Kerry Bill to Decrease Excise Tax for Breweries

13 May

Senate Bill 3339, introduced yesterday in the Senate by John Kerry, would decrease excise taxes for about 1,500 small breweries.  The bill is similar to one introduced in the House in December, and would cut the excise tax from $7 to $3.50 on small breweries first 60,000 barrels.  It would also decrease the tax from $18 to $16 on all subsequent barrels up to 2 million.

A small brewery is defined as one that produces no more than 6 million barrels of beer per year.  San Diego, a haven for quality microbreweries, would be greatly benefitted if this bill is passed.  It would also be valuable for those that enjoy drinking craft beers, who should see the decrease in excise taxes reflected in their beer prices.

Regarding the bill, Senator Kerry stated, “Small and independent brewers are vital small businesses,” and that “relieving their tax burden will keep them hiring and expanding”.

A study of the potential impact of the bill shows it to be advantageous and efficient.  The bill is expected to create 2,700 new jobs in the beer industry in its first year, and around 375 new jobs in each year after that.  The increased income and payroll taxes collected from these jobs would offset the loss in government revenue, and cost the government only $10.6 million in the first year of the bill being implemented.  At the same time, the bill would increase economic activity by $115 million in the first year, which when calculated out means that for every dollar lost in government revenue, overall economic activity would increase by nearly $11.  The bill is a huge win-win situation if the research is true.

This bill will likely be passed, as it is one of the few bills of late to have bipartisan co-sponsorship and support in both the House and Senate.  There should be more smart and cost-effective bills like this that increase economic activity and build jobs with minimal cost to the government.  Brewers and beer enthusiasts should be ecstatic about this proposed change in beer tax rates.  Legislators should look into introducing an analogous bill for the wine industry that could spur similar growth.

Image credit to Ahmet Guler / FreeDigitalPhotos.net

Conjunctive Labeling: Fair or Foul?

11 May

The Sonoma County Vintners plan to follow in the footsteps of the Napa Valley and require any wine produced in a Sonoma County American Viticultural Area (“AVA”) to have the words “Sonoma County” placed underneath the AVA designation on all wine labels.  All nine of the major wine and grape trade associations are now behind the proposed legislation, called the “Sonoma County Conjunctive Labeling Initiative”.

The proposed benefits of conjunctive labeling would be to promote the Sonoma County brand and give the individual AVA’s of Sonoma County enhanced name recognition.  The vintners believe this would increase awareness of Sonoma wines and help grow the wine industry of Sonoma.  On behalf of Sonoma County, WineOpinions, a market research firm, examined the law’s potential effects.  They concluded that consumers recognize a wine as having higher quality when the Sonoma name is attached.

While sentiment about the proposal is generally favorable, many still question the initiative, particularly the fairness of forcing wineries to market their wines in a particular way for the greater good of the Sonoma County brand.  Currently, any wine from a Sonoma County AVA may place the phrase “Sonoma County” on their bottle if they choose to.  This law would force those who chose not to place the designation on their wine to now do so, and if they fail to, be subject to criminal prosecution.

While the law may benefit a small Sonoma winery or lesser known AVA by creating a common thread with more known names like Russian River Valley, would it have any benefit to the more recognized wine or AVA?  There is probably a reason some wineries from Sonoma County have chosen not to place the phrase “Sonoma County” on their labels.  Some wineries may believe their name is of higher regard by itself and differentiated from Sonoma County.  Others may believe that being forced to do this would clutter their logo, or may simply not wish to pay the increased costs of changing their labeling practices.  Also, some may not wish to sound redundant on their label by having to place “Sonoma County” under an AVA such as “Sonoma Coast”.  It is arguable that these wineries should have the right to make those business decisions that they believe is critical to their success.  Many wineries pride themselves in their uniqueness, and may not wish to be related to wineries which may be of lesser quality or reputation in their minds.

The crux of the argument is that of free trade, and the right to market or advertise a product in a particular way is usually included in that bundle of sticks.  The proposed restriction would limit free trade for the good of the Sonoma name.  A winery that believes excluding the Sonoma County designation on their bottle would have to give up this perceived market advantage for the sake of enhancing the Sonoma County brand.  Other than the reputation and price of a wine, the wine’s label itself is the strongest marketing tool in attracting consumers.  While the Sonoma Vintner’s research showed that the Sonoma tag would increase marketing potential, should wineries have to rely on outside and potentially biased research in their own marketing research and decisions?

Further, approval of the law is placed in the hands of the State legislature, where not only elected officials from Sonoma, but officials from throughout California, will be the ultimate decision makers on the future of Sonoma labeling practices.  Legislators from other districts do not necessarily have the best interest of Sonoma in mind, which needs to be thought about before this proposal is sent to Sacramento.

On the other hand, a similar law passed for Napa Valley in the late 1980’s, turning Napa wineries into a collective force on the industry.  Napa has flourished since, becoming the preeminent wine appellation in all of the States.  Sonoma could have a similarly successful result, and it seems all their major wine associations believe that.

An insightful way to evaluate the initiative may be to hypothesize how conjunctive labeling would effect a less preeminent wine community.  For example, while San Diego has a strong wine culture with many high-quality wines, the name San Diego itself does not hold as strong a weight in the wine community as say Napa Valley, that would deem it beneficial to all wineries in any San Diego AVA to be forced to designate so on the label.  By requiring this designation, the overall reputation of San Diego wines may increase over time, but well known and successful wineries currently not using the designation may not be helped out by it, and could be hindered.  In Napa, the strength of the name was already strong, and the law allowed the region and its wineries to reach new heights.  Sonoma probably falls somewhere in between Napa and San Diego in this regard, and thus on the fringe of whether the law would end up being fair balanced against free trade arguments.

Both sides of the debate have valid points, and if passed, the Sonoma law could be the ultimate litmus test on the effectiveness of conjunctive labeling laws.

Image credit to Matt Banks / FreeDigitalPhotos.net

House Bill Threatens Local Wineries and Microbreweries

10 May
A recently introduced bill in the House of Representatives may limit the choice of consumers in purchasing wine and beer from small wineries and microbreweries. The Comprehensive Alcohol Regulatory Effectiveness Act (“CARE”), would effectively allow State legislators to strictly enforce the three-tier-system which mandates that alcohol sales must flow from producer to distributor to retailer.

37 states, including California, have enacted rules that allow direct to customer sales of alcoholic beverages. These rules benefit small wineries and microbreweries, and in turn wine and beer enthusiasts, by allowing sales to be made directly to the consumer. Currently, a handful of major distributors control a bulk of the sale of wines in the U.S., and these big distributors make it difficult and prohibitively expensive for smaller operations to get their wines and beers to retailers, favoring larger wine entities. If forced to go through distributors, these small ventures will either have to pay the high expenses of a distributorship (costs which would be passed on to the consumers), or be forced to take the financial hit of decreased overall sales, which could be crippling.

It is important for small wineries and microbreweries to be able to sell directly to customers, otherwise these operations may cease to exist. The proposed bill could have a largely negative impact in San Diego, where the microbrew industry is akin to the wine industry in Napa.

Further, the diverse array of local wineries in Temecula and San Diego could similarly be pushed into a corner.

The purpose of the bill, introduced by Rep. Bill Delahunt (D-Mass), is to protect the states right to regulate alcohol sales practices. Their legal argument is based in the belief that the 21st Amendment, ratified in 1933 to repeal the Prohibition era and put alcohol regulation in the hands of states themselves, creates a higher standard for courts to scrutinize state laws which may have discriminatory effects on alcohol producers out-of-state.

The bill, if passed, would effectively overrule a Supreme Court decision in 2005 which held the Commerce Clause of the Constitution prevented state legislatures from enacting laws which allowed in-state wineries to sell directly to consumers but did not afford the same ability to out-of-state wineries. CARE creates a high burden of proof for out-of-state winemakers and a strong presumption in favor of the state laws that would make it nearly impossible to invalidate discriminatory state laws. Its passing would allow states to give beneficial treatment to in-state wineries and breweries, at the behest of out-of-state ones. This would by far have the biggest impact on California, which is home to around 90% of the American wine growth and countless breweries, by potentially limiting exportation to other states.

The law also benefits wholesalers and distributors interests in keeping themselves as middlemen between producers and consumers or retailers. The National Beer Wholesalers Association and the Wine and Spirits Wholesalers of America are the strongest supporters of this bill. It is probably no coincidence that Rep. Delahunt received one of his largest campaign contributions in 2008 from the National Beer Wholesalers Association. The wholesalers true interest is solidifying their position between manufacturers and retailers in the alcohol sales chain, to prevent beer manufacturers from selling directly to retailers, as is done with Wal-Mart and Costco. As a side effect though, it could cripple many small wineries and microbreweries that sell a majority of their products directly to consumers or retailers.

This bill could also adversely impact future creative endeavors in the wine industry. With the rise of the internet and globalization, it is logical and more practical to allow winemakers and microbreweries to sell directly to customers without having to clear an unnecessary and overly expensive hurdle. The law could also stagnate innovative and forward-thinking ways of selling wine, such as Wine.com’s recent sale of futures of a vintage Bordeaux to high-end luxury wine customers. Sales on the periphery of the three-tier-system such as this may cease to exist.

Wine and beer consumers should not fret though, this bill has an uphill climb. Speaker of the House Nancy Pelosi herself owns a small vineyard and will likely side against the bill. Further, a new Facebook group of over 10,000 people and counting is battling this legislation, in addition to many other websites against the bill. In the interest of protecting free trade in the alcohol industry, carrying on the rich culture that independent wineries and microbreweries provide, and preventing a lobbyist driven attempt to line the pockets of alcohol distributors, hopefully this bill will never pass.

Image credit to Graeme Weatherston / FreeDigitalPhotos.net

New Wine Law Blog!

10 May

Welcome to my blog!  I will be updating this blog with pertinent legal issues affecting the wine and microbrewery industry, along with some posts on wine culture in general.  I am a 3rd year law student and am currently working in the wine law practice of Higgs, Fletcher & Mack, a prestigious San Diego law firm.  I have also interned in the past for Constellation Brands U.S., the largest wine producer in the world.