2019 Legislative Changes for California Alcohol Producers – a Blessing or a Curse?
It wouldn’t be a new year without new changes to the California ABC Act, making compliance an elusive target for even the most diligent licensees. Some changes were welcomed by the industry, and some, not so much. Here is an overview of the new changes affecting alcohol producers (and retailers with production privileges), and their consequences.
Brewpubs (Type 75s)
After reports surfaced of rampant non-compliance by Type 75 Brewpub licensees (who got their licenses mostly for the benefit of selling spirits), ABC conducted investigations state-wide to make sure folks were actually producing beer and otherwise complying with the statute. Recent changes to California Business & Professions Code Section 23396.3 in SB 1283 (all other citations are to the B&P Code) attempt to address some of these issues:
Brewing Equipment: Brewpubs must have a seven-barrel commercial brewing system located permanently on-site that can produce seven barrels per brewing cycle. This is more specific than the previous law, which required a seven-barrel brewing capacity. What to do if you are already licensed and your brewing equipment doesn’t meet these requirements? Are different systems grandfathered? Unfortunately, there is no such leniency baked into the statute. If your system does not meet the production criteria, ABC believes you do not comply with current law and if you continue to operate, you may expose your business to an ABC enforcement action.
Production Minimum and Records: The production minimum was doubled to 200 barrels and capped at 5,000 barrels. This makes it less appealing for licensees to make beer and dump it, simply to get the privilege to sell spirits at the premises. Licensees must keep records for three years evidencing their production compliance – which shouldn’t be too much trouble given TTB reporting requirements.
Growlers and Off-Premise Sales: Despite what many brewpubs owners believed, these privileges were not permitted under the old law. They are now, rejoice!
Brewpub Independence: The new law aims to keep brewpubs from collaborating with other brewers and providing them with a way to skirt the existing limits on duplicate locations and restaurants currently permitted by law. Specifically, a Type 75 licensee cannot produce any beer utilizing the same trademarks as a beer manufacturer, even if they are under common ownership. The specificity of this language leaves questions about branding the actual brewpub (not the beer it makes), and what can be sold in the restaurant. As usual, new restrictions invite new solutions.
Quota Control: If it’s too good to be true, it probably is. ABC is now limiting the sale price of currently operating brewpub licenses (or operating under an application filed before December 31, 2019), to the original license fee. Licenses will also be quota-controlled after this date, meaning there will be a cap on the number of newly issued licenses applied for after December 31, 2019, just like other spirits licenses in California.
Craft Distillers (Type 74s)
SB 1164 continues to refine the privileges of craft distillers, and its mostly good news here:
DTC Sales: The big update here is the new ability of craft distillers to sell the previously permitted 2.25 liters direct to consumer, but now without the previously required instructional tasting event on the premises prior to sale (23504). Have the floodgates been opened to DTC spirits sales? Unfortunately, not so much.
First, the permission is limited to sales to consumers in California. To sell those spirits across state lines, you would need a permit from the recipient state. At this time, few states other than Kentucky offer any form of DTC spirits permits.
Second, the majority of common carriers are not excited about shipping spirits, and will not do it if they know that they are shipping spirits, regardless of the legality. Local carriers and fulfillment houses could be an option; but finding them gets trickier all the time.
Tastings, Advertising and Donations: Changes to the statutes governing tasting events with consumers (amending 25503.56 and 25503.57), donations to non-profits (amending 25503.9) and trade tastings (25503.5 and 25503.51) now include craft distillers. As explained in Rebecca’s January 28th social media post, craft distillers can now also take advantage of advertising tasting events with pictures.
Free Rides: Craft distillers (and large distillers, rectifiers, distilled spirits manufacturer’s agents, brandy manufactures, and holders of out-of-state distilled spirits shipper’s certificates and distilled spirits importer general licensees (Type 13) can now offer consumers free or discounted rides, joining the ranks of beer manufacturers (SB 973 amending 25600). Note that if you are an importer general and you also have a wholesale or retail license, you are not eligible to participate. If we are allowing suppliers to provide free rides in the interest of public safety, why isn’t this open to all suppliers?
Wineries (Type 02)
Wineries (and especially APs, who usually aren’t able to make use of a tasting room at their host winery’s facility) were all very excited about the prospect of getting a second duplicate tasting room in SB 1430, and yet, this one failed to make it into current law. If at first you don’t succeed…try again next year!
Joint Tasting Rooms
AB 1890 amends 25607 to extend the privilege of the joint tasting room or food court (previously limited to licensees of the same type by ABC policy) to licensees of a different type; specifically, wineries, craft distillers and small breweries. The tasting area must be adjacent to production premises (not duplicate locations), effectively limiting the locations where these joint tasting rooms can exist given the zoning limitations that often hamstring craft distillers.
For now, this privilege is quite specific and will not impact too many California licensees. However, for larger producers with multiple products or for property developers looking to maximize tasting flexibility, this permission is a big win.
Cannabis and CBD
And just in case you haven’t heard the news, AB 2914 confirms cannabis cannot be in alcoholic beverages, and neither can CBD, whether derived from cannabis or hemp (25621.5 and 26070.2). CBD in beverages is all the rage, but for now these products can only be sold in beverages California if they are non-alcoholic, and the CBD is derived from cannabis and the product is sold by a retailer licensed by the Bureau of Cannabis Control.
2018 was a busy year for the legislature and the ABC and overall, a mixed bag for producers. As always, we (and your own counsel if its not us) are available to answer questions and offer guidance.