As more states legalize the recreational use of marijuana, beer servers will undoubtedly face situations in which a patron is too impaired to drive due to the consumption of both cannabis and alcohol. State laws do not provide a crosswalk of breath alcohol concentration (BrAC) limits and nanograms per milliliter (ng/ml) of delta-9-tetrahydrocannabinol (THC) in a driver’s body fluids. But a few states have established limits on the nanograms per milliliter (ng/ml) of THC that may be present in a driver’s blood or urine. States will continue to create and modify statutory and regulatory schemes focused on marijuana impairment. In doing so, state legislatures will likely revisit the policy discussions on limits for alcohol consumption.

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Originally published in The New Brewer, July/August 2018.

The latest development in a lengthy legal challenge to advertising restrictions in Missouri’s tied house laws and regulations raises practical economic issues for the alcohol beverage industry and significant legal and policy issues for legislators and regulators at all levels of government. On June 28, Judge Douglas Harpool of the US District Court for the Western District of Missouri filed a decision in Missouri Broadcasters Association vs. Dorothy Taylor. The Missouri Broadcasters Association (MBA) is a trade association representing media outlets. Two licensed Missouri retailers were also plaintiffs in the lawsuit. Ms. Dorothy Taylor is the Supervisor of the Missouri Division of Alcohol and Tobacco Control (DATC).

The basic issue in the case is whether several Missouri alcohol beverage advertising restrictions violate the plaintiffs’ commercial speech rights protected by the First Amendment to the US Constitution.

The June District Court decision follows a bench trial held in February 2018. The trial occurred as the result of prior legal proceedings culminating in a 2017 decision by the US Court of Appeals for the Eighth Circuit, which found that the MBA’s amended complaint “plausibly demonstrates that the challenged provisions [of Missouri’s tied house law] do not directly advance the government’s asserted substantial interest, are more extensive than necessary and unconstitutionally compel speech and association.”

Perhaps the most important Missouri law challenged in this litigation is an exception in the tied house laws that authorizes a manufacturer to pay for advertising that lists “two or more affiliated retail businesses selling its products” subject to four conditions:

(a) The advertisement shall not contain the retail price of the product;

(b) The listing of the retail businesses shall be the only reference to such retail businesses in the advertisement;

(c) The listing of the retail businesses shall be relatively inconspicuous in relation to the advertisement as a whole; and

(d) The advertisement shall not refer only to one retail business or only to a retail business controlled directly or indirectly by the same retail business.

This language may be familiar to many practitioners and regulators as a nearly identical provision appears in the Federal Alcohol and Tobacco Tax and Trade Bureau (TTB) tied house regulations. Laws and regulations of several states include similar express exceptions and TTB regulations are incorporated by reference in the trade practices regulations of other states. Innumerable TTB and state tied house laws and regulations restrict advertising in similar ways and may be invalidated if the analysis in Missouri Broadcasters is applied by other courts and ultimately upheld by federal appellate courts.

Other Missouri laws and regulations that were successfully challenged by MBA in the trial court prohibit (a) media advertising of price discounts, (b) beer and wine coupons, (c) outdoor advertising of discounts by retailers and (d) below cost advertising.

Unlike many cases based solely on theoretical legal arguments and the text of laws and regulations, the trial in the Missouri case resulted in a wide-ranging inquiry that included expert witnesses on advertising and the level of effort invested by the Missouri DATC in enforcing the challenged laws and regulations. The court’s decision suggests that the state struggled to provide any credible evidence that the challenged laws “directly reduce[] overconsumption of alcohol and underage drinking.”

The court found that the plaintiffs’ expert testimony provided substantial evidence “that there is in fact no demonstrative relationship between media advertising of alcohol and overall consumption rates of underage drinking…The State failed to present any evidence contradicting the testimony, empirical studies, and statistical analysis relied on by the Plaintiffs’ expert.”

The court agreed with the plaintiffs and cited language from the 8th Circuit decision that “the multiple inconsistencies within the regulations poke obvious holes in any potential advancement” of the state’s interest, “to the point the regulations do not advance the interest at all.” This finding is a threat to dozens of federal and state alcohol beverage laws that are riddled with exceptions that allow alcohol beverage advertising in one context and expressly prohibit the same advertising in another context (e.g., prohibiting exterior signs and permitting indoor signs).

Because the challenged Missouri laws restrict commercial speech rights protected by the First Amendment, the court also awarded legal fees to MBA and the retailer plaintiffs.

Advertising can be removed from the “marble cake” of state and federal tied house restrictions without dire consequences for regulators. If the reasoning in Missouri Broadcasters survives, the most significant effects will occur in intra-industry negotiations where parties will determine how advertising costs and activities are apportioned across the three-tier system.

Before proclaiming the death of the three-tier system, hundreds of state licensing and tied house laws have nothing to do with advertising. Prohibitions on ownership interests in more than one tier of the alcohol beverage industry are not affected by the recent decision along with substantial restrictions on industry trade practices other than advertising.

Finally, the reasoning in Missouri Broadcasters may have to survive another appeal and must be adopted by other courts to broadly affect house restrictions on advertising throughout the United States. Perhaps a state (or more likely a state with support from interested industry members) will develop credible evidence to support similar laws in other jurisdictions. For example, California aggressively defended analogous laws and regulations, which were ultimately upheld last year by the Ninth Circuit Court of Appeals.

In an article published by The New Brewer, Marc Sorini discusses five issues most likely to have a meaningful impact on craft brewers in the coming years, including:

  1. The Craft Beverage Modernization and Tax Reform Act’s (CBMTRA) new tiered excise tax rate structure, its extending benefits to foreign producers, and its authorization for brewers to transfer beer in bond between breweries of different ownership.
  2. The Sixth Circuit’s published opinion in Byrd v. Tennessee Wine and Spirits Retailers Association, affirming a decision finding that the “durational-residency” requirements imposed by Tennessee law for alcohol beverage retail licensees are unconstitutional under the “dormant” Commerce Clause.
  3. The TTB’s creation of a new unit within its Trade Investigations Division to focus on trade practice enforcement.
  4. The opinion in Mission Beverage Co. v. Pabst Brewing Co. from the California Court of Appeals, which found that “an existing distributor’s receipt of the ‘fair market value of the affected distribution rights’ under [the California statute] does not necessarily make that distributor whole.”
  5. The US District Court for the Northern District of California’s decision in a putative class action alleging that the labeling and marketing of a successful California-based craft brewery was false and deceptive.

Access the full article.

Originally published in The New Brewer, May/June 2018.

On May 17, the Alcohol and Tobacco Tax and Trade Bureau (TTB) issued an Industry Circular, No. 2018-1A, clarifying that under the recently-enacted tax reform legislation (Tax Act), wineries may tax determine and tax pay wine they produce and that is stored untaxpaid at another bonded wine cellar or bonded winery as if the wine were removed from the producing winery’s bonded premises.

Among the Tax Act’s many changes to the Internal Revenue Code, the new legislation (which went into effect on January 1, 2018) prescribed new tax credits for wine and suspended (through 2019) the previous tax credit. The Tax Act also suspended the prior law’s transfer provision, which allowed small wineries eligible for tax credits to transfer their credits to another bonded winery. This threatened to leave small wineries transferring their wines to larger bonded wineries without their tax credits. To apply the tax credits to such wines under the Tax Act, the producing winery would need to physically bring the wine back to its premises and remove and tax pay the wine. Continue Reading TTB Announces Extension of Tax Credits for Wines Stored at Bonded Wine Cellars and Bonded Wineries

The Agricultural Marketing Service of the US Department of Agriculture (USDA) recently published a proposed rule containing regulations to implement the National Bioengineered Food Disclosure Standard mandated by Congress in 2016. See 83 Fed. Reg. 19860 (May 4, 2018). The proposed regulations would govern the labeling of raw agricultural products and packaged foods whose labeling is governed the federal Food, Drug & Cosmetics Act, including wines below 7 percent alcohol by volume and non-malt beer (e.g., “hard seltzers”). The proposed regulations would not directly apply to alcohol beverages whose labeling is governed by the Federal Alcohol Administration Act, including all distilled spirits, wines containing 7 percent alcohol by volume or greater, and beer containing malted barley and hops. Nevertheless, the Alcohol and Tobacco Tax and Trade Bureau may look to the bioengineered food disclosure regulations as persuasive guidance in developing its own policies towards the disclosure of bioengineered ingredients (often called “genetically modified organisms” or “GMOs”). Continue Reading USDA Publishes Proposed GMO Labeling Regulations

On Friday, April 13th, Senator Cory Gardner (R-CO) announced that President Trump assured him that the Department of Justice’s decision to rescind the Obama-era guidance on marijuana enforcement would not affect Colorado’s legal marijuana industry. President Trump also promised Senator Gardner that he would support a federal legislative fix that takes into account state decisions to legalize marijuana. In turn, the senator lifted holds on all Department of Justice nominees, ending an intra-GOP standoff over the Department’s cannabis policy.

In January, Attorney General Jeff Sessions rescinded guidance that outlined eight marijuana enforcement priorities, heightening the possibility of a federal crackdown in states that legalized recreational and medical cannabis. Pro-legalization advocates feared that Sessions’ announcement granted federal prosecutors broader discretion to pursue criminal charges against marijuana businesses operating legally under state law in states like Colorado, Washington, California and elsewhere. Sen. Gardner immediately responded that he would block all DOJ nominations over the new policy. Continue Reading President Trump Commits to Protect Colorado’s Legal Marijuana Industry

On March 20, 2018, a federal district court in Texas issued an opinion in Deep Ellum Brewing, LLC, et al. v. Texas Alcoholic Beverage Commission. The court delivered a blow to Texas craft brewers, upholding Texas’ prohibition on sales of beer by brewers to consumers for off-premises consumption.

Texas authorizes the manufacture and sale of beer by persons holding a: (1) brewer’s permit (allowing the production of beer of more than 4% alcohol by weight (ABW)); (2) manufacturer’s license (allowing the production of beer of 4% ABW or less); or (3) brewpub license. Like many states, Texas’ alcohol beverage laws mandate separation among the three tiers of the alcohol industry: manufacturing, wholesaling and retailing. The three-tier laws generally require alcohol beverages to be sold from manufacturers to wholesalers, from wholesalers to retailers, and finally from retailers to consumers.

Continue Reading Federal District Court Rejects Craft Brewers’ Equal Protection and Due Process Challenge of Texas’ Ban on Brewer Off-Premises Retailing

On Friday, March 2, 2018, Alcohol and Tobacco Tax and Trade Bureau (TTB) issued its next round of guidance concerning the alcohol excise tax provisions of the recently enacted tax law (Tax Act). TTB has not yet addressed some of the biggest ambiguities contained in the Tax Act, such as (i) how foreign producers can assign excise tax credits to US importers and (ii) how the “Single Taxpayer Rule” will work. Nevertheless, TTB continues to make incremental progress in interpreting the Tax Act.

The March 2 guidance features the following:

  1. A new TTB Industry Circular, No. 2018-1 (March 2, 2018), announces the creation of a temporary “alternate procedure” (aka, variance) allowing wine producers to tax determine and tax pay wine of the winery’s own production stored untaxpaid at another bonded wine cellar as if the wine were removed from the producing winery’s bonded premises. Prior law allowed wineries eligible for tax credits under the small winery tax provisions to transfer their credits to another bonded winery. So, for example, an eligible small winery could transfer bulk wine in bond to a larger bonded winery for bottling without losing the tax credits. The new tax law does not contain a similar transfer provision, leading to the prospect of small wineries losing their tax credits because they transferred the wine to a bonded winery that already used up its tax credits available under the Tax Act. The alternate procedure permits a winery to tax pay the wine as if it were removed from the producing winery’s premises, allowing it to take the tax credit. The temporary alternate procedure authorized by Industry Circular 2018-1 expires on June 30, 2018.
  2. Beer, wine and spirits removed from a brewery, winery or distillery but received in bond from elsewhere can benefit from the Tax Act’s reduced rates and/or tax credits only if the taxpaying brewery, winery or distillery “produced,” “distilled” and/or “processed” the beer, wine or spirits in question. Exactly what processing qualifies the taxpaying facility for the reduced rate or tax credits will depend on specific facts and the commodity at issue.
  3. TTB further qualifies the produced/distilled/processed requirement by indicating that any production process should be made “in good faith in the ordinary course of production” and not done for purposes of obtaining a tax advantage.

Please let us know if you have any questions about these developments.

Earlier this week the Trump Administration presented its Fiscal Year 2019 Budget Proposal. While many portions of a president’s proposed budget do not get enacted, such proposals provide insight into the thinking of the administration.

With respect to the alcohol beverage industry, the budget proposal would transfer to the Alcohol and Tobacco Tax and Trade Bureau the remaining (criminal) authority the old Bureau of Alcohol, Tobacco & Firearms (ATF) has over alcohol beverages, stating:

ATF would transfer the entirety of its alcohol and tobacco regulatory and enforcement responsibilities to the Alcohol and Tobacco Tax and Trade Bureau (TTB) in the Department of the Treasury. This transfer would enable the ATF to hone its focus on activities that protect U.S. communities from violent criminals and criminal organizations, while consolidating duplicative alcohol and tobacco enforcement mechanisms within the TTB.

We suspect TTB would welcome an expansion of its authority to include criminal matters involving alcohol (e.g., diversion a/k/a “bootlegging”).

Two sections of Craft Beverage Modernization and Tax Reform Act (CBMTRA) that were dropped from the 2017 federal tax reform law were subsequently added to the Bipartisan Budget Act of 2018, signed into law by President Trump on February 9, 2018.

The new law mandates a temporary (two year) change in tax recordkeeping requirements for domestic breweries to eliminate duplicate reports and accounting obligations for breweries that have pub and sampling areas. The intent of the new law is to allow brewers to keep one set of books covering (a) beer removed from brewery for sale for distribution to retailers and (b) beer sold or provided for sampling to consumers at a brewery. Existing regulations and policies led to unnecessary complexity in accounting for brewers and for auditors from the Alcohol and Tobacco Tax and Trade Bureau (TTB). While the recordkeeping changes are required for calendar years 2018 and 2019, TTB may be able to make changes in regulations and policies that will provide permanent relief from unnecessary administrative burdens. Continue Reading 2018 Federal Budget Legislation Provides Breweries with Administrative Relief and Acknowledges 21st Amendment