A Year to Remember — 2016 Regulations in Review

Daniel Kostrzewa | December 22, 2016

For better or for worse, 2016 is nearing its end. So what better time to look back and review all that’s happened in beverage alcohol regulations than now?

Twelve months ago, we predicted a calm year with limited change ahead. Today we know how foolhardy that prediction was. In 2016, no fewer than four states implemented regulatory changes billed as “the biggest updates to beverage alcohol laws since Prohibition.” These tend to overshadow the numerous, less groundbreaking — though no less important in themselves — rule changes that happened this year.

Indeed, 2016 was quite a year for beverage alcohol regulations, with lots of activity affecting all tiers, all levels of government, and all types of sales. Here are some of the highlights we’ve seen:

The Four “Biggest Updates Since Prohibition”

1. Pennsylvania: A number of states had law changes on a scale “not seen since the end of Prohibition,” but few can say that with as much certainty as Pennsylvania. Several “modernization” bills were passed this year which, among other things, vastly opened up the availability of off-site wine sales, expanded the rules on off-site beer sales, altered the state’s minimum price rules, and created a modern direct to consumer program.

2. Oklahoma: On election day, voters in Oklahoma approved State Question 792. This will thoroughly revamp the entire set of beverage alcohol laws in Oklahoma — if nothing else, by bringing them out of the state constitution and into the state’s codified statutes, as is the case in every other state. But provisions to expand grocery sales, eliminate 3.2-percent beer as a separate product type, and a new direct to consumer rule will also overhaul the current beverage alcohol market in the state — though the implementation will almost certainly prove to be long and contentious.

3. New York: While not as sweeping as those seen in Pennsylvania and Oklahoma, New York implemented numerous rule changes based on the recommendations of last year’s industry working group. These changes include expanded Sunday sales, unification of craft licenses, and a new Importer license.

4. Colorado: In the last of these “revolutionary” rule changes, Colorado legislature passed a bill in June that expands the availability of licenses for grocery stores. Currently, any one entity can only hold a single off-site license for full liquor sales. The new bill creates a system for gradually expanding this limit, which will greatly increase grocery stores’ abilities to sell full-strength beer, wine, and spirits in the state.

Other Direct-to-Consumer Updates

1. Arizona: Earlier this year Arizona passed a bill creating a new Direct to Consumer (DtC) wine shipping license. This new 17W type license, which is now open for application, is available to wineries of all sizes. Previously, only wineries with an annual production of less than 20,000 gallons could receive DtC privileges through a 2W type Farm Winery license. While the new 17W does not replace the 2W license, we do expect many more wineries to take advantage of the rule change, and for DtC sales in Arizona to expand significantly.

2. Illinois: Illinois has been one of a number of states concerned with differentiating legal DtC sales from licensed wineries and improper sales from non-licensed entities. In order to create more awareness of who is involved in direct wine sales, the state passed a bill earlier this year imposing new rules on the use of third-party providers in DtC sales. Starting in 2017, wineries that apply for a new or renewed DtC license will need to indicate any third parties they use to store and ship wines being sold to Illinois residents. This largely targets the use of fulfillment houses. Notably, the provision does not include common carriers, like FedEx and UPS. In turn, these third-party providers will also need to file an annual report on their activities in the previous year to the Illinois Liquor Control Commission.

3. Louisiana: Louisiana amended several of its DtC rules this year. In March, the Office of Alcohol and Tobacco Control (ATC) announced a new DtC license that supplements wineries’ registrations with the Department of Revenue. This rule change was accompanied by a requirement that wineries register the wines they sell directly to consumers with the ATC. This was followed up in June, when a bill was passed to reform a restriction preventing wineries that had existing relationships with Louisiana wholesalers from also selling DtC. The new rules make clear that wineries may both sell to Louisiana wholesalers and directly to Louisiana residents. However, only wines with labels that have not been associated with Louisiana wholesalers may be sold DtC. This underscores the importance of registering all wine being sold in the state, and ensuring that it is associated with the appropriate license type.

Other Three-Tier (Wholesale) Changes

There were many other regulatory changes this year that affected the Three-Tier market, though they may not have been quite as “revolutionary” as some of the other rule changes. Illinois increased its beverage alcohol license costs, Ohio eliminated its ABV limit on beer, and Kentucky eased rules surrounding local option voting, which has already resulted in a number of previously dry counties going wet.

In addition, many states passed bills expanding the privileges given to craft and small-scale producers of all product types. These expanded privileges largely revolved around increases in allowable product, improved on-site sale and sampling rules, and greater abilities to self-distribute products to local retailers.

To name just a few examples, we saw these kinds of rule changes pass in Pennsylvania, New York, Oklahoma, and Alabama. But many other states had rule changes along these lines. The apparent benefits that a strong craft market can have on a local economy — providing good manufacturing-level jobs and local spending — make this an area that legislators and regulators are eager to support.

Many states also passed rules amending their definitions of cider to match the new federal standard, allowing up to 8.5 percent ABV and increased carbonation. Some states expanded the sale of growlers. The trend was to permit more licensees — including producers and retailers — to sell and refill growlers, and to allow them to sell wine in growlers.

TTB Updates

There were several big changes from the Tax and Trade Bureau (TTB), which largely affected producers’ abilities to get their products approved for sale.

Toward the beginning of 2016, the TTB announced a new ruling greatly increasing the number of ingredients that can be added to beer without requiring formula approval. The TTB followed this up later in the year, with rule changes affecting formulas for wine and spirits products. These changes removed the formula requirements for certain spirit and non-standard wine products: As long as products met the conformed to the definitions in the Federal Code they would not require a formula approval going forward.

The TTB amended its COLAs Online system by improving the visibility when selecting an appellation for wine products and for when a formula needs to be attached to a COLA application. The TTB also removed the alcohol content, net contents, wine vintage, and fax number fields from the COLAs Online system. This change is intended to make it easier to approve a COLA the first time it is submitted, as these fields are common sites for discrepancies between the labels and applications, and are not required under federal rules.

Predictions for 2017 (Foolhardy though they may be)

One prediction I might make for 2017 is that rules for craft producers will continue to improve. As I previously said, many states are realizing that supporting the local and small-scale manufacturing that the craft industry embodies is to everyone’s benefit. Having seen the boons that supporting craft business has brought to places like Colorado, Oregon, and Michigan over the last few decades, it is likely that more states will follow this trend.

This will be even more likely to happen if another of my predictions comes true: That the federal Craft Beverage Modernization and Tax Reform Act will be signed into law. If passed, it will expand the number of producers who qualify for reductions in their federal excise tax liability. Currently, a majority of members of both houses in Congress support the bill, so it should pass handily. A key consideration, though, is whether or not the incoming administration will be amenable.

Something else to look forward to is what will happen to DtC rules for retailers. As of publication, Michigan’s governor has been presented with, but has yet to sign or veto, SB 1088, which would grant the ability to ship alcohol products directly to Michigan residents to in-state retailers, while explicitly prohibiting out-of-state retailers from conducting such a sale. This bill is most notable in light of two recent lawsuits filed in Illinois and Missouri, arguing that their rules prohibiting out-of-state retailers from selling DtC to their residents are in violation of the Dormant Commerce Clause — the same argument that was successfully made in the 2005 Granholm v. Heald case, which opened up the DtC for wine producers. (If signed, SB 1088 will also remove some labelling requirements imposed on DtC selling wineries.)

This argument failed to pass muster in a 2008 case against the Texas Alcohol Beverage Commission. But that case was decided by the 5th Circuit, whereas Illinois and Missouri are in the 8th and 7th Circuit districts, respectively (Michigan is itself in the 6th Circuit). This means that the 5th Circuit’s 2008 ruling is not binding in these two new cases — though the courts are likely to look favorably on that ruling. However, there is still the possibility that a “Circuit Split” will develop, perhaps setting up a ruling by the Supreme Court in the future. A final ruling in either the Missouri or Illinois cases is not anticipated for many months, if not years, so do not expect any sudden change in retail DtC rules.

For other DtC predictions, it is possible that Delaware will follow the example of its big neighbor and pass its own DtC bill. Efforts by public advocacy groups such as Free the Grapes! will continue in Delaware this year, but there is no guarantee that a bill will pass. However, Pennsylvania’s bill this year was a big shock. So it is certainly possible that something as surprising will happen this year — but I’d still say that a DtC bill in Mississippi or Utah is pretty much a non-starter.

If you have questions on rule changes, or perhaps your own predictions for 2017, please consider posting them on the Beverage Alcohol Community — or if nothing else, consider entering our monthly label contests there.