Hard Cider Legislative Update

Hot on the heels of the craft beer revolution, hard cider is experiencing its own renaissance. Small labels are proliferating and widely available at retail locations, and cider bars are opening in major cities across the country. Hoping to capitalize on the craze, even larger producers like Stella Artois and Miller Coors are getting in on the action with Cidre (marketed towards women who would ordinarily choose white wine) and Smith & Forge (marketed towards men who would ordinarily choose beer). With so many new producers and products on the market, the confusing regulatory framework surrounding cider is now in the spotlight. Cider (including perry, or pear cider) has long resided in a legal grey area because it is regulated like wine (as it is made with fermented fruit), but often packaged and distributed like beer. Many consumers also treat cider as a substitute for beer, although this is changing (as Stella Artois is hoping with Cidre). This has led to many practical problems that states and the federal government are wrestling with. Below is an overview of recent legislative issues pertaining to cider – stay tuned for updates.

Federal Regulation

As TTB treats cider like wine for registration and labeling purposes, cider producers must register as a bonded winery, pay tax and follow other rules for winery operation per 27 CFR part 24, including TTB-enforced wine label requirements. However, the FDA, and not the TTB, has jurisdiction over the labeling of “diluted wine and cider” that contains less than 7% ABV.

Further complicating matters, TTB does not always treat cider like wine for the purposes of taxation. Depending on the sugar content of apples and the production technique, cider can be taxed like beer (if ABV is less than 7%), wine (if ABV exceeds 7%), or sparkling wine (if CO2 levels exceed a certain level).  As explained by the United States Association of Cider Makers:

Because many cider producers are small, craft operators, who rely on natural raw materials, they often have little ability to predict and control the precise alcohol content and carbonation level of their product. Meanwhile, cider consumers expect a somewhat high level of carbonation, equivalent to that of most beer.

To address these issues, Senators Chuck Schumer of New York and Patrick Leahy of Vermont are pushing legislation introduced last fall by Earl Blumenauer of Oregon (S 1531/ HR 2921) that would change the Internal Revenue Code to create a specific definition for hard cider (which would include pears) and tax it at the same rate as beer. The definition would also include a higher level of carbonation and align the allowable alcohol-content with the natural sugar content of apples (at least one-half of 1% and less than 8.5% ABV).

California

As mentioned in a previous Booze Rules post, AB 779 now permits a beer manufacturer who produces more than 60,000 barrels of beer per year to also manufacture cider. Until now, anyone who wanted to produce cider in California needed to obtain a winegrower’s license. This is still true for smaller craft producers, as the licensing exception only applies to larger operations. It is yet to be seen whether the small producers will demand equal treatment.

Colorado

HB 1346, backed by AB InBev and Miller Coors, would have allowed companies that make beer and also have an interest in a Colorado distribution company to import cider products directly without having to go through a specially licensed wine and spirits distributors, as cider imports to Colorado do now (because cider is classified as wine, beer distribution companies can’t directly import cider made out of state and sell it to retailers in Colorado). The bill was opposed by small producers and wholesalers who saw the legislation providing an unfair advantage to two wholesalers in the state owned by AB InBev and Miller Coors. Citing complexity and limited time remaining in the legislative session, the bill’s sponsor asked that it be tabled for future debate. More information can be found at the Denver Business Journal.

Maryland

Maryland’s 2014 legislative session included SB 0161, which amended the definition of hard cider to include pears. Hard cider in Maryland is taxed like beer (at 9 cents per gallon) and must be less than 7% ABV.

New York

As mentioned in a recent Booze Rules post, the NYSLA is proposing sweeping statutory revisions intended to revise and streamline the NY ABC law. With respect to cider, direct to consumer shipment rights would be extended to craft cider producers, and any producer with a NY direct shipping permit (including cider producers) would be able to ship products produced by others if those other producers were located within a 50-mile radius of the shipping producer. Additionally, manufacturers and “brand owners” would be able to obtain a permit to sell cider by the glass at special events. Liquor, wine and beer wholesale licenses would include the right to sell cider at wholesale.

 

New Marketing Model for New York – Lot 18 and the NYSLA

On April 23, the New York State Liquor Authority held a hearing on Lot 18’s request for declaratory ruling on (as worded in the request for ruling), the “validity of using nationally recognized marketing companies to market wine clubs in New York State, which are offered for sale by a New York State licensed package store.”  The hearing was interesting and informative for anyone in the business of marketing wine to NY consumers. Lot 18 told the NYSLA in the hearing that it has secured a NY retail package store license (and location) and plans to provide product and fulfill orders for third party marketers, including the Forbes wine club.    As a licensed retailer, Lot 18 will be doing most of the work in connection with the Forbes Wine Club orders (accepting the orders, taking the consumer’s payment, customer service, and making the delivery arrangements).  Lot 18 will be purchasing the inventory for the Forbes Wine Club in advance of taking customer orders.

Based on the comments and questions by the SLA Board members at the meeting (most questions were friendly and the approach was approving), it appears likely that the SLA will approve Lot 18’s model as presented.

During the meeting representatives of other NY package stores spoke, or rather, aired their grievances regarding the Lot 18 model.  Most of the remarks addressed the concern that if third party marketing entities were allowed to utilize the services of a NY retailer,  the perceived result would be the lack of a “level playing field” for regular retailers (regular retailers being, in this case, those who do not affiliate themselves with third party marketing entities).  The NY retailers also voiced concern that they wouldn’t have access to the same products that were being sold by Lot 18 for the Forbes club. Lot 18 responded that about 40% of their products are true private labels (owned by Lot 18), which can be lawfully restricted to Lot 18.  The other 60% would be available to other retailers through the NY wholesale system.

In response to the accusations that Lot 18 is not a bona fide retailer since its store is only 800 square feet and only open 30 hours a week, Chairman Rosen observed that the SLA had held two public hearings on Lot 18’s license application, and that after investigation, the SLA does in fact consider Lot 18 to be a bona fide retailer.  Chairman Rosen also noted that the SLA has no policy against just in time inventory models.

Chairman Rosen mentioned that the SLA has been receiving complaints that the agency is not  offering more guidance regarding the subject of Internet marketing, unlike – for example – the CA ABC, with its 2011 Advisory.  Chairman Rosen pointed out that the SLA’s declaratory ruling on ShipCompliant was lengthy, offered good guidance, and that rather than having strict parameters, using the “rule of reason” is a better method by which to evaluate Internet marketing programs.  This observation comported with H&C’s blog post following the ShipCompliant hearing making the same point.

The next event will be the Wine Cellar’s hearing on its similar request for declaratory ruling, which has been rescheduled for June 4.

Sweeping Changes in Proposed NYSLA Bill Include Expansion for Craft

The New York State Liquor Authority has been busy working on a series of statutory revisions that are intended to revise and streamline the provisions of the NY ABC law governing manufacturing and wholesale licenses. Retailers will also be affected. The SLA plans to submit the proposals to the Governor (who has announced he will be introducing a bill this session to address supplier issues) for his consideration, and held a meeting on April 17 to get input from the industry on the proposed revisions. Stay tuned for an update on the final outcome of this process because the politics and the lobbying from all sides may be fierce; especially over provisions softening the three-tier system in NY.  In the meantime, here are some highlights from the 122-page proposed legislation in its current form:

DTC:  Direct to consumer shipment rights would be extended to craft brewers and craft cider producers.  In addition, any producer with a NY direct shipping permit (winery, brewery or cider producer) would be able to ship products produced by others, in addition to their own, so long as those other producers were located within a 50-mile radius of the shipping producer. The 50-mile radius requirement is interesting because, for example, it would bring most (if not all) of Napa and Sonoma, for example, into the shipping radius for one winery.

Supplier Tastings: The bill would expand the categories of applicants eligible for marketing permits, which allow the holder to conduct tastings and bottle sales at other locations, to certain suppliers and “brand owners.”  Licensed wholesalers and importers would be allowed to obtain a “distributor’s tasting permit” for consumer tastings. “Brand owner” is not defined in the current version, and is likely to spark a battle if it includes, for example, foreign producers, celebrities, and non-producers.

Special Events: Manufacturers and “brand owners” would be able to obtain a permit to sell wine, beer or cider by the glass at special events.

Retailer Tastings:  Grocery stores licensed to sell beer would be able to conduct consumer beer tastings, though all beer poured must be from kegs, not bottles or cans. (The keg requirement was apparently intended to provide some assurance to certain local jurisdictions that have experienced problems with open container violations, though the SLA did indicate that it could be changed down the road if grocery beer tastings go smoothly in the interim).

Wine Growlers:  Retailers would be able to sell wine in growlers.  There is no indication yet how the legislation would address the fact that the TTB currently requires a federal basic permit as a tax-paid bottling house for a retailer to sell growlers; perhaps there would be an exemption provided in the final enabling legislation.

The significance of these proposed measures lies in their potential effect on the three-tier system, not just in NY but in every state that looks to NY for guidance.  Will the proposed changes be viewed by the distribution tier as an attack on their privileges, or as reasonable measures designed to facilitate routes to market for small producers?

The New York SLA and Online Wine Sales: A Work in Progress

On April 9th, the New York State Liquor Authority (SLA) issued a declaratory ruling describing limits on the activities of national advertisers (marketing websites) who advertise the availability of wine for sale to consumers in New York from licensed NY retailers. While the system presented to the SLA was not the first Internet marketing platform designed to operate within the three-tier system in New York (and to attempt to comply with all of the NY laws and regulations associated with selling wine through the three-tier system), it was the first time anyone had requested a declaratory ruling from the SLA to obtain guidance on how to operate such a marketing platform.

In its eight-page ruling, the SLA analyzed an actual relationship from an earlier iteration of the model that was submitted to the SLA for the declaratory ruling. The SLA noted that the relationship did not comport with the model presented to the SLA for approval (that was because the relationship existed before the model was developed and submitted), and found that the historic day-to-day business relations between that Internet advertiser and that NY retailer violated ABCL §111, which “prohibits a licensee from making its license available to a person who has not been approved by the Authority to hold that license.” In other words, the SLA believed the advertiser in the relationship they examined was too involved with, and had too much control over, the retailer’s business.

This is far from the death knell of Internet wine marketing platforms in New York; indeed, the SLA went out of its way to acknowledge that the Internet, and Internet marketing, is of vital importance to the NY marketplace.  In announcing its ruling, the SLA said it will continue to conduct public meetings and gather more information to further address the issues raised by the more sophisticated model described in the declaratory ruling request, as well as more generally, the issues raised “by the involvement of unlicensed parties in the Internet sale of alcoholic beverages to consumers in this state,” in an Advisory to the trade.

In the meantime, there are a number of important takeaways in the ruling itself that provide helpful interim guidelines to Internet wine marketers and NY retailers.  According to the SLA, a third party advertising arrangement with a licensed NY retailer selling wines through the three-tier system should abide by the following guidelines:

(a) Flat fees to retailers (paid by the Internet advertiser to compensate for a sale) are prohibited;

(b) Advertisers may not decide what wines will be offered for sale by the NY retailer (this is a function reserved to the retailer);

(c) Advertisers may not set the website prices for the wines offered for sale by the NY retailer (this is a function reserved to the retailer);

(d) Advertisers may not perform essential retailer functions such as deciding how consumer funds are controlled and disbursed, and deciding what the retailer’s profit margin will be; and

(e) Advertisers may not retain a “substantial” portion of the sales price for their services.

Thus, a retailer who selects the products that are going to be advertised on its behalf, sets the prices for the products that are going to be advertised, determines and receives normal business margins for the products that its sells, controls the funds received from consumers, and takes normal business risks (for example from loss or breakage of product, or credit card fraud) may utilize Internet advertising services facilitated by third parties.  (These elements were all present in the advertising platform described in the request for declaratory ruling, but the SLA focused on the prior system in its ruling).

There were also some unquestionably safe harbors mentioned by the SLA as a precursor to its Advisory to come:  a third party may host and maintain a retailer’s website and perform "related services," and a retailer may advertise its own products on a third party’s website, so long as consumers are directed to the retailer's website to place orders and the advertiser’s compensation is a flat fee that is "not contingent on the number of sales or the amount sold.”

While this ruling answered some questions, it raised many others that still need to be addressed - such as, is it acceptable for an advertising and marketing fee to be something less than a substantial portion of sales made by the retailer, or must it always be a flat fee?  What kinds of banking arrangements may the retailer use to receive consumer funds?  To what extent may a retailer coordinate with an Internet advertiser who is running a national advertising program? These are all tricky questions and we look forward to further guidance on these issues from the SLA.

  1. Is a 1935 Alcohol Beverage Federal Trade Practice Law Stifling Innovation?
  2. Decoding the BCC’s Guidance on Commercial Cannabis Activity.
  3. Prop 65 - Escaping a "Notice of Violation"
  4. TTB Consignment Sales Investigations - What is Behind the Curtain of the TTB Press Releases?
  5. Heads Up! The ABC Is Stepping Up Enforcement Against Licensees Located Near Universities
  6. Coming Soon: New Mandatory Training Requirements for over One Million “Alcohol Servers” In California – September 1, 2021 will be here quickly
  7. 2019 Legislative Changes for California Alcohol Producers – a Blessing or a Curse?
  8. A Picture (On Instagram) Is Worth A Thousand Words
  9. Playing by the Rules: California Cannabis Final Regulations Takeaways
  10. Hinman & Carmichael LLP Names Erin Kelleher Partner and Welcomes Gillian Garrett and Tsion “Sunshine” Lencho to the Firm
  11. Congress Makes History and Changes the CBD Game for Good
  12. Pernicious Practices (stuff we see that will get folks in trouble!) Today’s Rant – Bill & Hold
  13. CBD: An Exciting New Fall Schedule… or Not?
  14. MISSISSIPPI RISING - A VICTORY FOR LEGAL RETAILER TO CONSUMER SALES, AND PASSAGE OF TITLE UNDER THE UNIFORM COMMERCIAL CODE
  15. California ABC's Cannabis Advisory - Not Just for Stoners
  16. NEW CALIFORNIA WARNINGS FOR ALCOHOLIC BEVERAGES AND CANNABIS PRODUCTS TAKE EFFECT AUGUST 30, 2018, NOW INCLUDING ADDENDUM REGARDING 2014 CONSENT AGREEMENT PARTIES AND PARTICIPANTS
  17. National Conference of State Liquor Administrators – The Alcohol Industry gathers in Hawaii to figure out how to enforce the US “Highly Archaic Regulatory Scheme.”
  18. Founder John Hinman Honored with the Raphael House Community Impact Award
  19. ROUTE TO MARKET AND MARKETING RESTRICTIONS - NAVIGATING REGULATORY SYSTEM CONSTRAINTS
  20. Alcohol and Cannabis Ventures: Top 5 Legal Considerations
  21. ATF and TTB: Is Another Divorce on the Horizon? What’s Going on with the Agency?
  22. STRIKE 3 - YOU REALLY ARE OUT! THE ABC'S STRICT APPLICATION OF PENALTIES FOR SALES TO MINORS
  23. TTB Temporarily Fixes Problem with Fulfillment Warehouse Tax Credits - an “Alternate Procedure” for Paying Taxes & Reporting
  24. CUSTOMERS WHO HAVE HAD ONE TOO MANY - THE FREE TRANSPORTATION DILEMMA
  25. The Renaissance of Federal Unfair Trade Practices - Current Issues and Strategies
  26. ‘Twas the week before New Year’s and the ABC is out in Force – Alerts for the Last Week of 2017, including the Limits on Free Rides
  27. Big Bottles, Caviar and a CA Wine Strong Silent Auction for the Holidays!
  28. The FDA and the Wine and Spirits Industry – Surprise inspections anyone?
  29. NORTHERN CALIFORNIA WILDFIRES: UPDATED REGULATORY AGENCY DISASTER RELIEF RESOURCES AT A GLANCE
  30. NORTHERN CALIFORNIA WILDFIRES: REGULATORY AGENCY DISASTER RELIEF RESOURCES AT A GLANCE
  31. Soon to come to your Local Supermarket– Instant Redeemable Coupons of the digital age!
  32. The License Piggyback Dilemma – If it Sounds Too Good to be True, it Probably is
  33. A timely message from our Florida colleagues on the tied house laws, the three-tier system and the need for reform
  34. ABC Declaratory Rulings – A Modest Proposal Whose Time has Come
  35. More on FDA Inspections - Breweries, Distilleries and Questions
  36. WHY THE FDA IS INSPECTING WINERIES
  37. Senate Bill 378—The Proposed Demise of Due Process for Alcohol Licensees
  38. ABC Enforcement - Trends and Predictions
  39. The Corruption Chronicles – Volume One: A New Hope
  40. New Alcohol Delivery Oversight on the Horizon
  41. Michigan: Canary in the DtC Coal Mine?
  42. California ABC and Federal Credit Laws – Active Enforcement and Lots of Questions!
  43. Big Bottles For The Holidays - The Highest Calling Of The Winemaker's Art
  44. FINAL COMMENTS TO TTB NOTICE 160 DUE ON WEDNESDAY DECEMBER 7TH – WE ARE ASKING THE TTB TO EXTEND THE COMMENT PERIOD AGAIN TO ALLOW FOR INDUSTRY NEGOTIATION AND ALIGNMENT OF INTERESTS
  45. SONOMA COUNTY WINERY USE PERMITS, EVENT RESTICTIONS AND DTC
  46. New TTB Labeling Requirement Regulations: Out-of-State Bottling Is Not Created Equal and Consumers Right to Know Where the Grapes in their Wine Come from is Compromised
  47. Isn't A Written Agreement With A Distributor Worthless In A Franchise State?
  48. Crowd Funding for Alcohol Producers and Retailers – Down the Rabbit Hole with the Tied House laws
  49. Everything you ever wanted to know about the BPA Warning Statement but were afraid to ask
  50. AB 2082 - A Hunting License for Police and a Lethal Weapon for Politicians that Deprives Licensees of Currently Available Due Process Rights
  51. “Better Late Than Never”-- Judge in Illinois Dismisses 201 Sales Tax Cases against Retailers
  52. The Day the Music Almost Died: The Story of the BottleRock ABC Accusations, the ABC Appeals Board and a Victory for a Common Sense Interpretation of the Tied House Laws
  53. The Arsenic in Wine Class Action Dismissal – what it means
  54. Counterfeit or Artisanal Mexican Spirits? Pick your Poison, or your lime wedge
  55. Warning - CA ABC enforcement teams are on the prowl this weekend!
  56. RELIEF AT LAST! ILLINOIS MOVES TO FIX THE SALES TAX LAWSUITS AGAINST OUT-OF-STATE SELLERS BUT PROPOSES TO PENALIZE WINERIES AND RETAILERS THAT SHIP WITHOUT PERMITS
  57. The TTB Speaks on Category Management or, be Careful What you Ask for Because you might Get it!
  58. Hinman & Carmichael LLP Announces the Addition of Jeremy Siegel to its team of top beverage law lawyers
  59. 2016 LEGISLATIVE UPDATES: Part IV
  60. 2016 LEGISLATIVE UPDATES: Part III
  61. 2016 LEGISLATIVE UPDATES: Part II
  62. 2016 LEGISLATIVE UPDATES: Part I
  63. Hinman & Carmichael LLP is Hiring!
  64. John Hinman Presents NBI Webinar on Basics of Alcohol Beverage Law
  65. ABC DISMISSES SAVE MART GRAPE ESCAPE ACCUSATION BUT REFUSES TO ADOPT JUDGE’S DECISION FINDING NO STRICT LIABILITY FOR ABC VIOLATIONS
  66. Speakeasies are still with us, and proliferating!
  67. The War for the Soul of Sonoma County – the Winery Working Group Battle
  68. Santa Claus isn’t the only one coming to town this Christmas!
  69. Arizona's Direct to Consumer Shipping Rules - An Exercise in Complexity
  70. AB 780 - Social Media and the ABC: The California Legislative “Fix” that Fails
  71. Illinois Finally Offers Certainty and Relief for Victims of Sales Tax Lawsuits, but Prompt Action is Required in Pending Cases
  72. A Modest Proposal – Adopt the federal rule on Tied-House liability in California
  73. The Grapes Escaped - Why the First Amendment Matters
  74. Appellate Court Ruling Strikes Blow Against State’s Arbitrary Beer Label Ban
  75. Illinois Attorney General's Office Announces Intention to Dismiss False Claims Act Against Liquor Retailers
  76. Commercial Speech And Alcoholic Beverages - Part III
  77. Commercial Speech And Alcoholic Beverages - Part II
  78. Craft Beverages: Social Media Marketing the Effective and Compliant Way
  79. Commercial Speech And Alcoholic Beverages - Part I
  80. A LAYPERSON LOOKS AT ARSENIC IN WINE
  81. The Biggest Retailer in the World vs. the TABC
  82. Rebecca Stamey-White presents Emerging Issues in Wine Law
  83. Top Beverage Alcohol Law Firm Adds and Elevates Partners
  84. Illinois Qui Tam Lawsuits—Private Enforcement Of a State Claim: A Bonanza For A Plaintiff’s Lawyer And A Rip-Off Of Retailers
  85. BOOZE RULES OF SOCIAL MEDIA: The Retailer Right to Pay Exception
  86. LIONS AND TIGERS AND TWEETS, OH MY!
  87. AB 2004: Brewer's Incremental Parity with Wine Makers
  88. Expanding, Proud Of It, and Wanting to Tell the World
  89. DC Weighs in Strongly on Third Party Marketer Delivery Services
  90. “Visual Links” between Beer, Wine and Spirits Labels and Retailers Ruled Unlawful in California — the tied house laws run amok
  91. Hard Cider Legislative Update
  92. New Marketing Model for New York – Lot 18 and the NYSLA
  93. Sweeping Changes in Proposed NYSLA Bill Include Expansion for Craft
  94. Minimum Resale Price Policies - How to Control Price-Cutters
  95. AB 2130 – Gloves Off?
  96. “Gluten-Free” Labels for Wine, Beer and Distilled Spirits. We’re Still Waiting.
  97. AB 1252: Sanitation Overkill?
  98. Growlers: Not Just for Beer Anymore
  99. California Legislative Roundup 2014
  100. Build It and They Will Come: Craft Products Get New Privileges in CA and TX