April 12, 2014 | Leave a Comment
In our last post, we considered the problems faced by Brandywine as they set about trying to get off the ground as a new alcohol producer in California. The licenses allowing them to do all that they wanted to do were challenging to obtain, because the California Department of Alcoholic Beverage Control (the ABC) was concerned that they were trying to get around certain restrictions on serving brandy in a distillery tasting room. However, even convincing the ABC that Brandywine would meet the requirements for serving brandy in their tasting room was not the end of the issue for the ABC. In addition to doing all the right things, Brandywine had to show that it was going to do them in the right places – an interesting challenge when the facility is not even fully designed yet.
To understand why this matters, we’ll have to return to the previous post, where we talked about the different types of licenses the ABC issues: some for serving, some for selling, some for producing, and others besides. A licensee needs to be able to show the ABC not only that they are doing all the things required by each license, but also that certain things are physically separated from one another: tasting and sales is one instance; storage is another. When applying for a new license, the ABC will want to be able to see that your facility is set up in such a way that, once operations start, you will be able to comply with these physical constraints.
When Brandywine submitted their application, their facility was little more than a gleam in an architect’s eye. The ABC recognized that it was a new business with a new building, but was not content with Brandywine’s assurances that they would be able to adapt the space once it was completed. But where the agency and the client saw an impasse, we found an opportunity. By facilitating communication between our client and the ABC, a process emerged allowing the ABC to make suggestions which would design regulatory compliance right into the plans for the new building.
Working with regulatory agencies can be an enormous challenge for some businesses. By recognizing and taking advantage of the opportunity to make one a partner rather than an adversary means goodwill now, and long-term savings throughout the life of the business.
April 4, 2014 | Leave a Comment
It’s tough out there for any new business. Even in the best of economies, you have to deal with the formalities required by state and federal governments, filings, fees, and – let’s face it – lawyers. But some types of businesses have it especially bad, and high on that list is the new alcohol producer. Draconian Prohibition-era laws make it especially difficult for them to get off the ground, as one of our clients recently found.
The California Department of Alcoholic Beverage Control (fondly, the ABC) issues many different types of licenses – some to serve alcohol, some to sell on-site or off-site, others to produce. Our client, we’ll call them “Brandywine,” wanted to do all of those things: to create a business location where they would distill brandy and other liquors, with a tasting room where visitors could sample the wares, and a shop where they could purchase bottles to take home. Each one of these requires a different license, and the ABC looks very carefully at applications that ask for everything but the kitchen sink.
The special problem with Brandywine’s application was a peculiar inconsistency in California’s laws: brandy is licensed separately, and with different privileges from other liquors. Specifically, a general liquor production license carries with it a privilege to have a tasting room, while a brandy production license does not. Why? No one really knows – not even the ABC. But that didn’t stop their local office from grilling us on what – EXACTLY – Brandywine had planned for their business. Would they be producing liquor other than brandy? Yes. Immediately when they opened, or sometime in the unknown future? Immediately. It took some convincing, but then that’s what we are here for. Having a positive working relationship with regulatory agencies is one of the values we offer our clients, and it showed when the ABC was willing to issue the licenses before the build-out of Brandywine’s facility had even started.
From a certain perspective, the ABC’s insistence makes sense: they want to be sure that no one applies for a general liquor production license just so that they can have a tasting room for the brandy which is unavailable under their brandy license. That would just be sidestepping California law and ABC regulations. But from another, it is an overzealous application of irrational rules. It’s the very last thing a business owner wants to deal with when still figuring out branding, marketing, supply chain logistics, and everything else necessary to start a business. Knowing you have someone on your side who can solve the problem and make the regulators smile while they sign off on your licenses can make the difference between sleepless nights and sweet dreams.
So you’re a small winery about to launch your website, and you’re hoping that online sales will benefit both your brand and your bottom line. As you prepare to venture into the peril-ridden realm of the internet, you wonder: how can I be sure that minors don’t buy my wine online?
The short answer is: You can never be sure, because no matter how thorough and sophisticated a system you devise to verify age, teenage ingenuity will inevitably find a way to circumvent it.
Nevertheless, you do have certain minimum obligations with respect to age verification. At present, there is no “law,” as such, regarding age verification on winery websites, but the Federal Trade Commission and various alcoholic beverage industry groups have issued guidelines and recommendations regarding how alcohol manufacturers should guard against the exposure of minors to their marketing. The best practice for manufacturers is thus to adhere to their industries’ codes of conduct. The Wine Institute’s Code, adopted in June 2011, provides as follows regarding age verification:
“A member should employ an age affirmation mechanism on the homepage that restricts access only to viewers who affirm their legal drinking age before access to any area of the site. Any linkage to a member website page that bypasses its home page should include an age affirmation mechanism.
Member websites should employ a third party age verification mechanism that will verify the legal drinking age of online purchasers of wine at the point of purchase.”
To accomplish the first objective, wineries use language of their choosing, typically coupled with an “enter” button or a click-box. To accomplish the second objective, wineries must require each purchaser to provide his/her date of birth and then use a third-party age verification system to confirm (in theory, at least) that the purchaser is an adult.
Alcoholic beverage manufacturers have so far resisted stricter advertising regulation from the government by adhering to these best practices. Earlier this year, however, the FTC requested data from several major alcoholic beverage manufacturers regarding their digital advertising practices, and these practices are presently under review. New and more formal regulation may be in store. Watch this space.
All work and no play would make Parravano Witten a very dull law firm. So to celebrate the holidays and to end 2012 in grand style, our attorneys gathered together for laundry –the French Laundry, that is.
Thanks to both stunning good fortune and a friend’s gracious intervention, we snagged a last-minute reservation at chef Thomas Keller’s foodie Mecca in Yountville. The French Laundry is legendary, as is its esteemed chef-owner, whose cuisine and chef mentorship program have palpably influenced the American restaurant industry. In most such cases, one’s expectations are inevitably disappointed: the hype has built for so long that no real restaurant, staffed by imperfect humans armed with earthly ingredients, could live up to it.
That is not true of the Laundry, which manages to exceed even the highest expectations. The food defies superlatives. A rich but somehow still delicate sunchoke velouté, accented with red ribbon sorrel, pomegranate and spice foam, is liquefied sunshine. Butter-poached Island Creek Oysters, nestled in a bed of pearl tapioca and white sturgeon caviar, melt away in the mouth like sea foam on sand. A series of equally luscious courses follow, each building harmoniously upon the other in a crescendo of flavors.
But this is a wine (law) blog, so we imagine that most readers are currently thinking something like: “Yes, yes. That sounds delicious. But what were your DRINKING?” Our kind friends who assisted with our reservation also collaborated with the Laundry’s wine director to select our pairings for the evening:
Without entering too far into the controversial world of tasting notes, we will venture only that the Egly-Ouriet Extra Brut champagne paired exquisitely with the sunchoke velouté—it, too, tasted of sunshine as well as lemon zest, tart green apple, and French toast—and that the 1985 Comte Lafon Volnay and 2004 Robert Chevillon Nuits-Saint-Georges, equally glorious but entirely distinct from one another in nose and flavor profile, illustrated the extraordinary breadth of red Burgundy. In sum: Wow.
The same could be said of our evening overall. Good food, good wine, and good company coincide rarely, but on this Laundry Day, we enjoyed the best of all three.
We drank toasts to our team that night, but as this post will appear on New Year’s Eve, we offer another: Here’s to our clients. For those of you reading this post, thank you for choosing to work with us, and for putting your trust in us, and best wishes for 2013.
27 CFR 24.278, the small wine producers’ tax credit—beer and spirits producers, who do not enjoy a similar credit, might call it a loophole—strongly incentivizes domestic, still wine production by small and not-so-small wineries by reducing their excise tax liability on the first 100,000 gallons sold each year to almost nil.
The tax credit originated with efforts to rejuvenate the U.S. economy after its last major recession in the early 1990s. Specifically, in the Revenue Reconciliation Act of 1990, Congress increased the excise tax rate on still wine and artificially carbonated wine removed from bonded premises or Customs custody after January 1, 1991, by $0.90 per gallon. In the same bill, Congress introduced an up-to-$0.90 per gallon excise tax credit for small, domestic still wine and artificially carbonated wine producers. The taxation regime for most sparkling wines, which are naturally carbonated, remained the same.
This mildly protectionist measure—small, foreign wine producers receive no tax credit—sought to promote small business within the U.S. wine industry. Anecdotal evidence would suggest that it has succeeded: small independent wineries have multiplied since 1990. Yet, the credit defines “small” with surprising breadth, embracing any “person” who produces 250,000 gallons of wine—which equates to more than 100,000 cases—or less per calendar year. Conglomerates and wineries producing wine under multiple labels cannot necessarily double-dip, however: “person” includes a controlled group of entities with cross-ownership or control of 50% more, and a group of entities in which 5 or fewer people own or control 50% or more of each entity’s stock.
Originally, the credit could only be taken by a winery on wine produced and removed from bond for consumption or sale by the winery, itself. If the winery transferred the wine in-bond to a warehouse, it lost the ability to claim a credit on that wine, and the warehouse could not do so. In 1996, Congress amended the law to permit direct transferees in bond from qualifying small producers to claim the credit when they remove the wine from bond for sale or consumption.
The credit provides a strong financial incentive—and marketplace advantage—for small and mid-sized U.S. still wine producers. Wineries producing 150,000 gallons (63,090 cases) or less per year may take a full, $0.90 per gallon credit on the first 100,000 gallons (42,060 cases) produced. For wineries producing 150,000-250,000 gallons, the credit declines by 1% for every 1,000 gallons produced in excess of 150,000. Presently, the per-gallon excise tax rate on still wines with 14% or less ABV is $1.07. For still wines with 14%-21% ABV, the current rate is $1.57 per gallon. For many U.S. wines, then, application of the full credit reduces the per-gallon tax to only $0.17—about $0.03/bottle. Competing still wines produced outside the U.S. pay the standard excise tax rates of $1.07 or $1.57 per gallon, and all naturally sparkling wines are taxed at $3.40 per gallon.
Conclusion: Congress wants us to buy American—but without bubbles.
The U.S. government’s national do-not-call registry provides—in theory, at least—a respite from telemarketers’ unwanted solicitations. No national equivalent exists for email, though, so many businesses—including those in the wine industry—frequently use mass emails as a means of marketing their products to and otherwise communicating with existing and prospective customers. If the customer lives in Utah or Michigan, however, sending that marketing email might be a crime.
Under Title 13, Chapter 39 of the Utah Code, a person who sends a communication containing adult content (including advertising for wine and other alcoholic beverages) to a “contact point”—including an email address or mobile phone number—that has been registered with the state’s Kids Protection Registry for at least 30 days commits a misdemeanor and is subject to a civil fine of up to $1,000. Any contact point associated with a house in which a minor is present or to which a minor has access may be registered, provided that the minor is a Utah resident. Michigan’s Children’s Protection Registry operates almost identically, although the Michigan statute sets the per-violation fine at $10,000 for the first offense and classifies repeat offenses as felonies.
Many readers may be thinking: “I don’t need to worry about this. I only send emails to persons who have voluntarily given me their email addresses,” such as at a special event, in a tasting room, or through a website. Such simple consent, however, may not be a defense.
In both Utah and Michigan, a wine marketer can email a registered address only if: (1) the email address is controlled by an adult; (2) the adult consents in a signed writing; (3) the marketer has verified the adult’s age through an in-person inspection of a government-issued ID card (Michigan requires a government-issued photo ID); (4) the marketer includes in each communication to that address a notice that the adult may rescind his or her consent and an unsubscribe link; and (5) the marketer notifies the state’s enforcement entity that it has the registered recipient’s consent (which notification also involves a fee).
Given the steep penalties for violations and the rather onerous consent requirements, wine industry marketers have a strong incentive to carefully scrub their recipient lists before hitting SEND.
Since Prohibition’s repeal, the states have implemented and enforced laws ostensibly designed to promote temperance, including laws limiting wine, beer, and liquor manufacturers’ ability to coerce or even subtly influence retailers to exclude competitors’ products. To that end, California law prohibits licensed winegrowers and their agents from directly or indirectly giving anything “of value” to a retail licensee. This broad prohibition embraces free merchandise—winery schwag—whether for the retailer’s own use or for distribution to consumers.
Consumers love freebies, of course, but a corkscrew or wineglass bearing a winery’s logo can do far more than motivate a one-time purchase. The item serves as an advertisement, exposing the consumer’s friends, family, and household guests to the winery’s name and habituating the consumer to the brand. Free schwag can be a powerful promotional tool. For that reason, these items are formally known as “advertising specialties”.
The general prohibition on giving anything of value to retailers is riddled with exceptions, including exceptions for distributing advertising specialties. A winegrower may provide advertising specialties to a retailer for the retailer’s own use if: (1) the items “bear conspicuous advertising required of a sign”—that is, conspicuous notice of the winegrower’s identity, whether by its name, brand name, trade name, slogans, markings, trademarks or other symbols commonly associated with and generally used by the winegrower in identifying its name or product; (2) the total value of all items provided in a given calendar year does not exceed $50 per wine brand, per retail premises; and (3) the items’ donation is not conditioned on the retailer’s purchase of the winegrower’s products.
The ABC Regulations contain a rather wider exception for free merchandise provided to a retailer for distribution to consumers. A winegrower may provide advertising specialties to a retailer for distribution to consumers if: (1) the items “bear conspicuous advertising required of a sign”; (2) the items’ per-unit cost to the winegrower does not exceed $1.00; (3) the items are not likely to appeal to minors—e.g., no balloons, toys, candy, etc.; and (4) the winegrower places no conditions on the retailer’s distribution of the items.
In either case, whether specialties are provided for the retailer’s benefit or for distribution to consumers, the winegrower must maintain records for 3 years of all items so provided. These records must show: (1) the name and address of the retailer receiving an item; (2) the date furnished; (3) the item furnished; (4) the price per item paid by the winegrower to the item’s manufacturer; and (5) charges to the retailer for any item.
Provided they adhere to the forgoing limitations and requirements, California winegrowers can utilize advertising specialties in their marketing strategies.
September 29, 2012 | Leave a Comment
Last year, the California Water Resources Control Board enacted a new regulation designed to protect migratory salmon and steelhead in the Russian River: from March 15 through May 15 each year, any diversion of water for the purpose of frost protection from the Russian River stream system, including the pumping of groundwater hydrologically connected to the system, must comply with a Board-approved Water Demand Management Program. Or more simply, vineyard owners’ regular springtime diversion of water from the Russian River to combat frost on their vines would henceforth be subject to a discretionary, conditional permit, application for which would trigger review under the California Environmental Quality Act. Unsurprisingly, several growers sued to block the regulation’s implementation, claiming that it was unconstitutionally overbroad and failed to take account of measures already voluntarily adopted by growers to protect salmonid populations.
Last week, the growers won – the first round, anyway.
On September 26, 2012, Mendocino County Superior Court Judge Ann Moorman declared the regulation unconstitutional. Judge Moorman found several, fatal flaws in the regulation. By declaring the use of water within the Russian River watershed for frost protection purposes to be per se unreasonable, the Board had exceeded its regulatory jurisdiction. Article X, section 2 of the California Constitution establishes a state policy of respect for established water rights, when such rights are exercised reasonably. The court deemed the Board’s classification of all uses of water for a given purpose as unreasonable to be overly broad and inconsistent with this constitutional mandate. Indeed, the court noted that the law clearly required the Board to make specific findings regarding water use by riparian, overlying, and pre-1914 water right holders before extinguishing their right to use water. Yet, the Board had made no such findings and instead simply enacted a blanket regulation that treated all water users the same.
The Court also found fault with the Board’s evidentiary basis for enacting the regulation. It had failed to make findings regarding individual water use and the risk it posed to salmon and steelhead, instead simply reacting to a series of salmonid strandings that occurred in one season (2008) due to unusually low water levels in the River. Judge Moorman questioned the Board’s determination that the regulation was reasonably necessary and found no substantial evidence to support that determination.
Judge Moorman invalidated the regulation – which means that, unless and until her decision is overturned, growers may divert Russian River water for frost protection consistent with their past practices and existing water rights, and without obtaining new permits. The Board now has three options: appeal the decision to the Court of Appeal in San Francisco within the next 60 days, attempt to rewrite its regulation to address the flaws identified by the court, or find a new way to address the perceived problem. Watch this space.
Parravano Witten PC Ron Parravano, an attorney at Parravano Witten, is featured in Saturday Monterey County Heralds Adventures Magazine as a vintner.
September 28, 2012 | 1 Comment
Parravano Witten PC Ron Parravano, an
attorney at Parravano Witten, is featured in Saturday Monterey County Heralds
Adventures Magazine as a vintner. Check out the article below! Parravano Witten
represents several wineries and specializes in ABC Law! Check out our blog Wine
Law Decanted! http://www.parravanowitten.com/wineblog.php
Retailers – those selling beer, wine, and spirits directly to consumers – are not licensed by the Alcohol and Tobacco Tax and Trade Bureau (TTB); rather, that responsibility falls to states and sometimes county or city governments. New wine retail businesses face many hurdles on the path to opening day. While some concerns arise with respect to local zoning laws (discussed briefly at the end of this post), in California, most of those hurdles are part of the ABC license application process.
Since 1994, the number of available off-premises licenses has been limited based on the population of each county. The limit was set at one license per 2,500 residents; for counties already exceeding their limit, no new licenses could issue and existing licenses that were surrendered would not be reissued until the county was within the limit. The limits were adopted based on the belief that there was a relationship between high crime rates and an over-concentration of liquor stores in certain urban areas.
If a business is able to apply for an ABC license for a location that is not currently licensed, they must complete several steps before their application will be processed. First, a Notice of Intent to Sell Alcoholic Beverages must be mailed to all residential addresses within 500 feet. Second, a poster announcing the intention to sell alcohol on the premises must be posted near the entrance of the establishment for thirty days, and finally, the applicant must publish notice of its intent to sell alcohol at the location in the local newspaper. The local ABC office also notifies local law enforcement, city and county planning boards, as well as the county board of supervisors or city council where the business is located, of the application. Anyone – not just the residents who receive a notice in the mail or public officials – can lodge a written protest to the application with the ABC. An ABC employee will investigate the applicant and any protests received in determining whether or not to issue the new license.
Almost all new licenses that do issue will come with standard conditions for the area and type of business, and often additional conditions specific to concerns raised about the particular location. Failure to understand and comply with these conditions could be grounds for revocation of the ABC license.
As mentioned above, in addition to licensing concerns, new wine shops may also need to consult local zoning ordinances to determine if there are any regulations that would affect their new business’s ability to sell alcohol. In California, each city and county is required to have a zoning code regulating land use within their jurisdiction, which must be consistent with the city or county’s general plan. Because zoning ordinances are set by local government, business owners should review the ordinances where their business is located and/or consult an attorney regarding what is required before starting their new business in addition to obtaining the proper ABC license.