January 14, 2021
The state of Kentucky enacted a direct-to-consumer (DTC) shipping law for beer, wine, and spirits, effective July 15, 2020, and on December 14, 2020, finally issued the regulations to implement the new law. Here’s the new law in a nutshell:
Who is Eligible for the DTC Shipping License and What Can Be Shipped?
The law is applicable to producers of beer, wine or spirits with federal basic permits and state production licenses in their home state – it is not applicable to retailers. Producer licensees can ship up to 10 liters of distilled spirits, and up to 10 cases of wine or beer per month per Kentucky resident. The products must be produced by
the licensed shipper or produced or bottled by another producer exclusively for them under a brand name owned by, or licensed to, the direct shipper. Brands and labels must be registered with the Kentucky ABC.
What is Required to Obtain a License to Ship DTC?
In order to qualify to ship DTC, the out of state producer must obtain a direct shipper license from the Kentucky ABC, which currently costs $100/year. The applicant must first register to do business in Kentucky with the Secretary of State, and register with the Department of Revenue to collect and remit sales and alcohol taxes. Licensees can only ship product from their licensed premises and they must provide a copy of the deed or lease showing their right to occupy the licensed premises they will ship from. This is a significant limitation for licensees that typically operate their DTC program from fulfillment houses or third-party warehouses off their licensed premises.
Shippers must collect and pay a 6% sales tax, plus an alcohol wholesale tax and an alcohol excise tax. The wholesale tax is 11% of the wholesale price for spirits and 10% of the wholesale price for beer and wine. If there is no actual wholesale price for the products in Kentucky, it is deemed to be 70% of the invoiced retail price. The excise tax is currently $1.92/gallon for spirits, $0.50/gallon for wine, and ~$0.08/gallon for beer. Alcohol taxes are reported and paid quarterly.
If you have questions about the new law or about direct shipping generally, please reach out to one of the attorneys at Strike Kerr & Johns.
January 06, 2021
TTB issued a final rule, effective December 29, 2020, amending the existing labeling regulations for wine and distilled spirits. The revised regulations add seven new allowable container sizes (called “standards of fill”). For wine, TTB added 200, 250, and 355 milliliter sizes, and for distilled spirits, TTB added 700, 720, 900 milliliters and 1.8 liter sizes. The allowable sizes are now:
Wine – 27 CFR 4.72:·
The final rule also made two other revisions:
TTB had initially proposed to eliminate the standards of fill for wine except for the minimum 50ml size (to accommodate the required labeling info) and eliminate all but the minimum and maximum standards of fill for spirits. The thought behind the proposed changes was that it would expand manufacturing options and consumer purchasing options, and would promote commerce, without impacting tax revenue calculations or collection. TTB received comments in support of the elimination from commenters who felt it would provide them greater flexibility and enable them to grow their businesses.
However, TTB received many more comments in opposition to the proposed elimination, including from some industry members and their trade groups. The concerns raised by these commenters included potential consumer confusion caused by a myriad of available sizes, making it more difficult to price compare, and a more “chaotic consumer marketplace” generally. Some wholesalers and retailers also submitted comments in opposition, asserting that the proliferation of sizes would increase their costs. In the alternative, TTB had proposed not eliminating the existing standards of fill but adding new sizes based on those it had received petitions to approve. Taking into consideration the comments it received, the majority of which opposed elimination of the standards of fill, TTB opted to add certain of the proposed new sizes, as reflected in the final rule.
If you have questions about the new TTB ruling or about alcohol labeling and advertising generally, please reach out to one of the attorneys at Strike Kerr & Johns.
October 26, 2020
On September 28, 2020, TTB issued TTB Ruling 2020-1 and the corresponding TTB Procedure 2020-1, which expand the allowable tolerances for calorie statements in alcohol labeling and advertising. The new ruling further clarifies that producers are not required to conduct laboratory analyses prior to providing nutritional content information.
Expanded Calorie Tolerances.
In a 2004 Ruling, TTB began allowing permittees to voluntarily provide information about the nutrient content of their products. Specifically, TTB began to allow statements about a product’s calories, carbohydrates, protein and fat content, if truthful and accurate information was provided for each of the four elements in a “statement of average analysis.” In a subsequent 2013 Ruling, TTB expanded on its 2004 ruling and began allowing producers to provide the same nutritional information in a Serving Facts panel.
Under both the 2004 and 2013 rulings, calorie statements were compliant as long as the actual calorie content, as determined by TTB, was within a range of plus 5 or minus 10 calories from the advertised calories. For example, a label that says a serving of a product contains 100 calories was compliant as long as TTB’s testing shows no less than 90 calories nor more than 105 calories. The new ruling expands that tolerance to more closely mirror the FDA, which allows producers to understate calories by as much as 20%. Under the new TTB Ruling, a claim that a serving contains 100 calories is still compliant if the actual calories as determined by TTB are not more than 120 (vs. 105 under the old rule). There is no specific percentage tolerance for overstatements of calories on labels or ads; they are complaint if they are within a reasonable range and within good manufacturing practices. (We suspect overstatement of calories on alcoholic beverages is rare.)
TTB also will now allow permittees to round the calories to the nearest 10-calorie increment for per-serving amounts above 50 calories, and to the nearest 5-calorie increment for per-serving amounts up to and including 50 calories, which is also more consistent with FDA requirements. The same 20% tolerance applies to the advertised calorie count, whether or not it is rounded. TTB will continue to allow amounts less than 5 calories to be expressed as zero.
What About Fat, Carbs, and Protein?
The ruling does not change the tolerances for fat, carbs or protein, which have been subject to the 20% tolerance since 2004. Overstatements of protein, and understatements of carbs and fat are still compliant if within the 20% tolerance. The Ruling also does not affect the tolerances for alcohol content, which are set forth in the regulations at 27 CFR §§ 4.36, 5.37, and 7.71.
Lab Analysis Not Required.
The new rulings also clarify that permittees are not required to conduct a laboratory analysis on each batch of products they produce in order to substantiate voluntary nutrient content statements. Instead, producers may rely on databases or “typical value” charts to determine the nutrient content values applicable to their products. This announcement was particularly welcome news to the members of the wine industry, whose products are not produced in accordance with a formula, like distilled spirits and beer products, and therefore their nutrient content may vary from vintage to vintage and even from barrel to barrel.
These measures bring TTB in closer conformity to the FDA food labeling regulations, and TTB believes this will encourage broader use of nutrient content statements on alcohol labeling and advertising.
If you have questions about the new TTB rulings or about alcohol labeling and advertising generally, please reach out to one of the attorneys at Strike Kerr & Johns.
October 12, 2020
First, a note to our readers…
Like everyone, we’ve had our hands full with the pandemic and have been helping our clients work through its impact on our industry, so we haven’t had much time to write blog posts this year. We intend to resume posting with more regularity going forward, and below is our first post in a while, which is refreshingly not about COVID-19.
MENDOCINO COUNTY EARNS LONG-AWAITED CONJUNCTIVE WINE LABEL
Mendocino County is one of the largest wine-producing counties in California. From pinot noir to zinfandel, the region is known for its grape growing - particularly red varietals. However, it does not enjoy the same labeling protections as Sonoma County or Napa Valley, both of which require producers in American Viticultural Areas (“AVAs”) located within their borders to designate the greater region on their producers’ wine labels. (For an explanation of California appellations and wine labels, please see our previous post.) The practice of requiring wine labels to include both the region and sub-region of origin is coined “conjunctive labeling.” Conjunctive labeling is intended to boost consumer exposure to wines produced within a larger geographic region, in addition to the sub-region or AVA in which they were produced. Proponents believe that such uniform marketing translates to increased sales within the region as a whole. Conjunctive labeling can be particularly valuable to lesser known AVAs that lie within a region that contains other well-known AVAs.
Mendocino WineGrowers, Inc. (“MWI”), Mendocino County’s alliance of grape growers, thinks that Mendocino County deserves its own distinct conjunctive labeling law, and thanks to the enactment of SB 1009, MWI’s efforts have paid off. As of January 1, 2023, the words “Mendocino” or “Mendocino County” must appear on the front or back label of wines produced within AVAs located entirely within Mendocino County or that use a vineyard designation within Mendocino County. For containers 188 ml or larger, the “Mendocino” or “Mendocino County” designation must be in at least 2 mm font, and for containers 187 ml or less, the font cannot be smaller than 1 mm.
Mendocino County now joins “Lodi,” “Monterey County,” “Napa Valley,” “Paso Robles,” and “Sonoma County,” which mandate their producers to comply with conjunctive labeling laws. See Cal. Bus. & Prof. Code §§ 25240, 25244, 25245, 25246 and 25247.
January 30, 2020
After practicing for nearly ten years as Strike & Techel, we will henceforth and forevermore be known as Strike Kerr & Johns! All of our contact information will remain unchanged, and we will continue to practice exclusively in the field of alcoholic beverage law from our offices in downtown San Francisco. We wish our former partner, Kristen Techel, the very best as she takes some time off to chart her new course. Partners Barry Strike, Tom Kerr and Melani Johns are excited about the next chapter in our firm’s life and we look forward to continuing to tackle and resolve the thorniest problems the alcohol beverage industry can throw at us!
Barry, Tom and Melani
July 02, 2019
Last week, the Supreme Court issued its opinion in Tennessee Wine and Spirits Retailers Association v. Thomas, No. 18-96 (“Tennessee Retailers”). The full opinion can be read here, and our introduction to the case and issues can be found here. To recap, at issue in this case is the interplay between the Dormant Commerce Clause and the 21st Amendment. The Dormant Commerce Clause prohibits states from discriminating against interstate commerce, while the 21st Amendment grants to each state the authority to regulate alcohol within its borders. In Tennessee Retailers, the Court considered to what extent the 21st Amendment allows states to pass laws regulating the alcohol industry that would otherwise be prohibited by the Dormant Commerce Clause.
The Court last addressed this question in 2005, when the Court held in Granholm v. Heald that the 21st Amendment “does not immunize all [state alcohol] laws from Commerce Clause challenge.” In that case, the Court invalidated laws that favored in-state wineries over out-of-state wineries with respect to direct sales and shipments to consumers. Last week’s ruling in Tennessee Retailers confirmed a broad reading of the prior ruling in Granholm, as applied to a Tennessee law requiring applicants for retail liquor store licenses to live in the state for two years before being eligible for the license. The Court held that Tennessee’s discrimination against out-of-state individuals in the granting of retail licenses violates the Dormant Commerce Clause, and is not saved by the 21st Amendment. The Court ruled that the 21st Amendment “allows each State leeway to enact the measures that its citizens believe are appropriate to address the public health and safety effects of alcohol use and to serve other legitimate interests,” but that it does not “license the States to adopt protectionist measures with no demonstrable connection to those interests” in violation of the Dormant Commerce Clause. The Court also clarified that the prior ruling in Granholm was not limited to prohibiting discrimination against out-of-state products and producers, and that states are prohibited from discriminating against any out-of-state interests, including out-of-state individuals or retailers.
Much of the news coverage and discussion of this case has focused on the impact of the case on state laws that allow in-state retailers to ship alcohol directly to consumers, but prohibit out-of-state retailers from doing the same. Some coverage implied that such laws were automatically invalidated by the Court’s ruling, but the retailer direct shipping issue was not in front of the Court. While the ruling in Tennessee Retailers does confirm that the principles in Granholm apply to all out-of-state interests, rather than just out-of-state producers, the ruling does not categorically prohibit all state alcohol laws that do not treat in-state and out-of-state businesses equally. The ruling is instead a continuation of the Granholm conversation. The ruling confirms that states “‘remain free to pursue’ their legitimate interests in the health and safety risks posed by the alcohol trade,” and that the 21st Amendment does confer additional regulatory authority to the states. However, when a discriminatory state law is “purely protectionist” and cannot be “justified as a public health or safety measure” or on some other “legitimate non-protectionist ground,” then the law will be found unconstitutional. Thus, state laws that allow in-state retailers to ship alcohol directly to consumers, but prohibit out-of-state retailers from doing so, are not definitively unconstitutional following the ruling in Tennessee Retailers. These laws are only unconstitutional if the state cannot establish that the laws are necessary to advance a legitimate local purpose, such as protecting public health and safety, and that there are no reasonable nondiscriminatory alternatives that can adequately further that purpose.
So, what does this ruling really mean? First, the ruling is a victory for out-of-state individuals and entities that desire to apply for a retail liquor store license in Tennessee. Second, other states with burdensome retail residency requirements, such as Massachusetts and Maryland, are likely evaluating the legality of their laws in light of the ruling in Tennessee Retailers. Such states may opt to eliminate such requirements, or may decide to leave the residency requirements in place until challenged. Given the language in Tennessee Retailers analyzing the lack of connection between Tennessee’s residency requirements and advancing public health and safety interests, leaving burdensome residency requirements in place may be risky. But, the State of Tennessee did not attempt to defend its laws, and the public health and safety arguments put forth by the Tennessee Wine and Spirits Retailers Association were cursory, and thus other states may believe that they can do a better job defending their laws. If any states decide to leave retail residency requirements in place, it is likely that litigation will follow. Third, states with residency requirements for wholesaler licenses, such as Missouri, are also likely weighing whether to revise such laws or to leave the residency requirements in place until challenged. Missouri’s wholesaler residency requirements were upheld as constitutional by the 8th Circuit in 2013. However, the 8th Circuit ruling was based on a narrow reading of Granholm, and that interpretation was directly refuted by the Court in Tennessee Retailers. Accordingly, it would not be surprising to see litigation on this issue in the very near future, if such states do not remove wholesaler residency requirements. Finally, even less-burdensome residency requirements, such as requirements for licensees to have a resident manager, may be vulnerable to challenge.
While residency requirements will be most directly in the line of fire following Tennessee Retailers, the ruling has the potential to impact many other aspects of state alcohol regulation. Unlike Granholm, the Tennessee Retailers Court declined to describe the three-tier system as “unquestioningly legitimate.” The Court clarified that while the basic three-tier model may be sound, the 21st Amendment does not sanction “every discriminatory feature that a State may incorporate into its three-tiered scheme.” It is unclear to what extent Tennessee Retailers will spur states to act on their own to revise discriminatory aspects of the state’s alcohol regulatory scheme. We may see states make changes independently, but it may be that significant change will only be achieved through litigation. As the Court noted, “each variation [of three-tiered alcohol regulatory schemes] must be judged on its own features.” Because discriminatory alcohol laws are only unconstitutional if they are not reasonably necessary to advance a legitimate local purpose, states may leave discriminatory laws on the books in the hopes that they can justify those laws if challenged. Accordingly, the most direct outcome of Tennessee Retailers will likely be a considerable amount of litigation.
Which laws are the most likely targets of litigation? Any state alcohol laws that discriminate against “out-of-state economic interests” are vulnerable to challenge under Granholm and Tennessee Retailers. So, litigation could focus on laws that authorize only in-state retailers to deliver or ship to consumers, or it could target laws such as physical presence requirements, tied-house exceptions that allow only in-state producers to operate retail locations, laws that require retailers to purchase from in-state sources, laws that authorize only in-state suppliers to self-distribute products to retailers, at-rest laws, or franchise law exemptions that apply only to in-state suppliers. The recent ruling in Tennessee Retailers may also inspire further litigation and move the needle in the related area of alcohol laws that are facially neutral but potentially discriminatory in effect. For example, states such as New Jersey or Ohio with laws that have special privileges for certain “small” producers, where the definition of “small” may be designed to encompass most or all in-state producers while excluding many out-of-state producers.
While we noted above that some news coverage has overstated the immediate impact of Tennessee Retailers on out-of-state retailer direct to consumer shipping or delivery, the ruling will undoubtedly lead to more litigation regarding these laws. Some of that litigation may be successful in invalidating laws that allow in-state retailers to ship or deliver alcohol directly to consumers, but prohibit out-of-state retailers from doing so. However, each case will depend upon the specifics of the state’s regulatory scheme and the state’s public health and safety justifications for that scheme. While the justifications for Tennessee’s residency requirements were weak, states may have stronger public health and safety justifications for laws regulating delivery and direct shipping, such as preventing underage drinking or delivery of alcohol to intoxicated persons. Note, however, that this argument was held in Granholm to be insufficient justification for treating in-state and out-of-state wineries differently with respect to the shipment of wine to consumers. But, the strength of public health and safety justifications will likely be different in states that allow retailer hand delivery but not shipment by common carrier of alcohol, and these justifications may also be different with respect to beer or spirits as opposed to wine. Furthermore, states may have additional public health and safety justifications based on preventing counterfeit alcohol. An out-of-state retailer would not obtain its products from the same distribution system as an in-state retailer, and the state’s public health and safety justifications for its distribution system and requirements for alcohol sourcing may be persuasive. However, a state making this argument would likely also need to assert that there are no reasonable nondiscriminatory alternatives to accomplishing the goal of preventing counterfeit alcohol.
There are at least two cases already pending that challenge state laws with respect to alcohol shipping and delivery. In Missouri, Sarasota Wine Market v. Schmitt is on appeal to the 8th Circuit. The lower court held that Missouri’s laws permitting in-state retailers to ship wine directly to consumers, but prohibiting out-of-state retailers from doing the same, are valid under the 21st Amendment. However, this ruling was based on the 8th Circuit precedent mentioned above, which relied on a narrow interpretation of Granholm that was contradicted by the Court in Tennessee Retailers. Further, Lebamoff Enterprises v. Snyder, challenging Michigan’s wine shipping laws that treat in-state and out-of-state retailers differently, is pending before the 6th Circuit. In that case, the lower court held that Michigan’s laws are unconstitutional, as they impermissibly discriminate against out-of-state interests without sufficient justification in violation of the Dormant Commerce Clause. This ruling and appeal were stayed pending the outcome in Tennessee Retailers. These two cases will likely provide the earliest insight into how courts will apply the recent Supreme Court ruling.
Even if the outcome of these cases is that state laws are found invalid, it will not necessarily mean that these states will allow out-of-state retailer direct shipments. Upon a court ruling that a state’s laws are discriminatory and unconstitutional, the state could decide to rectify the issue by “leveling down” to prohibit all retailer alcohol shipments to consumers, from both in-state and out-of-state retailers. As such, the law would apply equally to all retailers regardless of location, so it would not be discriminatory. “Leveling down” to remove all retailer alcohol shipping privileges would likely be unpopular with consumers, but it may find support from some segments of the alcohol industry. Thus, this outcome remains a possibility even if litigation challenging laws prohibiting out-of-state retailer shipping is successful.
Overall, we will have to wait and see what the ruling in Tennessee Retailers will mean for the alcohol industry. But, if you have any questions regarding this ruling or how current laws affect your alcohol business, contact one of the attorneys at Strike Kerr & Johns.
July 01, 2019
Direct to consumer (“DTC”) wine shipping is a reoccurring topic on the Alcohol.law Digest. (Our most recent post on winery and retailer DTC shipping is located here.) This particular post addresses recent legislation in Connecticut, Senate Bill 647. Effective today, that legislation creates a new permit allowing out-of-state retailers to sell and ship wine directly to Connecticut consumers. The Connecticut Liquor Control Division has posted the application for this new permit, the Out-of-State Retailer Shipper’s Permit, as well as application instructions and guidance, here.
The compliance requirements for the new permit mirror the existing requirements for wineries to ship directly to Connecticut consumers. For example, out-of-state retailer shipper permittees must ensure that wine containers are conspicuously labeled: “CONTAINS ALCOHOL—SIGNATURE OF A PERSON AGE 21 OR OLDER REQUIRED FOR DELIVERY.” Further, the wine recipient must sign for the delivery and provide valid proof that he or she is at least twenty-one years of age. There are registration, reporting, and tax obligations. An out-of-state retailer shipper permittee may not ship more than five gallons of wine to the same Connecticut consumer in any two-month period. Additionally, there is also a new requirement, applicable to out-of-state retailer shipper permittees as well as out-of-state winery shipper permittees, that prohibits the sale of wine below cost. Finally, the Connecticut LCD guidance indicates that all wine brands that will be shipped to Connecticut consumers must be registered with the state.
If you have any questions about direct to consumer shipments of alcohol, contact one of the attorneys at Strike Kerr & Johns.
June 03, 2019
*** Update: The Oklahoma County District Court has ruled that Senate Bill 608 violates the Oklahoma Constitution. The new law, which was set to go into effect on August 29, 2019, would have required the top 25 wine and spirits brands sold in Oklahoma to be made available for distribution by all Oklahoma distributors. As a result of the Court’s finding, manufacturers of Oklahoma’s top selling alcoholic beverages retain the right to choose their own distributors. However, an appeal of the District Court’s ruling could be filed. ***
Oklahoma Governor Kevin Stitt recently signed Senate Bill 608 into law, mandating that as of August 29, 2019, suppliers of the top 25 wine and spirits brands must make their products available to all licensed Oklahoma distributors. The top 25 brands will be determined by total sales over the preceding twelve-month period.
Since October 2018, wine and spirits manufacturers have been allowed to enter exclusivity agreements with Oklahoma distributors. Prior to that time, wine and spirits manufacturers were required to make products available to all distributors in Oklahoma. The change was brought about by State Question Number 792, approved by voters in 2016, which amended the Oklahoma Constitution to permit the sale of cold, strong beer in liquor stores and to allow distributors to obtain sole distribution rights. Although the law allowing wine and spirits brands to be distributed exclusively by one Oklahoma distributor has been in effect for less than a year, smaller Oklahoma distributors and some Oklahoma retailers argued that the new distribution system was detrimental to their businesses. Senate Bill 608 purports to even the playing field and remedy the alleged business disadvantage to smaller distributors by mandating that top-selling products be made available to all distributors within the state. Opponents of Senate Bill 608 contend that the legislation runs afoul of the voter-approved constitutional amendment, because it is manufacturers’ right to choose their own distributors.
It is possible that the provisions of Senate Bill 608 will be challenged in the courts. But for now, it appears that suppliers of top wine and spirits brands in Oklahoma must again navigate a revised distribution system, beginning at the end of August.
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