorships of Non-Profit Events (Section 23355.3):
- This new statutory section was largely drafted in response to accusations filed by the ABC against certain wineries related to their participation in a nonprofit event, the “Save Mart Grape Escape”. As the name suggests, although this was a nonprofit event, Save Mart, a licensed retailer, was also a sponsor of the nonprofit event. The ABC had alleged in its accusations that participating supplier-side licensees that referenced the event by name on their websites or social media feeds were giving a thing of value to Save Mart in violation of California’s tied house rules. Section 23355.3 resolves this issue by providing an exception to the tied house rules that not only allows both retail and nonretail licensees to sponsor non-profit events but allows participating nonretail licensees to reference retail licensees, subject to the restrictions contained in the statute.
- Section 23355.3 permits sponsorships of nonprofit organizations (not other organizations) that are conducting and receiving benefit from the subject event. Note that nonprofits are still required to obtain any required temporary licenses from ABC to conduct their event.
- A nonretail/supplier side licensee may advertise or communicate its sponsorship of or participation in the nonprofit event in social media and elsewhere, which advertising can include identification of both retail and nonretail licensees that are sponsoring or participating in the event and can include posting, re-posting, forwarding or sharing social media and/or other advertisements or communications made by other nonretail or retail licensees (subject to the restrictions below) . For purposes of this provision “social media” is specifically defined as “a service, platform, application, or site where users communicate and share media, such as pictures, videos, music, and blogs, with other users.” Note that Section 23355.3 does not usurp other applicable industry or legal standards that govern when and where the advertisement of alcohol is acceptable and typical precautions to ensure responsible advertising practices should be taken.
- Any advertisement or communication by a nonretail licensee that includes identifying a retail licensee (including reposting, forwarding, sharing social media posts by others) cannot include the retail price of any alcoholic beverage or otherwise promote the retail licensee beyond its sponsorship or participation in the event.
- It should be noted that donations of alcoholic beverages to nonprofits by supplier side licensees are only permitted to the extent they are otherwise allowed under Section 25503.9, which only permits certain supplier side licensees to make certain types of donations to nonprofits. And except as otherwise may be permitted in specific circumstances under the ABC Act, retailers are not permitted to give or sell alcoholic beverages to the nonprofit.
- Nonretail/supplier-side licensees should be careful not to provide other things of value to retail licensees, except as permitted above. Specifically, nonretail licensees should not pay or reimburse any retail licensee, directly or indirectly, for any advertising services (whether by social media or otherwise) or cover any costs of a retail licensee sponsoring or participating in the event.
- Retail licensees are also subject to rules and restriction under the new statute and should not accept any payment or reimbursement, directly or indirectly, for any advertising services offered by a nonretail licensee and should not offer or provide nonretail licensees any advertising, sale, or promotional benefit in connection with the sponsorship or participation.
Sponsorships of Certain Live Entertainment Marketing Companies in Napa (Section 25503.40)
- Section 25503.40 creates a new exception to the tied-house rules that allows certain alcohol beverage licensees to purchase sponsorships and advertising time and space from certain live entertainment marketing companies related to live artistic, musical, sports, food, beverage, culinary, lifestyle, or other cultural entertainment events promoted by a live entertainment company in Napa County, such as Bottlerock. The events are to be held at entertainment facilities, parks, fairgrounds, auditoriums, arenas, or other areas or venues that are designed for, or set up to be, and lawfully permitted to be used for live artistic, musical, sports, food, beverage, culinary, lifestyle, or other cultural entertainment events. The conditions and restrictions related to such sponsorships are set forth below.
- Only the following types of licensees are permitted to sponsor events under 25503.40: Beer Manufacturer (Type 01 or Type 23), Out-of-State Beer Manufacturer’s Certificate (Type 26), Winegrower (Type 02), Winegrower’s Agent (Type 27) , Distilled Spirits Manufacturer (Type 04 and likely new Type 74 craft distilled spirits manufacturer), Distilled Spirits Manufacturer’s Agent (Type 05), Rectifier (Type 07, 08 or 24) or Importer that does not hold a wholesale or retail license (Type 09 (but only if hold one of the other licenses listed), 10, 11, 12 (but only if hold one of other licenses listed) or 13).
- The above licensees may sponsor events promoted by a live entertainment company and may purchase advertising space and time from or on behalf of a live entertainment marketing company. For purposes of Section 25503.40, a live entertainment marketing company must be a entertainment marketing company that is a) a wholly owned subsidiary of a live entertainment company b) not publicly traded, c) has its principal place of business in the County of Napa, and d) which may own interests, directly or indirectly, in retail licenses or winegrower licenses.
- Sponsorships must be pursuant to a written contract and may only be purchased by permitted licensees in connection with live artistic, musical, sports, food, beverage, culinary, lifestyle, or other cultural entertainment events that take place at entertainment facilities, parks, fairgrounds, auditoriums, arenas, or other areas or venues that are designed for, or set up to be, and lawfully permitted to be used for live artistic, musical, sports, food, beverage, culinary, lifestyle, or other cultural entertainment events located within the County of Napa. Expected attendance of the event must be at least 5,000 people per day and the live entertainment company promoting the event is required to represent to the retail licensee that will hold the license for the event, such as the concessionaire, that the live entertainment company promoting the event, including the subject event, has not exceeded the permissible limit of three events in the County of Napa for the year in which the event is being held.
- An on-sale licensee (such as a concessionaire) selling alcoholic beverages at the event must serve at least one other brand of beer, distilled spirits, and wine (one per category) distributed by a competing wholesaler in addition to any brand manufactured or distributed by the sponsoring or advertising licensees.
- Participating licensees are not permitted to give, or lend anything of value to an on-sale retail licensee, except as expressly authorized by 25503.40 or any other provision of the ABC Act.
- Note that while Section 25503.40 does not itself provide licensees the right to be present at the events (either pouring their products and/or educating the consumers in their tents), because the premises will be licensed as an on-sale retail premises, Sections 25503.4, 25503.55 and 25503.57 of the ABC Act would allow limited education and tastings by certain wine, beer and spirits licensees at the event, subject to the terms and conditions of those sections and approval by the event organizers.
Listing of Retailers in Supplier Advertising and Marketing (Section 25500.1)
- The recent revisions to Section 25500.1 of the ABC Act have revised the tied-house exception in that section to provide supplier side licensees with new ways to refer to retailers in their advertising and marketing. These changes were driven by new marketing and advertising practices on the internet and social media but apply to all marketing and advertising practices. Previously, listings of retailers were only permitted in response to consumer inquiries and were further limited by statute.
- Supplier-side industry members (such as manufacturers or wholesalers) may list the following information in their advertising or marketing (include social media posts), so long as the remaining requirements listed below are also satisfied: Names, addresses, telephone numbers, email addresses, or Internet Web site addresses, or other electronic media, of two or more unaffiliated on-sale or off-sale retailers selling the beer, wine, or distilled spirits produced, distributed, or imported by the supplier-side industry member. The listing must include information about two or more unaffiliated retailers and must be the only reference to the on-sale or off-sale retailers in the direct communication with the consumer.
- The listing cannot contain the retail price of the product.
- The listing is made, or produced, or paid for, exclusively by supplier-side industry member.
- For more information about the changes to Section 25500.1, refer to our prior blog post on this issue.
New Craft Distiller License & Expanded Tasting Privileges for Distilled Spirits Manufacturers
- Various provisions of the ABC Act have been amended to create the new Type 74 craft distiller license for distillers that manufacture up to 100,000 gallons of distilled spirits per fiscal year (July 1 through June 30). The new legislation has also provided Type 04 distilled spirits manufacturers, and craft distillers, expanded rights and privileges with respect to consumer tastings.
- The new Type 74 craft distiller license may be issued to a person who has facilities and equipment for, and is engaged in, the commercial manufacture of distilled spirits. The fees for the craft distiller shall be the same as those of a Type 04 distilled spirits manufacturer. It should be noted that the craft distiller will be required to report its production to the ABC on an annual basis, and if the production amounts go above the maximum requirements described below such that the craft distiller no longer qualifies to hold a craft distiller’s license, the ABC will automatically renew the license as a Type 04 distilled spirits manufacturer’s license (Type-04).
- The production, sale, distribution and tasting privileges of the new Type 74 Craft Distiller’s license include the right to:
- Manufacture up to 100,000 gallons of distilled spirits per fiscal year (July 1 through June 30) (excluding brandy that the craft distiller manufactures or has manufactured for them). In its advisory, ABC noted that “gallon” is defined in Section 23031 as “that liquid measure containing 231 cubic inches” and that the amount to be reported is the actual liquid volume manufactured not proof gallons. ABC also clarified that measurement of gallons for this purposes is the volume of distilled spirits (excluding waste product) drawn off the still.
- Package, rectify, mix, flavor, color, label, and export only those distilled spirits manufactured by the licensee. This means that the holder of a craft distiller license is not permitted to package, rectify, mix, label, flavor, color or export any spirits manufactured by any other licensees. However, ABC has confirmed that this provision does not prohibit the use of grain neutral spirits manufactured by another distiller in the manufacture of distilled spirits by a craft distiller licensee, since that requires actual re-distillation of grain neutral spirits. ABC has also noted that this prohibition against rectification of other products also means that the holder of a rectifier’s license (Type 07 or Type 24) cannot also hold a craft distiller’s license.
- Only sell distilled spirits that are manufactured and packaged by the craft distiller solely to a wholesaler, manufacturer, winegrowers, manufacturer’s agent, or rectifier that holds a license authorizing the sale of distilled spirits or to persons that take delivery of those distilled spirits within this state for delivery or use without the state.
- Sell up to 2.25 liters (in any combination of prepackaged containers) per day per consumer of distilled spirits manufactured by the craft distiller at its premises to a consumer attending an instructional tasting on the licensed premises pursuant to Section 23363.1.
- Sell all beers, wines, brandies, or distilled spirits to consumers for consumption on the premises in a bona fide eating place as defined in Section 23038, which is located on the licensed premises or on premises owned by the licensee that are contiguous to the licensed premises and which is operated by and for the licensee, provided that any alcoholic beverages not manufactured or produced by the licensee must be purchased from a licensed wholesaler.
- During private events only, sell or serve beer, wines, and distilled spirits, regardless of source, to guests during private events or private functions not open to the general public. All alcoholic beverages sold at the premises that are not manufactured or produced and bottled by or for the licensed craft distiller must be purchased only from a licensed wholesaler. ABC has noted that “private events” and “private functions” do not include events, activities, or functions that are open to the public, whether by purchase of a ticket or otherwise. As an example, the ABC has stated that it would not consider a cocktail-making class that anyone could attend to be a “private event or private function”.
- Craft distillers (unlike type 04 distilled spirits manufacturers) have also been provided with a tied house exception that allows a craft distiller to hold ownership interests in up to two (2) on-sale licenses (such as restaurants, hotels or bars). Other than the products made by or for the craft distiller, all other alcoholic beverages at such on-sale retailers must be purchased from a California wholesaler. Further, the interested craft distiller’s products cannot exceed more than 15% of the total distilled spirits by brand offered for sale by the on-sale licensee. This exception shall continue to apply, even if the distiller no longer qualifies as a craft distiller, so long as the distiller qualified as a craft distiller at the time it first obtained the interest in the on-sale retailers.
- As noted above, the recently enacted legislation amending Section 23363.1 provided both craft distillers and distilled spirits manufacturers expanded privileges with regard to direct to consumer tastings from their licenses premises. Type 04 and Type 74 licensees may now provide one and one-half ounces tastings of distilled spirits per individual per day from their premises with or without charge and can also serve these tastes in the form of a cocktail or mixed drink.
Beer Tastings at Farmers Markets
- Previously, under Section 23399.45, beer manufacturers were permitted to sell limited amounts of bottled beer at certified farmers markets so long as they held a Type 84 certified farmers market beer sales permit. An amendment to Section 23399.45 will now the holder of a type 84 certified farmers’ market beer sales permit to conduct instructional tasting events for consumers at certified farmers markets as well. These privileges are automatically extended to Type 84 permit holders as of January 1, 2016 so no additional permit is required for existing permit holders.
- The holder of a certified farmers market beer sales permit is authorized to conduct an instructional tasting event for consumers at locations specified in Section 23399.45 at a certified farmers market.
- The tasting is limited to 8 ounces per person per day and may be provided as provided as one 8 ounce tasting or various smaller tastings.
- The instructional tasting event area must be separated from the remainder of the market by a wall, rope, cable, cord, chain, fence, or other permanent or temporary barrier.
- Only one Type 84 license holder may conduct an instructional tasting event during the a farmers market.
- The licensee shall not permit any consumer to leave the instructional tasting area with an open container of beer.
Please note that the information provided above is just an overview of the requirements of the new legislation. Careful review of each statute in its entirety should be undertaken before any actions are taken in reliance on these new provisions.
We will be posting details on other new legislation in the coming days and weeks, but for questions on any of the new legislation discussed above and how it may affect your business, please contact Bahaneh Hobel.
COLA’s Provide Scant Protection from Class Action Lawsuits
ShipCompliant recently published a guest blog post by DP&F Wine Law attorney John Trinidad on the class action lawsuits claiming that the use of the term “handmade” on vodka bottles constituted false or misleading information under state consumer protection laws.
Over the past year, a slew of class action lawsuits have been filed claiming that certain alcohol beverage product labels are false or misleading under state consumer protection laws. Tito’s Vodka, owned by a company called Fifth Generation, Inc., faces numerous actions claiming that the company’s use of the term “handmade” deceived consumers by leading them to believe that they were buying high quality, non-massed produced products.
Fifth Generation has fought these allegations, arguing that that TTB’s approval of their label as evidenced by the issuance of a certificate of label approval (“COLA”) protects against liability under state consumer protection laws. The company’s argument relies on “safe harbor” provisions provided for under state law, which in general make certain actions authorized by laws administered by state or federal regulatory authorities immune from liability. Unfortunately for the alcohol beverage industry, this argument has had mixed success.
To read the full blog post, please go to the ShipCompliant website.
New York Aims to Modernize State Alcohol Beverage Laws
New York alcohol beverage producers, wholesalers and retailers take note: there may be some changes coming your way. Governor Andrew Cuomo has announced the creation of an industry working group to recommend revisions to the state’s Alcoholic Beverage Control Laws. The group, to be headed up by NY State Liquor Authority Chairman Vincent Bradley, is scheduled to look into “reorganizing or replacing the current alcohol beverage control law” as well as the following issues:
- Removing outdated and redundant provisions;
- Modernizing statutory language for clarity;
- Improving and consolidating various licensing provisions;
- Clarifying the types of licenses available;
- Reducing mandatory paperwork; and
- Eliminating unnecessary restrictions imposed on manufacturers.
The working group’s first meeting is scheduled to take place on November 12, 2015 at 1pm at the NYSLA’s Harlem Office (317 Lenox Avenue). Video conferencing will be available in the NYSLA’s Albany and Buffalo office locations. Seating is limited, and parties interested in attending should RSVP by sending an email to RSVP@sla.ny.gov no later than noon on Wednesday, November 11.
Clock is Ticking for Trademark Owners for .wine Generic Top-Level Domain
As we’ve previously reported, the Internet Corporation for Assigned Names and Numbers (ICANN) has been selling hundreds of generic top-level domains (gTLDs) to domain name registries for $185,000 each. These registries then authorize domain name registrars to sell domain names to the public under the gTLDs that the registries have purchased. The registry called Donuts has purchased many of these gTLDs, including two of particular interest to members of the wine industry — <.wine> and <.vin>. The <.wine> and <.vin> gTLDs have been in limbo since they were awarded to Donuts due to issues raised by the EU and several regional wine associations concerning the protection of appellations of origin within the <.wine> and <.vin> gTLDs. However, those issues have since been resolved and the <.wine> and <.vin> gTLDs are now moving forward.
This means that trademark owners that wish to secure domain names encompassing their trademarks under the <.wine> and <.vin> gTLDs must now do so within the sunrise periods that have been established by Donuts for the <.wine> and <.vin> gTLDs. If they fail to secure their domain names within the sunrise periods, those domain names under the <.wine> and <.vin> gTLDs can then be purchased by members of the general public and the only recourse available to the trademark owners will be through costly dispute resolution procedures.
The Sunrise periods for the <.wine> and <.vin> gTLDs open on November 17, 2015 and close on January 16, 2016. In order for a trademark owner to obtain its trademarks within domain names for the <.wine> and <.vin> gTLDs, the trademark owner must first register its trademarks with the Trademark Clearinghouse. We have previously blogged about the process for registering a trademark in the Trademark Clearinghouse here. Once a trademark owner has obtained registration in the Trademark Clearinghouse, it may then pay to register its trademarks as domain names under the <.wine> and/or <.vin> gTLDs with recognized domain name registrars during the November 17, 2015 – January 16, 2016 sunrise periods.
So, for all of you wineries wishing to take part in the new <.wine> and <.vin> gTLDs, now is the time to make sure that your trademarks are registered with the Trademark Clearinghouse. For additional information or any other questions contact Scott Gerien at his email.
CEB Wine Law Forum (Nov. 5-6 in Paso Robles)
Thursday and Friday, November 5th & 6th
Paso Robles, California
Three DP&F attorneys will be speaking at the annual CEB Wine Law Forum,™ taking place on November 5th and 6th in Paso Robles, California. The Forum, sponsored by the International Wine Law Association and moderated by DPF’s Richard Mendelson, will address Water Regulation, the AVA System, and Employment Law. Mr. Mendelson will speak on the history and future of the U.S. AVA system, and DPF Director Carol Ritter will lead a panel on protecting and promoting AVAs. DPF co-managing partner Greg Walsh will lead a panel discussion on employment law issues faced by winery and vineyard owners.
The event is sponsored by the International Wine Law Association and Napa Valley Vintners.
Additional information and on-line registration can be found on the CEB website.
Water and Wine—Thursday Morning
Water and Wine—California
Water and Wine—Paso Robles
Appellation Designations—Thursday Afternoon
35 Years Later—An Examination of the AVA System
Promoting and Protecting AVAs
Employment Law Matters—Friday Morning
Challenges of a Seasonal Workforce
Top 5 Wage & Hour Issues Facing Winery and Vineyard Owners
9 hours MCLE Credit
New Law Amends California Tied-House Law
Governor Jerry Brown has signed AB 780, a law which helps clarify the rules that permit an alcohol beverage producer, importer, or wholesaler (collectively, a “supplier”) to list or mention on- and off- premise retailers in supplier-sponsored advertising, including supplier websites and social media channels. As described in more detail below, the new law is fairly limited, and does not give suppliers carte blanche to begin mentioning retailers in their social media posts.
State alcohol beverage law prohibits suppliers from providing retailers with “things of value.” These “tied-house” restrictions are generally aimed at preventing undue influence by suppliers over retailers. The ABC Act, however, also contains numerous exceptions to tied-house laws. For example, ABC Act Sections 25500.1 and 25502.1 allow suppliers to list certain information such as the address, phone number, email address and website address of two or more unaffiliated retailers so long as the listing (1) is made in response to a direct consumer inquiry, (2) does not contain the product’s retail price, and (3) is made by, produced by, or paid for exclusively by the supplier.
AB 780 amends these tied-house exceptions that pertain to on- and off-premise retailer listings. Here are a few key things that AB 780 will do when it goes into effect on January 1, 2016.
- Creates one set of rules for producer’s listing of on- and off- premise retailers . Previously, the ABC Act had two different rules that governed supplier listings of retailers: on-premise retailer listings were governed by ABC Act Sec. 25500.1, and off-premise retailer listings were governed by Sec 25502.1. AB 780 repeals 25502.1 and consolidates rules governing on- and off- premise retailer listings into Section 25500.1, meaning that there is now one set of rules that governs retailer listings.
- Impact. Under current law, a supplier listing of on-premise retailers could include the “names, addresses, telephone numbers, email addresses, or Internet Web site addresses, or other electronic media” of those retailers. The law governing listings of off-premise retailers did not include the “other electronic media” language. Thus, current law could be interpreted to prohibit a supplier from including the Twitter handle of an off-premise retailer in a listing because the handle may be considered “other electronic media” of the retailer. Once AB 780 goes into effect, the listing of on- and off-premise retailers’ “other electronic media” is allowed so long as the other requirements of Sec 25500.1 are met.
- Deletes language requiring customer inquiry for retailer listing. Under the ABC Act, any listing of a retailer could only be made “in response to a direct inquiry from a consumer.” AB 780 eliminates this requirement.
- Impact. The current law could be interpreted as prohibiting a producer from issuing a social media post (such as a tweet) listing two or more twitter handles of on-premise retailers unless it was in direct response (and potentially in a direct message not viewable by the general public) to a consumer inquiry. AB 780 would allow such a post, whether or not it was in direct response to a consumer, provided that all other requirements are met.
- Continues to restrict the type of listing allowed. Once amended. Section 25500.1 will continue to prohibit any supplier sponsored listing from referring to only one retailer or listing the retail price of the product. In addition, the listings must be made, produced, or paid for exclusively by the supplier.
- Impact. Suppliers should familiarize themselves with the limitations contained in Section 25500.1.
- Does not change rules governing events at retailer locations. AB 780 does not alter the sections of the ABC Act that govern the promotion of producer events at retailer locations, such as ABC Act Sec. 25503.4 (regarding winegrower instructional events).
- Impact. Suppliers wishing to promote upcoming events at on-premise retailer must continue to follow the applicable rules for events, which may be more restrictive than the amended Sec. 25500.1. For example, under ABC Act 25503.4, a winemaker instructional event held at a retailer cannot include laudatory statements about the retailer, nor can they include pictures of the retailer.
Finally, suppliers should keep in mind that the adoption of AB 780 does not repeal state tied-house laws and that it is still generally impermissible for a producer to provide a “thing of value” (such as free advertising) to a retailer, absent an explicit exception in the ABC Act. AB 780 simply clarifies one exception to the state’s tied-house laws by declaring that certain listings of retailers are not considered “things of value.”
For more information or assistance on alcohol beverage advertising, social media, and tied house laws, contact John Trinidad (email@example.com).
This post is made available for general informational purposes only and none of the information provided should be considered to constitute legal advice.
NYSLA Proposes Advisory for Trademark Licensing Agreements
The New York State Liquor Authority is considering adopting an advisory regarding trademark licensing agreements between retailers and alcohol beverage producers. If adopted, the advisory would prohibit certain trademark licensing agreements between retailers and suppliers (i.e., producers and wholesaler) that involve a licensing fee based upon a percentage of sales or that otherwise “correlate[s] with sales.” According to the NYSLA, such arrangements violate state tied house law because they are indicia of a retailer having a direct or indirect interest in a supplier.
The draft advisory will be discussed at the June 30, 2015 NYSLA Board Meeting. Interested parties can submit comments to NYSLA Secretary Jacqueline Held at Jacqueline.Held@sla.ny.gov by June 29, 2015.
6/30/2015 UPDATE – According to the NYSLA website, the hearing has been postponed until July 14, 2015.
Proposed Expansion of Oregon’s Willamette Valley AVA
Willamette Valley, one of the most well regarded American Viticultural Areas, may be getting a wee bit bigger. Last week, the Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) published a notice of proposed rulemaking detailing the proposed addition of approximately 29 square miles (which constitutes less than 1% of the existing AVA) to the southwestern edge of the Willamette Valley, as shown in the following map:
King Estate Winery, which is located in the proposed expansion area and Oregon’s largest wine producer, submitted the petition, and both the Willamette Valley Wineries Association and the Oregon Winegrowers Association have voiced their support. The petition is available online at http://www.regulations.gov/#!documentDetail;D=TTB-2015-0008-0002
As evidence that the expansion area is associated with the established Willamette Valley AVA, the petitioners included excerpts from restaurant wine lists that identify certain King Estate wines as coming from “Willamette,” “Willamette Valley,” or “Willamette, Oregon,” even though the wines are not labeled as Willamette Valley AVA, nor could they be under TTB regulations. Query as to whether this demonstrates true association with the expansion area and the existing Willamette Valley AVA or simply sommelier error.
Members of the public can submit comments through August 17, 2015. For more information, go to http://www.regulations.gov/#!docketDetail;D=TTB-2015-0008
For more information regarding AVA formation and expansion, please contact John Trinidad (firstname.lastname@example.org)
Napa County to Consider Minimum Parcel Size for Winery Development
Napa County’s Agricultural Protection Advisory Committee will be holding a hearing on Monday, April 27, 2015 at 9:00 am to discuss (1) the minimum parcel size for establishing new wineries in the agricultural preserve, (2) the net loss of vineyards associated with winery development and/or expansion; and (3) the role of estate grapes in winery production. The hearing takes place at 2741 Napa Valley Corporate Drive, Building 2, and public comment is welcome.
The full agenda for Monday’s meeting and other material for that meeting can be found at: http://services.countyofnapa.org/agendanet/MeetingDocuments.aspx?ID=4410
Small Producer Tax Credit Pitfalls: The K Vintners Case
When is a small producer not a small producer? That was the question answered by a federal district court in a case that centered on a winery’s ability to claim a small producer tax credit for wine produced at another winery (K Vintners v. U.S., Case No. 12-cv-05128-TOR (E.D. Wa. Jan 21, 2015)).
Background on the Small Producer Tax Credit.
Under federal law, domestic wineries producing 250,000 gallons of wine or less per year (“small producers”) are entitled to a tax credit of up to $0.90 per gallon for the first 100,000 gallons of non-sparkling wine removed from bond and “produced at qualified facilities” and a reduced credit thereafter (26 U.S.C. Sec. 5041(c)). This is popularly referred to as the “small producer tax credit,” what I’ll refer to as the SPTC.
There are two methods by which a small producer can take advantage of the SPTC for wine that was produced at its own facility. First, the winery can claim the SPTC on wine that it removes from its own bond by reporting the removal on its tax return, claiming the SPTC, and paying the net tax. Alternatively, the producer can transfer wine it produced at its own facility in bond to a bonded warehouse, and transfer the SPTC to the bonded warehouse for eligible wine. In this scenario, the warehouse reports the removal on its tax return, claims the winery’s SPTC as transferee, and pays the net tax.
The SPTC can also apply to wines that were not made at small producer’s bonded winery, but only if that wine is transferred in bond from the producing winery to the small producer’s facility and removed from bond by the small producer so long as the small producer actually produces some wine at its facility that year.
The K Vintners Case: SPTC does not apply to wine produced at another winery on behalf of a small producer and transferred directly to a bonded cellar is not eligible for SPTC.
But what happens when the small producer has wine made at a different facility, and instead of transferring that wine to its own bonded premises, decides to have the wine transferred directly to a bonded warehouse? Is that wine eligible for the SPTC?
That was the issue that one Washington winery, K Vintners, faced a few years back. From 2005-2008, K Vintners produced wine each year at its bonded facility and also purchased bulk wine from two other wineries, Hogue Cellars and Wahluke Slope Vineyards. Hogue and Wahluke fermented, blended, and bottled wine for K Vintners (referred to hereafter as the “Hogue/Wahluke Wine”), then transferred the bottled wine directly to Tiger Mountain, a bonded cellar contracted by K Vintners. K Vintners then sold the wine its own tradenames. Pursuant to the K Vintners-Tiger Mountain contract, Tiger Mountain paid claimed K-Vintners’ SPTC on the wine transferred from Hogue/Wahluke and paid the net excise taxes on those wines when removed from bond, and K Vintners reimbursed the bonded cellar for any excise taxes it incurred.
TTB conducted an audit in 2007 and determined that the SPTC could not apply to the Hogue/Wahluke Wine because the wine in question was not produced at K Vintner’s bonded facility. TTB ordered Tiger Mountain to pay $327,496.83 in unpaid taxes and an additional $126,580.05 in late-payment penalties. TTB acknowledged that if the Hogue/Wahluke Wines had been shipped in bond from the producing wineries to K Vintner’s bonded premises, and then removed from bond by K Vintners, then K Vintners could have claimed the credit on its own behalf (provided that K Vintners produced some wine at its own facility in each of those years).
K Vintners and Tiger Mountain paid the amount under protest, raised administrative claims that were subsequently denied by TTB, and eventually filed suit to seek a refund of these tax payments. K Vintners argued, in part, that the wine was eligible for the SPTC because even though it was made at the Hogue/Wahluke facilities, K Vintners had significant control and oversight through its contractual arrangement with those wineries that in essence, K Vintners “produced” the wine, and therefore the wine was eligible for the SPTC.
The federal district court in the Eastern District of Washington sided with TTB, concluded that such wines were produced at the winery where they went through fermentation (Hogue/Wahluke) and therefore were not eligible for the SPTC when removed from Tiger Mountain’s bond. The end result: K Vintners would not see any refund of the nearly half million dollars worth of unexpected taxes and penalties it incurred as a result of its misapplication of the small producer tax credit.
Can a small producer claim the SPTC for wine produced at a winery that produces more than 250K gallons of wine?
One curious comment in the court’s decision (mere dicta, for those of you with legal experience) is worth exploring in more detail. The court took a close look at the regulatory language authorizing the SPTC, and noted that the SPTC was only available for “wine produced at qualified facilities in the United States.” Under the court’s interpretation, this means that a small producer could only claim the SPTC on wine it purchased from another winery if that winery was also “qualified” as a small producer. This directly contradicted statements in TTB’s court filings in which TTB stated that K Vintners could have applied the small producer tax credit to the Hogue/Wahluke Wine if the wine had been directly transferred in bond to, and subsequently removed from bond by, K Vintners.
We reached out to TTB to determine if, in light of this language in the court’s decision, TTB would be making any changes to its interpretation or enforcement of the small producer tax credit. TTB affirmed that it still interprets 26 USC Sec 5041(c)(1) to allow an eligible small producer to purchase wine from another winery — whether or not that selling winery is itself eligible as a “small producer” — and that wine may still be eligible for the SPTC, so long as the small producer meets all other conditions for eligibility. Note , however, that one of those conditions is that allowance of the SPTC would not “benefit a person who would otherwise fail to qualify for use of the SPTC.…”
This article does not constitute legal advice. Please contact an attorney if you have any questions about the application of the small producer tax credit.
Considerations in Structuring Alternating Proprietorship Agreements
In 2008, TTB published an Industry Circular- Alternating Proprietors at Bonded Wine Premises (http://www.ttb.gov/industry_circulars/archives/2008/08-04.html). The Circular sets the parameters for establishing an alternating proprietor (AP) relationship that will satisfy TTB regulations. The structure, although called an alternating proprietorship, is fundamentally a lease arrangement involving two parties: the AP and the “host” winery. The AP is a fully licensed and bonded wine producer (at both the federal and state levels) who produces wine at facilities of another fully licensed and bonded wine producer (the “host” winery) holding a Federal Basic Permit, on an alternating basis. The AP, as result of its permit status, is responsible for its winemaking activities and all associated reporting and tax obligations. For the AP to control its permitted and licensed activities, it must control the facilities at the host winery in the alternating premises (when the AP is alternating into the alternating premises) and, if applicable, at its designated premises.
From the perspective of the host winery, an AP Agreement that allocates risk and liability similar to a landlord/tenant relationship can offer many benefits. In exchange for offering the host winery’s premises, on an alternating basis, to the AP, the host winery can take a triple-net lease approach that limits the host winery’s potential liabilities and expenses associated with the winery premises. In the event of, let’s say, an earthquake, the AP Agreement could expressly disclaim all warranties with respect to the structure and equipment. The host winery can disclaim responsibility for maintaining insurance that covers damage and destruction and limit the availability of insurance proceeds to the AP.
On January 21, 2015, host wineries got an additional incentive to clearly structure their APs as leases. The Board of Equalization found in favor of an appeal by Terravant Wines reversing a $416,457 tax bill. See http://www.pacbiztimes.com/2015/01/30/wine-firm-wins-crushing-victory-in-tax-case/.
The Board of Equalization originally ruled that the host winery owed a one-time sales tax payment on the purchase of equipment used at the winery. The Board did not accept the argument that the equipment was leased and, therefore, subject to a use tax instead of a sales tax. The Board found that the host winery was performing a service for the AP rather than providing a leased premises for the AP’s independent winemaking operations. In the January 21 ruling, the Board reversed its decision and accepted the argument that the AP structure gave the AP “constructive possession and actual control.” In short, the Board was ultimately persuaded that the AP relationship was a lease relationship.
The takeaway is that an AP Agreement structured in a manner that explicitly and clearly reflects the leasehold nature of the relationship and also takes into account TTB’s concerns set forth in the 2008 industry circular can have regulatory, liability and tax benefits all of which should be considered by parties involved in AP relationships.