California Regulatory Roundup – Fall 2018

December 11, 2018

Several new provisions of the California ABC Act were signed into law recently; below is an overview of the ones we find most relevant to our clients’ businesses. All statutory references are to the California Business & Professions Code. All of the laws described below take effect January 1, 2019.

Changes Affecting Craft Distillers (License Type 74)

Production Cap Increase – Craft distillers currently can produce no more than 100,000 gallons of distilled spirits per year (excluding brandy), and no owner, officer, director, etc., of a craft distiller can be affiliated with a producer of more than 100,000 gallons per year. Section 23502. Those limits will be increased to 150,000 gallons. (SB 1164)

Sales at the Distillery – Section 23504 is amended to eliminate the requirement that a person must attend a tasting before being able to purchase prepackaged containers of the craft distiller’s spirits at the licensed premises. The 2.25 liters per day restriction remains in place. (AB 1164)

Consumer Tastings – Current California law allows for tastings of spirits at on- and off-sale licensed premises, subject to various restrictions. Sections 25503.56, 25503.57. Those tastings can only be conducted by “authorized licensees,” which did not include craft distiller licensees. The definition of that term was expanded in the two cited statutes to include craft distiller licensees. (AB 1891)

Trade Tastings – Existing Section 25503.5(b) allows distilled spirits manufacturers, rectifiers, importers, and distilled spirits manufacturer’s agent licensees to conduct instructional tastings for licensees and their employees; it has now been amended to include craft distillers. (SB 1164) In addition, Section 25503.51 was added, which essentially does the same thing as the revision to 25503.5(b), except that the new section adds distilled spirits wholesalers, which can now also provide the instructional tastings. (AB 3264)

Changes Affecting Advertising by Suppliers

Advertising Consumer Tastings - Existing Section 25503.4 allows wineries and wine importers to conduct consumer tasting events at on-sale retailers’ premises. Existing Section 25503.56 allows consumer tastings of beer, wine or spirits at off-sale licensed premises, and 25503.57 allows consumer tastings of wine and spirits at on-sale licensed premises. All three statutes allow the supplier licensee conducting the tasting to advertise the event in advance, but restrict them from providing any information about the retailer beyond its name and address. Revisions to the three laws will allow the ads to also include still photos (no video) of the retailer’s “premises, personnel and customers,” and expanded contact info for the retailer, including its email and website addresses, and social media accounts. Suppliers also can re-post social media posts about the events, including posts by the retailer, as long as they comply with the content restrictions in the statutes. The references to the retailer still must be “relatively inconspicuous” in relation to the ad as a whole, and the supplier still cannot make laudatory references to the retailer. Note that the expanded ad content relates only to advertisements for the events allowed under the three statutes referenced above – it does not apply to supplier advertising in other contexts. (AB 2452, SB 1164)

Venue Advertising – The ABC Act prohibits supplier licensees from paying retailers for advertising rights at retail licensed premises. There are a number of exceptions to the prohibition, carving out allowances for supplier advertising at specific stadiums, parks, arenas, and other on-sale licensed venues. Section 25503.6 was revised to add three San Jose venues (San Jose Giants stadium, San Jose
Earthquakes stadium, SAP Center) and the San Diego Padres stadium (Petco Park). (AB 2000, AB 2146) Wine Institute and others have been working to pass an “Entertainment Venue Sponsorship” exception that would more broadly allow venue advertising, but it remains in legislative limbo.

Cannabis & Alcohol: You Gotta Keep ‘Em Separated New Sections 25621.5 and 26070.2 prohibit licensees from selling cannabis at their licensed premises, including alcoholic beverages that contain cannabis. The laws further clarify that no alcoholic beverage can be produced or sold that contains cannabis, tetrahydrocannabinol (THC), or cannabinoids (CBD). (AB 2914)

Miscellaneous

Free Rides – Existing law allows beer manufacturers to provide free or discounted rides to consumers “for the purpose of furthering public safety.” Section 25600(d). The law was amended to also allow certain distilled spirits supplier licensees, including craft distillers, to provide free or discounted rides. (AB 3264, SB 973)

Cemetery Cocktails
– For-profit cemeteries in Los Angeles that are at least 100 years old and on the National Register of Historic Places can now get on-sale general licenses. Good news for visitors to the Hollywood Forever Cemetery, which seems to be the sole beneficiary of the new Section 24045.76. (AB 1217)

Notable Unsuccessful Bills

Free Glassware – AB 2573 would have allowed beer manufacturers to provide up to five cases of free, branded glassware annually to on-sale retailer licensees, had Governor Brown not vetoed the bill. Consistent with this anti-free-glassware sentiment, Bus & Prof code § 25600 was amended to clarify that glassware is not an allowable retailer advertising specialty item that could be given to retailers by wine and spirits suppliers. (AB 3264)

4 a.m. Last Call – SB 905 would have extended the hours of sale for alcohol from 2 a.m. to 4 a.m. in several California cities, including Los Angeles, San Francisco, Sacramento, and Coachella. Governor Brown vetoed the bill, noting that he believes “we have enough mischief from midnight to 2 without adding two more hours of mayhem.” We expect to see this bill resurrected in future legislative sessions. (SB 905)

Duplicate Winery Tasting Rooms – Existing law allows wineries to sell wine to consumers and to conduct tastings at their licensed premises and at one additional premises under a duplicate license. The proposed amendment to 23390.5 would allow consumer sales and tastings at two additional premises licensed with duplicate licenses. The bill did not make it to the governor’s desk but we don’t expect this to be the end of it.


Changes to the California Brewpub License – and Recent ABC Enforcement Actions

December 05, 2018

The primary statute governing California brewpubs was recently amended by SB 1283, resulting in several changes for brewpubs that go into effect on January 1, 2019. The primary changes include heightened beer production requirements, the ability to sell beer produced by the brewpub for off-premises consumption, and the inclusion of brewpubs among on-sale licensees subject to quota restrictions beginning in 2020. The following are among the new provisions of California Business & Professions Code Section 23396.3 as a result of SB 1283:

  • The brewpub licensee must have a minimum commercial brewing system located permanently onsite that is capable of producing at least seven barrels of beer per brewing cycle. The law already requires minimum seven-barrel capacity, but the revision clarifies that the system must be capable of producing at least seven barrels per brewing cycle, and requires the system be permanently installed on site.
  • Minimum required production on the premises will increase from 100 barrels to 200 barrels per year. Maximum allowable production remains at 5,000 barrels per year.
  • Existing law allows the brewpub licensee to sell beer to, and buy beer from licensed wholesalers but prohibits them from selling, furnishing or exchanging alcoholic beverages with any other brewpub licensee or retailer in California. The revisions clarify that the brewpub licensee also may not buy beer from, or sell beer to, any holder of a beer manufacturer license, nor may a brewpub produce and sell beer under a trademark used on beers made by any other beer manufacturer.
  • Current law requires the licensee to make beer, and “authorizes” the licensee to offer it for sale for on-premises consumption. The revised law states that beer made on the premises “shall” be offered to consumers in a “bona fide manner.”
  • Licensees must keep records on a monthly or quarterly basis that are sufficient to establish compliance with the production and sale requirements. These records must be kept for at least three years. ABC recently investigated brewpub licensees in the state and determined that many were not producing beer under the license, so licensees should anticipate that ABC will be monitoring them for compliance with the brewpub production and sale requirements going forward.

Amendments to Section 23396.3 also expand the brewpub licensees’ privileges in a couple of beneficial ways:

  • Brewpub licensees may now sell beer made on the premises directly to consumers for off-sale consumption, and they can refill “any container” with beer made on site, i.e., growler fills are allowed.
  • Licensees can donate beer made at the premises to non-profit organizations pursuant to the requirements of Section 25503.9, but that beer does not count toward the 200 gallon minimum production requirement.

Note that brewpub licensees are still required to sell canned, bottled and draft beer made by others and bought from a licensed wholesaler, but cannot sell those products to consumers for off-premises consumption. Similarly, the brewpub can (but is not required to) sell wine and
spirits bought from winegrowers or wholesalers for on-sale consumption only.

The license fee for a brewpub license is the same as for an on-sale general license, but the brewpub license is not currently subject to the license quota that limits the number of on-sale general licenses (ABC can only issue one such license in a county per every 2,000 inhabitants of that county). As a result, brewpub licenses have been significantly less expensive than on-sale general licenses, which must be purchased from an existing licensee in the event the county license limit has already been met. However, beginning with license applications submitted on or after December 31, 2019, the quota restrictions will apply to brewpub licenses.

SB 1283 brings significant operational and licensing changes for California brewpubs. If you have any questions about brewpub licensing or operations, contact Strike & Techel.


The Importance of TTB Updates: Officers, Directors and Shareholders – Oh My!

October 01, 2018

There have been some recent developments at the Alcohol Tobacco Tax & Trade Bureau (“TTB”) regarding filing corporate updates that may affect your federal licensing as an importer, producer or wholesaler of alcoholic beverages. When you receive an approval letter for a TTB permit, you’ll receive information regarding the ongoing requirement to report changes in name, address, ownership, management or control after the original qualification of your business. Perhaps someone on your board of directors is new, or there’s a new 10% or greater shareholder in your company, or an officer leaves, or new officers are appointed; all of these changes must be reviewed by the right folks in your organization to determine if it triggers corporate updates with both the TTB and state authorities where you hold licenses.

We’ve blogged about the importance of staying up to date on your license applications with the TTB in the past, but we’ve just been reminded why keeping up with these compliance requirements is so important. Recently, the TTB announced enforcement against an Illinois wholesaler for not updating its TTB permits to report changes in ownership and control within the required timeline (in this instance, 30 days). See the TTB press release here. The Illinois wholesaler in question had not updated its ownership information with the TTB in a significant period of time, and the TTB ruled that the wholesaler was therefore operating without a valid permit, which is a criminal offense under 27 U.S.C. § 207. Although the Illinois wholesaler was engaged in other, more problematic behavior (paying slotting fees to a retailer), the citation of the unreported permit changes does indicate a potential shift in TTB enforcement priorities.

Accordingly, we recommend that all businesses keep their TTB permits up-to-date within the required deadlines, and, where required, file applications or amendments in advance of such changes. A change in proprietorship typically requires TTB preapproval of the new entity before closing a transaction, while a change in control typically triggers a post-closing notification to TTB. Other changes that may require updates with the TTB include changes to trade names, changes to business names, extensions or curtailments of the premises, changes to any alternation of premises or proprietor, or adding or removing non-contiguous storage locations. The TTB website also features more specific guidance on required updates for wineries, breweries, distilled spirits plants, and wholesalers/importers.

If you have any questions about report updates or licensing, please contact one of the attorneys at Strike & Techel.


Major Changes to Beer Wholesaler Operations in California

September 24, 2018

Governor Brown approved a bill on September 19, 2018, that will impose a range of significant new restrictions on California-licensed beer wholesalers. The bill number is AB-2469.

The new section §23378.05 of the Business & Professions Code (B&PC) will require a beer wholesaler to:

- Own or lease at least one warehouse sufficient to store stocks of beer equal to 10% of the wholesaler’s annual wholesale beer volume (similar to existing warehouse requirements for spirits in 4 CCR §28).

- Actually maintain in at least one warehouse stock equal to no less than 5% of the wholesaler’s annual beer volume.

- Receive all beer at the wholesaler’s warehouse, “unload and maintain” it on the premises, record it into inventory records and for purposes of compliance with California recycling laws, prior to any sale or reloading.

- Only sell beer that the wholesaler owns and has in the wholesaler’s physical possession, that is not acquired, held or offered for sale on consignment.

- Only sell beer from the wholesaler’s licensed premises or per B&PC §23388 (allowing the sale of beer from wagons or trucks operated by the wholesaler).

- Make deliveries to retailers only with equipment that the wholesaler owns, leases, or rents.

- Sell generally to retailers, and not to a single retailer or retailers that have a direct or indirect interest in the wholesaler or in each other, and to retailers that are owned in whole or in part or managed or controlled directly or indirectly by the retailer or retailers.

It also includes reminders on two other, previously existing parts of the ABC Act, which require a wholesaler to: (1) have and file with the state territorial agreements with each of the wholesaler’s beer suppliers; and (2) price post.

The bill was sponsored by the California Beer and Beverage Distributors, and its stated purpose is to “bring parity to California law by setting forth qualifications for a beer wholesaler consistent with qualifications for brandy and distilled spirits wholesalers.”

The new law will go into effect on January 1, 2019. It contains no grandfathering provisions for existing licensees, or deferred effectivity provisions, so California beer wholesalers should review the new law and ensure they are in compliance by January 1, 2019.


Federal Excise Tax Reform Update: Beer Transferred in Bond

August 29, 2018

Last month, the TTB released TTB Procedure Number 2018-1 addressing the transfer of beer between breweries not of the same ownership. Unlike wineries, prior to the Tax Cuts & Jobs Act of 2017 (the “Act”), breweries could not transfer beer under bond unless the transferring and receiving brewer were under common control. However, the Act now allows the transfer of beer under bond (i.e., without the payment of excise tax) between breweries not of the same ownership, subject to certain conditions, and only through December 31, 2019. In these transfers, the receiving brewery must accept responsibility for the payment of excise taxes on the beer, when the beer is ultimately removed from the receiving brewery for sale. TTB Procedure Number 2018-1 sets out the record keeping and documentation requirements for these transfers, and also provides instructions for completing TTB operational reports to reflect transfers of beer under bond.

Note that a brewery may only claim the reduced excise tax rates on beer that the brewery has produced. Beer is considered to be “produced” if it is brewed or produced at a brewery premises, including beer that has been brewed by fermentation or to which water or other liquids have been added during any stage of production. However, blending or combining two beers does not count as “production” for reduced tax purposes. Thus, for beer transferred in bond, the receiving brewery may not be eligible to claim the reduced excise tax rates on the beer received under bond. However, transfers beer produced at the brewery to another brewery for bottling, and which receives the same beer back under bond, would be eligible to remove such beer at reduced tax rates.

The TTB is still working on guidance regarding the Act’s changes to alcohol excise taxes. For more information on the excise tax changes, production requirements, and the alternate procedure relating to claiming the excise tax credit, we have previously blogged on these subjects here, here, and here. The TTB has not yet issued guidance on the controlled group and single taxpayer rules, but such guidance could impact how your business is able to claim the Act’s reduced excise tax rates. We will continue to post updates on the TTB’s guidance as it is released.

If you have any questions about how the recent excise tax changes may affect your business, contact one of the attorneys at Strike & Techel.


Compliance with California Prop 65 – The August 30, 2018 Deadline is Approaching!

August 22, 2018

Effective August 30, 2018, new Prop 65 signage requirements will be in effect in California for alcohol retailers and suppliers with ten or more employees. In a nutshell, there are two new requirements:

(1) The existing Prop 65 general alcohol warning language has been slightly revised to include the word WARNING and a link to the state government’s Prop 65 website;

(2) A new warning is required to warn consumers about Bisphenol A (BPA), which is a chemical present in certain packaging materials, such as some synthetic wine corks and aluminum cans, and in certain processing equipment, such as some hoses. (We previously wrote about BPA here.)

Suppliers and retailers of alcoholic beverages must comply to the letter with the new requirements to remain safe from possible lawsuits for violating the Prop 65 consumer warning requirements. Below is a summary of the specific signage requirements and instructions about where these required warnings will need to be posted.

(1) The Prop 65 General Alcohol Warning Sign

(a) Who must provide the general alcohol warning?

All retailers of alcoholic beverages in California with 10 or more employees must post the new general alcohol warning sign pictured below. The posting requirements also extend to California producers with tasting rooms, ecommerce websites, catalog sales, and to retailers outside of California shipping wine to California consumers.

(b) What does the general alcohol warning say?

The warning must use the exact language shown below, including the word WARNING in uppercase, bold type. When it is posted at the retail point-of-sale, it must be presented within a rectangular border, as shown below.

P65 Warning

(c) Where must the general alcohol warning sign be posted?

  • Must be visible to consumers before they purchase alcohol. Retail stores and tasting rooms have two options:

1) on an 8.5” x 11” sign with 22-point type at the point-of-display, that is at eye level, and is “readable and conspicuous” i.e., on the wall of the tasting room or retail store near where the alcohol is displayed; or

2) on a 5” x 5” sign with 20-point type presented within a square border, just as pictured above, placed at each point-of-sale (i.e., near each cash register) or each point-of-display.

  • Bars and restaurants may use one of the options above, or may provide the warning on a menu or drink list.
  • Websites and product catalogs displaying alcohol for purchase also must display the general alcohol warning. In cases where the size of the sign and text is not specified, such as on menus, websites and catalogs, the warning must be prominently displayed with such conspicuousness as compared to other words and designs on the labels or related signage as to make the warning likely to be seen, read and understood by an ordinary individual.
  • Deliveries of alcohol direct-to-consumer must include the general alcohol warning “on or in the shipping container or delivery package in a type size no smaller than the largest type used for other consumer information on the product,” and in no case smaller than 8-point type. The warning must be readable and conspicuous, so place it where it will be seen before consumption.

(2) The BPA Warning Sign

(a) Who must provide the BPA warning sign?

The BPA warning only applies to companies with 10 or more employees that sell products that contain BPA, and may not apply to your business. If you aren’t sure if your product contains BPA, you can seek written certification letters from your suppliers of equipment and packaging materials (e.g., cans, bottles, caps, hoses, synthetic corks, etc.). If you are unsure, it would be wise to err on the side of caution and include the warning.

(b) What does the BPA warning sign say?

The BPA warning must use the exact language shown below: including the symbol (a black exclamation point within a yellow triangle) at least as large as the word “WARNING,” which must appear in uppercase, bold type. (The triangle symbol can be black and white if the sign is black and white.)

Warning triangleWARNING: This product can expose you to chemicals including bisphenol A (BPA), which are known to the State of California to cause birth defects or other reproductive harm. For more information go to http://www.P65Warnings.ca.gov. For a list of products go to: http://www.prop65bpa.org.

(c) Where must the BPA warning sign be posted?

  • Must be visible to consumers before they purchase alcohol. Retail stores and tasting rooms have two options:

1) on a posted sign, shelf tag or shelf sign at the point-of-display; or

2) with an automatic warning provided to the consumer prior to or during the purchase, that does not require the consumer to seek out the warning.

  • Websites displaying alcohol can either use one of the methods above, or can print only the word WARNING on the product display page with a hyperlink directly to the text of the warning above. In any case, the warning must be prominently displayed and cannot be buried in the general website content. (A website wanting to use the automatic warning option above, could enable a pop-up warning that appears when the consumer enters a California zip code, for example.)
  • Catalogs featuring alcohol for sale must display the warning “in a manner that clearly associates it with the item being purchased.”
  • Shipments of alcohol delivered direct-to-consumer must include the BPA warning prominently on or in the packaging if the products may expose the consumer to BPA.

If the alcohol products being displayed or sold contain advertising or consumer information in a foreign language, the general alcohol warning and the BPA warning must also appear in that language, as well as English.

More information on the BPA requirements, including sign templates, can be found at the Wine Institute’s website here. Note that you can order free signs that are compliant, provided by Prop 65 Sign Management, as we noted in our earlier article.

This summary is provided for general information purposes only and should not be construed as legal advice. Any businesses selling alcoholic beverages in California should be aware of the impact of Prop 65 on their activity. If you have any questions, contact one of the attorneys at Strike & Techel.


South Carolina Off-Premises Retail Caps, Part II

August 01, 2018

Last year, we covered the South Carolina Supreme Court case that ruled the state’s prohibition against an entity holding more than three off-premises retail liquor licenses was unconstitutional. The court held that the South Carolina law was enacted to protect small retailers, and that economic protectionism was not a sufficient justification for the law. Read our previous blog on that March 2017 decision in Total Wine v. South Carolina DOR here.

The South Carolina legislature recently passed a law that reenacts limits on the number of off-premises retail liquor licenses that an entity may hold. Act 147 was signed by the South Carolina Governor in April, and it went into effect immediately. In an attempt to distinguish the Act from the law previously ruled unconstitutional by the South Carolina Supreme Court, the legislature listed a variety of health and safety policy arguments in favor of the legislation, in addition to the economic goals of spurring competition and reducing monopolization of the alcohol market. The legislature asserted that harms related to excessive alcohol consumption are tied to liquor retailer density, and cited statistics involving alcohol-related deaths, traffic fatalities, as well as binge drinking rates.

The new law, S.C. Code § 61- 6-141, provides that an entity may only obtain three off-premises retail liquor licenses in the state. However, an entity may obtain three additional off-premises retail liquor licenses, if the new retail liquor licenses are obtained in counties with more than 250,000 residents. Furthermore, an entity seeking any of the three additional off-premises retail liquor licenses may not operate more than two stores in a county with more than 250,000 residents. However, if the entity already operated three off-premises retail liquor licenses in a
county with more than 250,000 residents as of March 21, 2018, then the entity may obtain two additional off-premises retail liquor licenses to operate in that county. Currently, only seven counties have a population larger than 250,000 residents.

The issuance of the three additional off-premises retail liquor licenses is staggered under the new law. Entities may obtain only one additional license between now and May 31, 2020, a second additional license between June 1, 2020 and May 31, 2022, and the third additional license will not be available until June 1, 2022.

If you have any questions about retail liquor licensing or chain limitations, contact one of the attorneys at Strike & Techel.


Federal Excise Tax Reform Updates: Imports and Wine Transferred In Bond

May 22, 2018

The Alcohol and Tobacco Tax and Trade Bureau (“TTB”) has issued a revised industry circular regarding the alternate procedure for wineries to claim the excise tax credit on wines that are stored at a bonded wine cellar or bonded winery. Per Industry Circular 2018-1A, that alternate procedure is now available through December 31, 2019, rather than expiring on June 30th as originally determined. Thus, the alternate procedure is available for the entire term of the federal excise tax revisions, which are set to expire on December 31, 2019, although industry groups are working to get the excise tax revisions extended. Furthermore, the alternate procedure is available for wines stored untaxpaid at a bonded winery as well as at a bonded wine cellar. The prior industry circular had only specified bonded wine cellars. For more information on the excise tax changes, production requirements, and the alternate procedure relating to claiming the excise tax credit, we have previously blogged on these subjects here and here.

Those following our blog will be aware that the tax changes that took effect in January apply to beverage alcohol products produced outside of the United States, as well as domestic production. Having said that, it is still not possible to claim the tax credit for wine, or the reduced beer and distilled spirits tax rates, for products coming into the US from overseas. The TTB issued preliminary guidance through its FAQ page back in February that it was working with Customs and Border Protection to establish procedures and issue guidance for importers. Based on recent public statements from TTB, we expect those procedures and guidance to issue in June. Until then, imported products continue to be subject to tax payment at the full excise tax rates for each product category. Once the new procedures take effect, importers will be eligible to claim retroactive credits and lower tax rates for products brought in since January 1st of this year.

If you have any questions about how the recent excise tax changes may affect your business, contact one of the attorneys at Strike & Techel.


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