Comment

Lexington Approves Minimum Wage Ordinance

Per the Bluegrass Hospitality Association:

“As you have probably already heard, the local minimum wage ordinance was approved by Council (9 to 6) at last night’s meeting.

The ordinance will increase minimum wage in Fayette County to the following on the below dates:

July 1, 2016                  $8.20

July 1, 2017                  $9.15

July 1, 2018                  $10.10

There was over two hours of public comment prior to the almost 9:00 PM vote.  As expected, there were passionate pleas and points both in support and against.

Several Council Members spoke prior to the vote.  The consensus is that raising the minimum wage does not ultimately solve the underlying issues long-term.  As such, Council will continue to work on programs to address long-term solutions to better wages like education, housing, transportation, childcare, etc.”

For more information on the vote itself:

http://www.kentucky.com/news/local/counties/fayette-county/article45566235.html

For more information on how this vote will affect your business, contact the attorneys at McBrayer.

Comment

Comment

Come See Us at the 10th Annual NALCP Conference in Austin, TX!

McBrayer attorneys Steve Amato and Tom Flanigan will be attending the 10th Annual National Association of Licensing and Compliance Professionals (“NALCP”) conference in Austin, Texas on October 14-16, 2015. This conference is attended by industry professionals and features informational sessions on numerous aspects of alcohol regulation and compliance, where our attorneys will hone their hospitality law skills and foster deeper connections throughout the hospitality industry.

If you are attending this event, please come and visit us at our McBrayer table in the vendor area. We look forward to seeing you!

For more information on this event, visit http://www.nalcp.net/conference-details.

Comment

Comment

Come Learn Everything You Ever Wanted to Know about Food Trucks at "Food Trucks 101."

 Our popular food business series continues with "Food Truck 101!"

Learn from food truck owners, legal, financial and marketing experts about the important aspects of the mobile food biz. Featuring Carol Rosenberg owner/chef of Military Mom's Food Truck from the Great Food Truck Race Season 5.

Keynote: Carol Rosenberg --owner/chef Military Mom's Food Truck -- Fort Drum, NY

Panelists include: 
Marty Meersman - Owner/Chef, Marty's Waffles - Cincinnati
Steve Amato – Hospitality Attorney, McBrayer Law
Mark Jensen - Owner/Chef, middle fork kitchen bar - Lexington
Theresa Stanley - Marketing/PR, Smiley Pete Publishing
Tom Flanigan – Corporate Attorney, McBrayer Law

Ideal for anyone interested in starting a food truck, expanding to a food truck or investing in the food truck biz.

Registration is $30 and include hors d'oeuvres and drinks. Seating is limited and you must register to attend. There are student discounts available. Plus, any military wife or mom gets a crazy discount to attend. 

Register @ https://events.r20.constantcontact.com/register/eventReg?oeidk=a07ebmfg3bvc0c99f81&oseq=&c=&ch

Comment

Comment

Alcohol Tax Breaks Brewing in Congress

Tax relief may be on the way for alcohol producers both large and small. Two tax breaks for brewers are vying for the spotlight on Capitol Hill, while a third piece of legislation would grant earlier tax deductions to distillers of aged spirits. All three pieces of legislation signal a willingness on the part of Congress to address the growth and economic benefit of the alcohol industry, but two of the bills also represent a growing schism among producers. Both the bills concerning beer taxation will reduce the excise taxes on sectors of the brewing industry, but these competing bills pit craft brewers against larger brewers, setting up a David and Goliath fight over tax reform.

The first bill of the two bills to be filed this year, the Small Brewer Reinvestment and Expanding Workforce Act (“Small BREW Act”), would reduce the federal excise tax rate by 50 percent on the first 60,000 barrels produced by breweries that produce 6 million or less barrels a year.[1] Barrels between 60,000 and 2 million produced would also receive a discounted tax rate of $16, down from $18. This bill also widens the net for craft breweries, tripling the capacity under which breweries qualify for incentives. The Brewers Association (“BA”), a trade group for craft brewers, estimates that the cost of the tax will be approximately $64 million annually, but will create around 5,200 jobs in the first 12-18 months after passage.

The Fair Brewers Excise and Economic Relief Act (“Fair BEER Act”), introduced less than a month after the Small BREW Act, contains nearly similar tax provisions to the Small BREW Act, although it also eliminates the excise tax on the first 7,143 barrels of beer.[2] The oddly specific 7,143 barrel threshold in this bill was designed to comport with the definition of “small brewer” under the Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau, helping with ease of administration. The main difference between the bills, however, is that the tax breaks in the Fair BEER Act apply to all brewers, regardless of size. The Fair BEER Act finds its most staunch support from the Beer Institute (“BI”) and the National Beer Wholesalers Association (“NBWA”), trade groups that represent the beer industry as a whole and beer distributors, respectively. The cost in tax revenue is a subject of dispute between the BI, which estimates the total around $113 million, and the BA, which puts a figure of $150 million or more on the bill.

The main contention between the interests represented by both bills seems to be inclusion. The Small BREW Act limits the tax breaks to only small brewers, while the Fair BEER Act provides a tax benefit to all brewers and importers. It also cuts the taxes for the smallest breweries to zero, theoretically benefitting small brewers significantly. Opponents of the Fair BEER Act suggest, however, that the tax provisions of that bill disproportionately favor large, multinational brewers that already receive favorable tax treatment. Another argument by opponents of the bill is that it is a red herring, created with the appearance of a more favorable bill to the industry, but destined for failure by design, effectively killing the chances of both pieces of legislation. Supporters of the Fair BEER Act counter that the legislation supports the entire industry, rather than focusing only on certain sectors, providing a more equitable tax benefit to all.  

Industry participants from Kentucky are involved in this national debate, such as Country Boy Brewing’s Daniel “DH” Harrison, a supporter of the Small BREW Act.

"As a small brewer and a member of the rapidly growing craft beer industry, we are in full support of the BREW Act, as we believe that it will allow small brewers in America to reinvest more of their earnings back into the business in the form of added tanks and most importantly- more workers," said Harrison. "However, we do not oppose the Fair Beer Act. We believe that its cost is too great and that the benefits to large brewers will ultimately make this a bill with no chance of passing. The BREW Act is a more economical and manageable bill that grants real tax breaks to small American craft brewers."

This is not the first time these two excise tax bills have battled it out. Versions of both bills have been introduced in all four Congresses since 2009. The provisions of the legislation have changed over the terms, but the essentials and essential differences have remained the same.  Neither of the two contenders has had much traction, mostly dying in committee. Currently, GovTrack.us, a site that tracks legislative action and calculates probabilities of enacting legislation, gives the Small BREW Act a ten percent chance of getting past a committee and a five percent chance of being enacted. The Fair BEER Act, by contrast, has a slightly lower chance – nine percent – of escaping committee, and a far lower chance at two percent of getting passed.

Brewers aren’t the only alcohol producers seeking tax reform in the Congressional spotlight, however. In February, Representative Andy Barr (R-KY) introduced the “Aged Distilled Spirits Competitiveness Act.”[3] In May, Kentucky’s Senators introduced a nearly identical measure the “Advancing Growth in the Economy through Distilled Spirits Act,” or the AGED Spirits Act.[4] The introduction of the latter tax relief bill for distillers came on the 51st anniversary of Senate Concurrent Resolution 19, a 1964 Congressional Resolution designating bourbon as a “distinctive product of the United States.”  The senators deemed the proposal a “pro-growth measure” to boost the economy and create jobs.

Both versions of the bill change tax laws so that distillers can deduct the interest expense that correlates to aging inventories the same year that they are paid. Under current federal tax law, distillers cannot take the deduction for interest until the distilled product is sold, which could be, in the case of some premium bourbons, as long as 23 years. Interest costs can be capitalized under IRC §263(a) if they are paid or incurred during the production period. This tax provision would work by exempting the aging process in the determination of the production period for distilled spirits, allowing distillers to claim the deduction when the spirits are produced and stored, not sold. While identical legislation died in earlier congressional sessions, the current iteration may well benefit in this session from having a newly-christened Senate Majority Leader as its primary sponsor.

In a press release from Sen. McConnell’s office concerning the Act, Eric Gregory, President of the Kentucky Distillers’ Association, said, “Kentucky Bourbon can’t be made overnight like most spirits. It takes years of age and tender craftsmanship to produce the world’s finest Bourbon, but that’s actually a deterrent when it comes to the discriminatory tax policies that are restricting growth and investment. The AGED Spirits Act will relieve that burden, create new jobs and level the playing field for our signature industry as it competes in the global marketplace.”

Time will tell if any of these tax provisions will pass a Congress mired heavily in gridlock, but brewers and distillers can remain hopeful, at least, that tax relief may be forthcoming. At the very least, a discussion of tax relief is underway.

Stephen G. Amato is a member of McBrayer, McGinnis, Leslie & Kirkland, PLLC and is located in the firm’s Lexington office. Mr. Amato's administrative practice focuses extensively in the area of alcoholic beverage regulation, representing the interests of alcoholic beverage producers, wholesalers and retailers in connection with licensing and enforcement issues with the various local ABC agencies, the Kentucky ABC and the TTB in Washington, DC. . He can be reached at samato@mmlk.com or (859) 231-8780.

This article is intended as a summary of newly enacted federal and state law and does not constitute legal advice.

[1] H.R. 232

[2] H.R. 767

[3] H.R.867

[4] S.1179

Comment

Comment

Fudging a Five-Star Rating – Can It Hurt?

An online reputation can make or break a business. Though word-of-mouth is still important, most consumers today take to the Internet when looking for a place to shop, eat, vacation, or play. It is no surprise, then, that businesses want to boost their online ratings and garner gleaming reviews on sites such as Yelp, Angie’s List, TripAdvisor, Urbanspoon, and the like. Is there really any harm in requiring an employee to post a positive review under a fake name? How about paying a stranger to sing your business’s praises, even if he or she has never used its services? It may seem like a harmless form of self-promotion, but engaging in this practice can be illegal and very expensive.

Just ask the nineteen New York businesses that, after a year-long undercover investigation by the New York Attorney General’s office, agreed to pay more than $350,000 in penalties for writing or paying for fake online reviews. "Operation Clean Turf," as it was dubbed, was an in-depth investigation in 2013 into the reputation management industry and the manipulation of consumer-review websites. The investigation revealed that the businesses flooded sites like Google Local and CitySearch with fake reviews and concealed their identities through IP spoofing techniques, fake profiles, and the use of freelance writers in foreign countries.

As businesses have become increasingly concerned with their online reputation, search engine optimization (“SEO”) companies are in high demand. These companies offer online reputation management as part of their services, but businesses may fail to understand how some SEO companies operate – by soliticiting fake reviews and establishing phony online accounts. These techniques have become so prevalent that they even have a name. “Astroturfing” is the practice of preparing or disseminating a false or deceptive review that a reasonable consumer would believe to be a neutral, third-party testimonial. According to New York Attorney General Eric T. Schneiderman, “Astroturfing is the 21st century’s version of false advertising, and prosecutors have many tools at their disposal to put an end to it.”[1]

While a sham review about a restaurant’s Sunday brunch could be harmless, consider false reviews raving about a surgeon’s work, a babysitting company’s background check process, or a lawyer’s success rate and you can more clearly see how a little white lie can become an ambush for the non-suspecting consumer who relies on it. A wide variety of businesses, including a dental practice and charter bus company, were caught in Operation Clean Turf.

The Attorney General had power to prosecute the businesses pursuant to New York’s consumer protection laws that prevent false advertising and deceptive business practices, specifically NY. Gen. Bus. Laws 349 and 350. What qualifies as false advertising varies from state to state, but consumer protection statutes generally prohibit the same kind of misconduct. In Kentucky, KRS 367.170, also known as the Kentucky Consumer Protection Act, protects against "unfair, false, misleading or deceptive acts or practice in trade or commerce.” In addition to state laws, consumers are also afforded protection at the national level from the Federal Trade Commission (FTC). The FTC was not involved in the New York investigation, but had it been, the conduct at issue would have likely violated Section 5(a) of the FTC Act, the consumer protection statute which provides that "unfair or deceptive acts or practices in or affecting commerce...are...declared unlawful." (15 U.S.C. Sec. 45(a)(1)). Businesses using endorsements or testimonials should review the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising, as the use of these may require special, inconspicuous disclosures. At minimum, the FTC’s Guides require endorsements to reflect the honest opinions, findings, beliefs or experiences of the endorser.

Regulatory agencies are not the only ones cracking down on false advertisements. Review companies themselves seek to protect the integrity of the content that appears on their site and therefore usually include a provision in their Terms of Use prohibiting users from posting false or intentionally misleading material.  Fake online reviews can violate these provisions and constitute a breach of contract. Yelp recently targeted a San Diego law firm for allegedly posting reviews from non-existent clients. While suing for false reviews is extreme, these companies regularly use filtering software and user tips to locate deceptive content.

Fake reviews may seem like a quick fix for an imperfect online reputation, but business owners should think twice before pushing the edge of the credibility envelope. If truly false and negative online reviews are affecting business, business owners may have a claim for defamation. Business owners can also seek reprieve from negative posts by contacting the offending websites and asking for derogatory material to be removed, or by addressing customers’ feedback in-kind. If you are a business owner and have questions about advertisements or endorsements for your business, consider contacting an attorney. Keep in mind that news of a customer’s bad experience can travel faster than ever and adjust your real-world interactions appropriately.

[1] New York State Office of the Attorney General. (Sept. 23, 2013). A.G. Schneiderman Announces Agreement With 19 Companies To Stop Writing Fake Online Reviews And Pay More Than $350,000 In Fines. Retrieved from http://www.ag.ny.gov/press-release/ag-schneiderman-announces-agreement-19-companies-stop-writing-fake-online-reviews-and.

Stephen G. Amato is a member of McBrayer, McGinnis, Leslie & Kirkland, PLLC and is located in the firm’s Lexington office. Mr. Amato's administrative practice focuses extensively in the area of alcoholic beverage regulation, representing the interests of alcoholic beverage producers, wholesalers and retailers in connection with licensing and enforcement issues with the various local ABC agencies, the Kentucky ABC and the TTB in Washington, DC. . He can be reached at samato@mmlk.com or (859) 231-8780.

This article is intended as a summary of newly enacted federal and state law and does not constitute legal advice.


Comment

Comment

The Basics of Alcoholic Beverage Control Laws

 

 

 

 

 

 

 

 

 

 

I.              Introduction

 

Since the end of Prohibition, states have traditionally dealt with the issue of Alcoholic Beverage Control (“ABC”) laws in one of two ways, either through full state regulation of the sale of alcohol or through a three-tier system of production, distribution and sale. With the abuses of the industry fresh in their minds, policymakers after Prohibition set about finding ways to keep alcohol from becoming a societal problem through careful regulation.  In Kentucky, the three-tier system is paramount, and that principle has been consistently affirmed by key court cases and legislation. These materials will provide an overview of the three-tier system in Kentucky with discussions of relevant cases and legislative changes.

 

II.            The Three-Tier System

 

a.    What it is

 

                                          i.    The three-tier system divides the alcoholic beverage industry into three distinct segments, each restricted to a particular service:

 

1.    Producers - brewers/distillers

 

2.    Distributors

 

3.    Retailers

 

                                         ii.    The three-tier regulatory system is based on an understanding that vertical integration in the industry (brewers/distillers owning distributors and retailers) could create entities so incredibly powerful that they could effectively beyond the influence of alcohol regulation. One of the side effects of this power would be to erode ABC laws and consistently push for deregulation.

 

                                        iii.    No one tier controls another

 

1.    Tied-house laws - These laws ensure that the two top tiers can’t control or influence the bottom tier. Retailers can operate on a level playing field independent of the suppliers and distributors. Tied house laws:

 

a.    Prohibit each tier from owning an interest in another tier, and

 

b.    Prohibit suppliers and distributors from giving a retailer anything of value

 

2.    Franchise laws – designed to level the playing field between suppliers and distributors and, similar to tied-house laws, protect the independence of distributors

 

                                       iv.    The system is likened to an hourglass instead of a pyramid – distribution, the center tier, is the constriction point that controls the flow of the system. Distributors are mandated to have an in-state presence.  Retailers and distributors are the most subject to local accountability through:

 

1.    Compliance checks

 

2.    Audits

 

3.    Community pressure

 

b.    The legitimacy of the three-tiered system:

 

                                          i.    Granholm v. Heald, 544 U.S. 460 (2005) –

 

1.    New York and Michigan had laws that allowed in-state wineries to ship wine directly to buyers, but prohibited out-of-state wineries from doing so. Out-of-state wineries and wine collectors sued.

 

2.    Plaintiffs argued the dormant commerce clause prohibited the states from interfering with interstate commerce via these laws.

 

a.    Commerce Clause grants Congress power “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” Dormant Commerce Clause doctrine suggests that states can’t make anticompetitive laws against out-of-state entities without Congressional permission.

 

3.    States argued that the 21st amendment gives them pretty much carte blanche to regulate alcohol as they see fit.

 

a.    21st Amendment, Section Two: “The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited”.

 

4.    Court held in favor of plaintiffs under Commerce Clause argument:

 

a.    “The Twenty-first Amendment’s aim was to allow States to maintain an effective and uniform system for controlling liquor by regulating its transportation, importation, and use.”

 

b.    “The decision to invalidate the instant direct-shipment laws also does not call into question their three-tier systems’ constitutionality”

 

c.    “State policies are protected under the Twenty-first Amendment when they treat liquor produced out of state the same as its domestic equivalent.”

 

d.    Stateshave broad power to regulate liquor under § 2 of the Twenty-First Amendment.”

 

                                         ii.    Manuel v. State of Louisiana, 2008 WL 1902437 (April 30, 2008 La. App. 3 Cir.):


“Without the three-tier system, the natural tendency historically has been for the supplier tier to integrate vertically. With vertical integration, a supplier takes control of the manufacture, distribution, and retailing of alcoholic beverages, from top to bottom. The result is that individual retail establishments become tied to a particular supplier. When so tied, the retailer takes its orders from the supplier who controls it, including naturally the supplier's mandate to maximize sales. A further consequence is a suppression of competition as the retailer favors the particular brands of the supplier to which the retailer is tied-to the exclusion of other suppliers' brands.   With vertical integration, there are also practical implications for the power of regulators. A vertically integrated enterprise-comprising manufacture, distribution, and retailing-is inevitably a powerful entity managed and controlled from afar by non-residents.

The three-tier system was implemented to counteract all these tendencies. Under the three-tier system, the industry is divided into three tiers, each with its own service focus. No one tier controls another.   Further, individual firms do not grow so powerful in practice that they can out-muscle regulators. In addition, because of the very nature of their operations, firms in the wholesaling tier and the retailing tier have a local presence, which makes them more amenable to regulation and naturally keeps them accountable. Further, by separating the tiers, competition, a diversity of products, and availability of products are enhanced as the economic incentives are removed that encourage wholesalers and retailers to favor the products of a particular supplier (to which wholesaler or retailer might be tied) to the exclusion of products from other suppliers.”

 

c.    Modern trends

 

                                          i.    Every tier has experienced serious consolidation

 

                                         ii.    Policy questioning of whether either of the two systems (three-tier or state-based regulatory) are necessary

 

                                        iii.    Craft brewers and distillers and small-farm wineries have exploded

 

1.    All seek exemptions from regulations to distribute or sell their products themselves

 

III.           Relevant Kentucky Statutes

 

a.    243.157 – Microbrewery license

 

                                          i.    Permits licensee to sell malt beverages produced on the premises for on-premises and off-premises purposes without a distributor

 

                                         ii.    Must have:

 

1.    Retail drink license

 

2.    Retail package license

 

                                        iii.    Subject to reporting requirements

 

b.    243.155 – Small farm winery license

 

                                          i.    Permits small farm winery to make and bottle wines, bottle wines produced at other small farm wineries, hold tastings subject to limits per patron, sell wine by the drink or by the package on the premises or at events, etc.

 

                                         ii.    If it is sold or consumed, it must be in wet territory.

 

c.    These two licenses are exceptions to the three-tier system

 

                                          i.    Allowing suppliers/producers to skip distributors and retailers entirely and become retailers themselves

 

                                         ii.    Vertical integration of small producers is allowed under this system

 

                                        iii.    There is an explosion of microbreweries and small farm wineries, so this does put larger suppliers at a disadvantage, leading to some erosion of the three-tier system. So far, however, retailers haven’t seemed to mind so much.

 

 

d.    243.0305 – Licensed distillers souvenir package sales

 

                                          i.    Distiller in wet territory that has a gift shop may sell souvenir packages at retail to visitors of legal drinking age

 

1.    Limited to three liters per day per person

 

2.    Even though the liquor can be delivered directly from the distillery to the gift shop, it is still invoiced to the wholesaler and from the wholesaler back to the distiller. This preserves the tier system on paper in this instance.

 

e.    244.602-.606 – Beer franchise license

 

                                          i.    No brewer or importer can require or request a distributor to pay the brewer, nor can they accept any money from the distributor in exchange for the right to distribute the alcohol

 

                                         ii.    Marketing fees are okay, though

 

                                        iii.    Prevents brewers from basically ever terminating or failing to renew a contract with a distributor absent severe breaches listed under the statute.

 

                                       iv.    Basic intention of the statute is to keep distributors and brewers at arms’ length and preserve the three-tier system

 

IV.          Relevant Kentucky Case Law

 

a.    Huber Winery, et al v. Wilcher, et al, No. 07-5128 (6th Cir. 2008)

 

                                          i.    Kentucky had a statutory scheme that prohibited out-of-state wineries from acting as distributors, even though in-state wineries were allowed to do so. In the wake of Granholm, plaintiffs filed suit against the state over the laws. The state quickly worked to amend the laws, requiring all sales of alcohol to be in-person with no direct shipping.

 

1.    District court nullified new laws, effectively opening up direct shipping, subject to a two-case limit

 

2.    Sixth Circuit affirmed, holding that in-person sales effectively gave in-state sellers an advantage over out-of-state sellers and was illegal under the holding in Granholm

 

3.    Collapsed the supplier/distributor tiers slightly where wineries are concerned

 

                                         ii.    Maxwell's Pic-Pac, Inc. v. Dehner, Nos. 12-6056/ 6057/ 6182 (6th Cir. 2014)

 

1.    Kentucky bars grocery and convenience stores from selling package liquor and wine, even though drug stores and others can do so. Plaintiff argued that this violated Equal Protection under both the U.S. and Kentucky Constitutions. 

 

a.    District Court agreed with the plaintiffs, but Sixth Circuit reversed.

 

b.    We conclude that reasonably conceivable facts support the contention that grocery stores and gas stations pose a greater risk of exposing citizens to alcohol than do other retailers. A legislature could rationally believe that average citizens spend more time in grocery stores and gas stations than in other establishments; people typically need to buy staple groceries (for sustenance) and gas (for transportation) more often than items from retailers that specialize in other, less-frequently-used products. Consider the district court’s pharmacy example. Kentucky could believe that its citizenry visits grocery stores and gas stations more often than pharmacies—people can survive without ever visiting a pharmacy given that many grocery stores fill prescriptions.”

 

c.    Court once again gives great deference to state control over liquor laws

 

V.            House Bill 168

 

a.    HB 168 was signed by Gov. Beshear on March 20th

 

b.    Amends KRS 243.110 to prohibit brewers from holding distributor’s license. Relevant text:

 

(2)     (a)       Each kind of license listed in KRS 243.040(1), (3), or (4) shall be incompatible with every other kind listed in KRS 243.040(1), (3), or (4), and no person holding a license of any of those kinds shall apply for or hold a license of any other kind listed in KRS 243.040(1), (3), or (4).

(b)     A brewery holding a license listed in KRS 243.040(6) or (9) shall not apply for or hold a license listed in KRS 243.040(3) or (4).”

c.    This is a direct codification of the three-tier system where breweries are concerned, nullifying the ability of brewers to self-distribute:

 

                                          i.    KRS 243.040(1) – Brewer’s License – Supplier/Producer

 

                                         ii.    KRS 243.040(3) – Distributor’s License

 

                                        iii.    KRS 243.040(4) – Nonquota retail malt beverage package license

 

                                       iv.    KRS 243.040(6) – Out-of-state malt beverage supplier’s license

 

                                        v.    KRS 243.040(9) – Limited out-of-state malt beverage supplier’s license

 

VI.          SB 81

 

a.    SB 81 failed to pass the General Assembly this session

 

b.    This bill had multiple provisions affecting Kentucky ABC laws

 

                                          i.    Expanded sampling privileges at distilleries to 3 ounces per customer per day (tripling the current amount).

 

                                         ii.    Enabled small farm wineries to enter into “custom crush” agreements to produce wines for each other

 

                                        iii.    Allowed distillers to give away by-products or non-alcoholic merchandise at a distillery tour

 

                                       iv.    Allowed local option elections for:

 

1.    Distilled spirit souvenir package sales by local distilleries

 

2.    Allowing by the drink sales at marinas

 

3.    Small farm wineries or golf courses

 

                                        v.    Created a sampling license that includes both free and paid samples

 

                                       vi.    Allowed souvenir package sales at distillers in moist precincts that have authorized those sales

 

                                      vii.    Permitted small farm wineries to sell unmarketable byproducts to distillers (pomace to be made into brandy)

 

c.    SB 81 would have given more generous privileges to distillers, bringing them more in line with small farm wineries and breweries

 

VII.         Suggested Reading

 

Raymond B. Fosdick & Albert L. Scott, Toward Liquor Control  (1933)

 

The importance of this book in alcoholic beverage control cannot be understand. Most laws and even court opinions spring from the provisions of this book and remain relevant in modern times. The book provides policy background and regulatory frameworks still in use today.

 

Stephen G. Amato is a member of McBrayer, McGinnis, Leslie & Kirkland, PLLC and is located in the firm’s Lexington office. Mr. Amato's administrative practice focuses extensively in the area of alcoholic beverage regulation, representing the interests of alcoholic beverage producers, wholesalers and retailers in connection with licensing and enforcement issues with the various local ABC agencies, the Kentucky ABC and the TTB in Washington, DC. . He can be reached at samato@mmlk.com or (859) 231-8780.

This article is intended as a summary of newly enacted federal and state law and does not constitute legal advice.

Comment

Comment

Kentucky’s Microbreweries, Small Farm Wineries and Craft distilleries Are Growing by Leaps and Bounds, but is the Law Catching Up?

The winds of change may be blowing in favor of small alcohol producers in Kentucky lately, but perhaps those winds could blow just a bit harder. In the midst of the phenomenal growth of the Kentucky Bourbon Trail and "alcohol tourism", the legislative bent of the Commonwealth of Kentucky lately seems poised to also encourage the proliferation of microbreweries, small farm wineries and craft distilleries. New laws and legislative considerations that permit certain retail privileges for small producers are a relatively new wrinkle in the state’s alcoholic beverage control (“ABC”) laws, and may reflect a growing shift in state alcohol policies that reflect and adapt to the growing economic benefit of both craft producers and alcohol-related tourism. At the same time, Kentucky is careful to uphold a strong three-tier system where larger producers are concerned, drawing a line separating economic benefit and tourism versus vertical integration and excessive top-heavy control by large distillers and breweries. Under these recent laws, small wineries and malt beverage producers may engage in modest retail activities that would ordinarily be restricted to them in the interest of furthering a thriving craft economy, but questions remain as to whether these laws go far enough in encouraging the growth of Kentucky’s craft producers, and even those of our iconic Bourbon distilleries, whose own retail privileges remain relatively limited.

Microbreweries, those that produce less than 25,000 barrels of beer in a year, may sell malt beverages produced on the premises by the drink or by the package without the need to physically transfer the products to a distributor. These provisions afford microbreweries limited privileges of entering the retail tier onsite, allowing these small producers to integrate vertically to retail their own products. The Louisville Courier-Journal and Lexington Herald-Leader note that while Kentucky only possessed two microbreweries in 2002, at least 14 have opened doors just since 2011.[1] This mirrors growth nationwide, as the Brewers Association, a trade group representing small and independent American craft brewers, cites 2014 statistics showing that craft brewers now control an 11 percent volume share of the marketplace, along with 22% growth in retail dollar value.[2]  Kentucky pales in comparison to Indiana, however, which has 126 active craft brewery licenses.  Kentucky currently has 26 active microbrewery licenses, and this disparity may be due in part to a difference in laws – Indiana allows for 30,000 barrels per year for microbrewers, a 20 percent increase above Kentucky.

Small farm wineries, however, are eclipsing microbreweries at a prodigious rate, with 88 small farm wineries in Kentucky. The state also provides certain retail package privileges for small farm wineries. For example, small farm wineries in Kentucky may make and bottle wines of their own, bottle wines from other small farm wineries, hold tastings and sell wine by the drink or by the package on the premises or at certain events.[3] They may also hold a restaurant liquor license. Still, small farm wineries would have received a significant boost from legislation that failed to pass the 2015 regular session. Senate Bill 81 would have brought a multitude of changes to Kentucky’s ABC laws, such as several “local option” provisions that would have allowed a local vote for package sales at distilleries and small farm wineries. Small farm wineries would also have been able to sell unmarketable wine products such as pomace to distillers to make brandy. HB 423, which also failed to pass this year, would have allowed small farm wineries to produce brandy directly for purposes of producing fortified wine.

Following the exploding growth in our state's signature Bourbon industry, dozens of small homegrown distilleries have begun cropping up in recent years. That prompted the legislature in 2014 to create a new class of distiller license that makes a distinction between large distillers and craft distillers, with the latter producing less than 50,000 gallons of distilled spirits a year. Craft distilleries are subject to a reduced licensing fee ($1,000 as compared to $3,090), but according to a report made for the Kentucky Distiller’s Association (KDA), this new system is not as generous to microdistilleries as other states laws are with similar distinctions.[4]

Kentucky also has limited provisions for distillers with respect to retail privileges in order to promote economic development and tourism along the Kentucky Bourbon Trail. In 2014 alone, more than 725,000 people visited the Kentucky Bourbon Trail, and most of those visitors came from out of state, according to the KDA.  Distilleries that both have a gift shop and are in wet territory have souvenir package privileges and may sell up to three liters of their distilled spirits per day, per person onsite.[5] The distillery, however, must still give and receive an invoice from a wholesaler for the delivery from the distiller to the distiller’s gift shop. This small step recognizes and preserves the three-tier system for the souvenir package sales, in addition to generating the appropriate tax revenues. Licensed distillers may also acquire a sampling license to allow visitors to sample the distilled products on premises.[6] SB 81, which failed to pass the General Assembly this year, would have expanded sampling privileges at these distilleries, allowing up to three ounces of samples per visitor per day, which would allow visitors to sample the wide variety and ages of distilled spirits being produced today. This legislation underscored the fact that distilleries have not yet been afforded the same privileges as breweries and small farm wineries.

Kentucky’s legislative climate certainly seems to be warming towards craft producers and growing thetourism and economic development through such venues as the Kentucky Bourbon Trail.  But, the failure this year of SB 81 and other craft producer-friendly legislation suggests that the General Assembly remains somewhat reluctant to fully embrace the concept of alcohol tourism, meaning that Kentucky still far lags behind other states in taking full advantage of the craft beverage industry while bolstering the three-tier system with regard to large and out-of-state producers.

Stephen G. Amato, Member of McBrayer, has practiced law throughout Kentucky since his graduation from the University of Kentucky College of Law in 1990. His practice is diverse, focusing on civil litigation and administrative law. Mr. Amato's administrative practice focuses extensively in the area of alcoholic beverage regulation, primarily representing the interests of alcoholic beverage retailers and distributors in connection with licensing and enforcement issues at both the state and local levels. He can be reached at samato@mmlk.com or (859) 231-8780, ext. 104.

Steve Amato.JPG

Stephen G. Amato is a member of McBrayer, McGinnis, Leslie & Kirkland, PLLC and is located in the firm’s Lexington office. Mr. Amato's administrative practice focuses extensively in the area of alcoholic beverage regulation, representing the interests of alcoholic beverage producers, wholesalers and retailers in connection with licensing and enforcement issues with the various local ABC agencies, the Kentucky ABC and the TTB in Washington, DC. . He can be reached at samato@mmlk.com or (859) 231-8780.

This article is intended as a summary of newly enacted federal and state law and does not constitute legal advice.


[1] http://www.courier-journal.com/story/news/local/2014/12/30/kentucky-craft-beer-scene-exploding/21050267/

[2] http://www.craftbrewersconference.com/wp-content/uploads/2015/04/2014-BA-Growth-Release.pdf

[3] KRS 243.157

[4] Barry Kornstein with Jay Luckett, University of Louisville, The Economic and Fiscal Impacts of the Distilling Industry in Kentucky (October 2014)

[5]KRS 243.0305

[6] KRS 244.050


Comment