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Wine Sales and Distribution 2012 – A Look Forward

In looking forward to what 2012 might bring the world of wine compliance and regulation, it is instructive to first look back at 2011. One thing we’ve learned after eight years in the world of wine compliance is that once movements gain momentum, it’s hard to slow them down.

The past year demonstrated the continuation of certain trends and the emergence of another that we believe will carry forward in 2012. The trend of more states opening their borders to the direct shipment of wine from other states continued steadily. Maryland and New Mexico both opened their borders to permit-based direct-to-consumer shipping in 2011, a continuation of a movement toward regulated consumer access to wine that began in 2005 with the Granholm v. Heald Supreme Court decision. Tennessee also saw a change in their law in 2011 that made the entire state “wet” for direct shipments from wineries.

The past 12 months also saw an increase in new “Third Party Providers” that help wineries market their products to a broader collection of consumers. Either as flash sites, wine product advertisements, or multi-offer marketplaces, these new entries into the wine market were helped along by a new California Department of Alcoholic Beverage Control (ABC) Advisory that set down specific rules as to how suppliers and non-licensed Third Party Providers can work together compliantly.

Finally, 2011 demonstrated that various forms of privatization of the sale and distribution of wine and spirits in control states are an important trend to watch. The passage of Initiative 1183 in Washington State that took the sale and distribution of spirits out of the hands of the Washington Liquor Control Board was the most tangible example of the privatization trend.


What To Expect in 2012

Direct-To-Consumer Shipping
Winery-to-Consumer shipping laws will continue to be modernized in those now few states that continue to prohibit interstate shipping. We expect New Jersey, the most important wine consuming state currently outlawing interstate shipments, to pass legislation allowing some form of direct shipments to consumers. Currently, a bill working its way through the legislature would allow all wineries making up to 250,000 gallons annually to obtain a direct shipment permit. The capacity cap of 250,000 gallons will be a point of concern, but wineries should expect passage and should be prepared to ship to New Jersy consumers in 212. The bill, which has passed the senate, is expected to be voted on in the assembly before the close of session tomorrow, January 10th.

Massachusetts too has seen a number of direct shipment bills introduced over the past couple of years, but none have found their way to the Governor’s desk. Recently, however, Governor Deval Patrick put a spotlight back on the issue by saying in a radio interview that he would sign legislation that permitted direct-to-consumer wine shipments. 2012 may be the year that Massachusetts finally opens to direct-to-consumer shipping.

Finally, Pennsylvania, traditionally one of the states where alcohol sales and distribution is most tightly controlled, may see a move to allow direct-to-consumer shipping. As talk continues in that state to privatize wine sale and distribution, there has also been much talk and the introduction of bills to “modernize” the PLCB, including allowing direct-to-consumer shipping, opening up a state with big consumer potential for wineries.

Modernized Marketing
Digital marketing in the wine industry has been behind the curve due primarily to the massive amount of regulations that govern the industry on a federal and state level. It’s unlikely that the wine industry will see significant deregulation. However, it appears that some clarity is coming to the issues that have historically deterred modern marketing methods.

Late in 2011 the California ABC issued an “Advisory” that spelled out the conditions under which non-licensed Third Party Providers (TPPs) and suppliers must arrange their relationships in order to work together. In a nutshell, the California ABC made clear that wineries and other licensed suppliers must always be in control of the transaction from approving each transaction to controlling the flow of funds. (Read our blog post that explains these new rules). While adhering to the new California ABC rules can be a complex task and require very specific actions and programming on the part of licensed suppliers and non-licensed TPPs such as flash sites and community buying sites, we believe this new clarity represents an important development for suppliers and marketers that will yield interesting developments in 2012

We expect to see a rise in the number of TPPs. In addition, we expect other states to follow California’s lead in issuing rules and regulations for how licensees and non-licensed marketers can work together to help market wine to consumers in innovative ways.

Privatization
With Washington State paving the way in the realm of privatization of sales and distribution with the passage of Initiative 1183 in November, we predict the privatization trend to regain momentum in 2012. Most eyes are on Pennsylvania where serious discussions are underway concerning the privatization of the sale and distribution of wine in that highly controlled state. Virginia too has seen discussions in the past years concerning the merits of reforming its alcohol control system. Meanwhile, in Michigan a task force has been empowered to look at updating its alcohol beverage laws.

This slow moving trend toward privatization, if it continues and gains more momentum, could lead to significant changes in the area of wine sales and distribution and the compliance measures that suppliers must undertake.

Federal Action on Wine Sales and Distribution
In early 2011, with the introduction of H.R. 1161 (read our series on the CARE Act here) in the House of Representatives, it looked like supporters of federal legislation that would give states greater control over how they can regulate alcohol and overcome judicial rulings that have put limits on state powers, would push hard to see this bill passed. Yet, H.R. 1161 garnered fewer supporters in the House than a similar bill, H.R. 5034, gained in 2010. Furthermore, no hearing was held in the House Judiciary Committee on H.R. 1161 and no Senate sponsor was introduced.

This bill, opposed by all supplier organizations and by retailers, has another year to gain more support and move through the legislative process. Most in the industry are taking a wait and see attitude on H.R. 1161 to determine its fate, but it seems unlikely that the bill will move on to President Obama’s desk in 2012.

Finally, federal legislation is moving forward concerning the United States Postal Services, and it could have long-term effects on the wine industry. The new bill moving forward is the 21st Century Postal Service Act 2011. If enacted as currently written it would allow the United States Postal Service to deliver wine to consumers and compete with Federal Express and United Parcel Service.

As always, ShipCompliant will continue to watch the political and regulatory landscape throughout the coming year and will work to keep you up-to-date on important changes that impact your ability to market and sell wine.








All Eyes on Washington (State) as Voters Consider Privatization


On November 2, 2010 citizens of The Evergreen State will see two separate measures on the ballot concerning the distribution of liquor. Both initiatives represent a big change to the current liquor distribution system. The Washington State Liquor Control Board currently regulates the sale of all liquor (wine, beer and spirits) and maintains total control over distribution and retail sale of spirits. Washington is one of the nineteen control states, and is one of three control states, along with North Carolina and Virginia, that took a hard look at privatization in this election year.

Initiatives 1100 and 1105 would privatize liquor sales, completely removing the state’s involvement from the sale of liquor. However, the state would retain its involvement in the enforcement and regulation of liquor products sold within the state. The measures could significantly decrease the amount of tax collected from liquor sales; initiatives 1100 and 1105 would both discontinue some portion of the current taxes collected on liquor, and both seek to replace the lost revenue with alternate collection methods. A loss in revenue is one of the main concerns with both initiatives, particularly I-1105.

Initiative 1100 is sponsored, in part, by Costco and Wal-Mart, large retailers who stand to receive significant benefits from its passage. If the initiative is adopted, retailers would no longer be required to to purchase liquor from a wholesale distributor; retailers could purchase spirits, wine and beer directly from the manufacturer. Additionally, retailers could negotiate volume discounts, a practice currently banned for wine, beer and spirits. Lower prices for retailers means lower prices to consumers, but some producers fear that they will not be able to compete with the low prices that large producers may be able to offer. Several other important changes would also occur, including adding the ability for retailers to charge liquor suppliers for shelf space (slotting fees) and eliminating Cash on Delivery (COD) requirements.

Like I-1100, I-1105 would remove the state’s presence from the selling of liquor, however, there are few other similarities. I-1105 is sponsored, in part, by the Washington Beer and Wine Wholesalers two Washington wholesalers, Odom Southern Holdings and Young’s Market Company. If the measure passes, state distribution centers would be forced to close by April 2012. Volume discounts would be permitted for spirit products only; not for beer or wine. Additionally, with passage of I-1105, spirit products could be sold at retail stores alongside beer and wine.

If I-1100 passes, state retail stores would be required to close, and state distribution centers could not purchase any new products effective December 1, 2011. Spirit-only distribution centers would be able to apply for a spirit distribution license as early as December 2, 2010, while new liquor permits to distribute any combination of liquor products would become available in January 2011. Liquor retailers’ licenses would be made available in June, 2011.

If I-1105 passes, operation of state liquor stores would cease, and state distribution centers would have to sell all assets by April 1, 2012. Newly licensed spirits retailers would be allowed to commence sales on November 1, 2011. Newly licensed spirit distributors would be able to begin distributing spirits on October 1, 2011.

A ballot poll from mid-October suggests that neither initiative has emphatic support, but of the two, I-1100 is in the lead. Though it is unlikely, if both initiatives pass, the common provisions of both initiatives would become effective, leaving the state legislature to sort out conflicting language. Any decision (or lack thereof) made by the state legislature could be challenged in court.

For more details on the specifics of Initiative 1100, please view the full text of the initiative or view the Senate summary. For more specific details on Initiative 1105, read the Senate summary, or view the full text of the measure. For further information and a detailed comparison of each initiative, a suggested account is Sean Sullivan’s four-part series in the Washington Wine Report. Brief summaries, quoted from the Senate summaries linked above, are provided below.

I-1100 Brief Summary:

Initiative 1100 (I-1100) amends state laws regarding the manufacture, distribution, and sale of liquor in Washington. There are two main components to the initiative. The first component changes the way the state regulates the distribution and sale of beer and wine. Washington has a three-tiered system of beer and wine regulation: a manufacturing tier, a distribution tier, and a retail tier. Beer and wine must generally move through each tier before it can be purchased by a consumer. A number of laws regulating the relationships and business transactions between and among the tiers are repealed by I-1100, including uniform pricing requirements and restrictions on financial interest, quantity discounts, and moneys’ worth.

The second component changes the way spirits, also known as hard liquor, are sold in Washington. Washington is a control state, meaning the state has exclusive control over the distribution and retail sale of spirits in the original package. I-1100 eliminates the state’s exclusivity and privatizes the distribution and sale of spirits.

I-1105 Brief Summary:

Initiative 1105 (I-1105) amends state laws regarding the distribution and sale of spirits in Washington. Washington is a control state, meaning the state has exclusive control over the
distribution of spirits and the retail sale of spirits in the original package. I-1105 eliminates the
state’s exclusivity and privatizes the distribution and sale of spirits (hard liquor).

Notes on Wine Distribution v.32

The latest version of “Notes on Wine Distribution”, by R. Corbin Houchins, is now available. Release 32 includes updates on legislation, litigation and general discussions on available distribution channels for wine. This release includes substantial changes, including new sections on age and identity, facial neutrality, and logistical support services, as well as updates to state summaries in Arizona, Delaware, Kansas, Kentucky, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Tennessee, Texas, Virginia, Washington, and Wisconsin. Read about these and other updates that affect the way wine is sold and shipped within the United States.

If you are at all interested in the shipping and distribution of wine, this is an excellent resource that is well worth reading.  You can view the most recent version of the document anytime by visiting the ShipCompliant Blog and clicking the link located under “Compliance Resources”, or by visiting CorbinCounsel.com and clicking on the home page link, “Notes on Wine Distribution.”

Click Here to View NWD Release 32

Representing Change: One Piece of Washington’s Overhaul

Last year, Washington State relaxed some of its restrictive alcoholic beverage laws as a result of a couple of comprehensive bills that passed the legislature (SB 5834 and HB 2040). The mandatory minimum markups between suppliers and wholesalers and between wholesalers and retailers are now history. Retailers can now pay suppliers using electronic funds transfers if they want to. Price posting (which required beer and wine suppliers and distributors to file their product prices with the state and hold those prices for 30 days) was officially abolished.

Another change in the law that has more significance than it might appear to on the surface is the expansion of the state law’s definition of “Authorized Representative.” First, some definitions are in order: a Certificate of Approval is the Washington license given to a U.S. winery or brewery located outside of Washington that enables it to ship its products to a Washington importer or distributor. An “Authorized Representative” is an entity located outside of Washington but in the U.S. that is appointed by a Certificate of Approval (COA) holder to market and sell the COA holder’s products into the state of Washington through the three-tier system.

Before last July, Washington made it very hard for out of state wineries and breweries to sell their products into Washington through marketing agents, unless they wanted to give over all of their brands to the marketing agent.

That’s because, through a quirk in Washington law whose origins aren’t very clear, there could be only one source (i.e. either one Certificate of Approval license holder, or one Authorized Representative) for an out of state winery or brewery’s products. For example, if you were a winery that produces Brand A and Brand B, and you have been selling your Brand A to a Washington importer, you couldn’t appoint an Authorized Representative to market and sell your Brand B in Washington.

That all changed on July 26, 2009. As part of the “omnibus bill” and other sweeping legislative changes that took place last year in Washington, the definition of Authorized Representative was amended to remove the exclusivity portion that had been so problematic. As a result of the change to RCW 66.04.010(2), a Certificate of Approval holder can now divide up its brands, selling some itself and using one or more Authorized Representatives to market and sell different ones, if it wants. The state does require the producer to have written agreements with each of its Authorized Representatives, and there can be only one Authorized Representative per brand, but even with these restrictions, this one seemingly minor change in the law gives producers a lot more control and flexibility over how they market their products in Washington.

-Sara Mann, Beverage Industry Attorney

Representing Change: One Piece of Washington's Overhaul

Last year, Washington State relaxed some of its restrictive alcoholic beverage laws as a result of a couple of comprehensive bills that passed the legislature (SB 5834 and HB 2040). The mandatory minimum markups between suppliers and wholesalers and between wholesalers and retailers are now history. Retailers can now pay suppliers using electronic funds transfers if they want to. Price posting (which required beer and wine suppliers and distributors to file their product prices with the state and hold those prices for 30 days) was officially abolished.

Another change in the law that has more significance than it might appear to on the surface is the expansion of the state law’s definition of “Authorized Representative.” First, some definitions are in order: a Certificate of Approval is the Washington license given to a U.S. winery or brewery located outside of Washington that enables it to ship its products to a Washington importer or distributor. An “Authorized Representative” is an entity located outside of Washington but in the U.S. that is appointed by a Certificate of Approval (COA) holder to market and sell the COA holder’s products into the state of Washington through the three-tier system.

Before last July, Washington made it very hard for out of state wineries and breweries to sell their products into Washington through marketing agents, unless they wanted to give over all of their brands to the marketing agent.

That’s because, through a quirk in Washington law whose origins aren’t very clear, there could be only one source (i.e. either one Certificate of Approval license holder, or one Authorized Representative) for an out of state winery or brewery’s products. For example, if you were a winery that produces Brand A and Brand B, and you have been selling your Brand A to a Washington importer, you couldn’t appoint an Authorized Representative to market and sell your Brand B in Washington.

That all changed on July 26, 2009. As part of the “omnibus bill” and other sweeping legislative changes that took place last year in Washington, the definition of Authorized Representative was amended to remove the exclusivity portion that had been so problematic. As a result of the change to RCW 66.04.010(2), a Certificate of Approval holder can now divide up its brands, selling some itself and using one or more Authorized Representatives to market and sell different ones, if it wants. The state does require the producer to have written agreements with each of its Authorized Representatives, and there can be only one Authorized Representative per brand, but even with these restrictions, this one seemingly minor change in the law gives producers a lot more control and flexibility over how they market their products in Washington.

-Sara Mann, Beverage Industry Attorney

Washington State Approval No Longer Required for Wine Labels

In an action supported by Washington Wine Institute, the Washington State Liquor Control Board adopted a new policy on wine label approval. Effective August 19, 2009, the WSLCB will accept the federal Certificate of Label Approval (COLA) as label approval for beer and wine to be sold in the state of Washington. Producers will no longer be required to apply for state label approval, but as WSLCB confirmed today, wineries will still need to file their COLA’s with the Board. Alcohol and keg products that do not require Federal label approval are also approved to sell immediately.

- Jean M. Leonard, Esq. – Executive Director, Washington Wine Institute

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