Crawling from the Wreckage

We’re always pretty glad we don’t live in Oklahoma, particularly in recent weeks, but lately we’ve been feeling like the victims of an Oklahoma tornado; metaphorically at least. Over the last few months the Legislative storm has blown us hither and yon so it took at least a week past Sine Die for our eyes to stop rolling around in their sockets and our brains to stop sloshing around in our skulls. This session there were ninety-five alcoholic beverage bills filed, which is three normal sessions worth of such things. About twenty-seven of them passed and that’s more than enough liquor law for even the giddiest more government enthusiast.

Each segment of the industry – distilled spirits, beer, and wine – got some attention from the ephors this session; some good and some not so good. There were light touches in the marketing practices and tax areas and at least a half bushel of changes to the regulatory system. Here’s our quick scan of the things we think might interest you – with a little not-so-quick lingering on the things that interest or aggravate us most. (All of this legislation is effective September 1, 2013 unless otherwise noted.)

Malt Beverages

In the past we’ve written about that series of bills filed by Senator Eltife expanding the rights of malt beverage manufacturers. We haven’t written about Representative Geren’s HB-3307, authorizing alternating proprietorships and contract brewing arrangements between both in-state and out-of-state malt beverage manufacturers. Even though such arrangements had been common in the brewing industry for some time, it was always illegal in Texas; or so the Commission said anyway. Finally a fix was put in the code to allow it, but only for those (i) already held a Manufacturer’s License or Brewer’s Permit or (ii) whose product was already lawfully sold in the state, both as of May 1st, 2005. Representative Geren’s bill defines “alternating brewery proprietorship” and “contract brewing arrangement” and just lets everybody get busy doing it without the temporal restriction. There’s probably going to be a price for this beneficence though. The Commission can require a bond up to $200,000 and not less than $30,000 if one of the parties doesn’t have a “fee interest” in the premises being used.

There’s something else here, too, slid onto the last seemingly innocuous section. While private labels of distilled spirits and wine for retailers and malt beverages for distributors have always been considered by the Commission to be legal in Texas, the Commission has always maintained that private labels of beer and malt liquor produced for retailers are illegal, even though they didn’t always have a rule saying so.  In 1985, the San Antonio Court of Appeals, in the case of Pearl Brewing Company v TABC told the agency in no uncertain terms that it wasn’t either illegal. To keep that opinion from being published, the agency settled the case by promising to lay off poor Pearl Brewing who, after all, was just trying to make a buck, and not to pass a private label rule establishing the very thing the Court had just blown the whistle on unless the Legislature spoke to the issue. By the spring of 1994, that dust storm had blown over and the agency passed the current set of rules that says private label beers are so illegal, even though the Legislature had not addressed the issue. So there.

A few years ago, the Commission staff picked up the private label rule for consideration and conducted the usual stakeholder symphony. It turned out that no one could figure out why private label malt beverages for retailers ought to be illegal except beer distributors who opposed legalization with their usual adamantine resolve. Ultimately the staff decided the private label ban should be lifted but the rule should be used to untangle what the staff took to be the complicated knot of what “contract brewing” means and who ought to be allowed to do it and for whom. That project died of slow strangulation.

That was alarming to somebody though because, out of the blue, Representative Geren’s bill mandates that all malt beverage producers must “verify” to the Commission every year that their facilities aren’t being used “to produce malt beverages primarily for a specific retailer or the retailer’s affiliates.” What that has to do with contract brewing or alternating proprietorships is a brass button mystery to us.

Oh yeah, those other beer bills. Here’s how they came out:

Brewpubs (SB-515, effective immediately):

  • Annual production cap raised from 5,000 to 10,000 barrels per year/location.
  • Any brewpub may sell an unlimited amount of its production to distributors/wholesalers granted exclusive territories under distribution agreements subject to the Beer Industry Fair Dealing Law.
  • Brewpubs operating under Wine and Beer Retailer’s permits (rather than Mixed Beverage permits) who only sell malt beverages they produce may sell up to 1,000 barrels per year/location to retailers or 2,500 barrels for all Brewpub locations under common ownership. These sales are subject to the cash/credit law.

Self Distribution (SB-516/517, effective immediately):

  • In-state and out-of-state producers of malt liquor and beer who make less than 125,000 barrels of those products combined can get a “Self Distribution” permit/license.
  • Self Distributors can sell up to 40,000 barrels of malt liquor and beer per year to retailers.
  • Producers must provide monthly reports of sales to retailers to the Commission.
  • Malt liquor or beer sales under this law “may only be shipped from a brewery/manufacturing facility in this state.” (We don’t know what that means for out-of-state producers.)

Sales to Consumers

  • Malt beverage producers who make less than 225,000 barrels of malt liquor and beer per year/location can sell up to 5,000 barrels per year to consumers for on-premises consumption at the brewery.
  • Hours of possession and sale are 8:00 – 12:00 AM Monday – Saturday and 10:00 AM to 12:00 AM Sunday.

We’re not talking about SB-639 (effective immediately), which includes the several pounds of flesh that the distributors extracted to agree to the other malt beverage bills, anymore because the doctor told us not to do things that make blood come out of our ears.

Distilleries

As we have written before, Senator Van de Putte got busy improving the prospects of Texas distilleries this session. Here’s what she did:

  • Distilleries may sell “bulk alcohol” to Industrial permittees. (The credit law applies.) SB-642
  • Texas Distilleries may sell distilled spirits to each other “for manufacturing or rectification purposes.” SB-652
  • Distilleries, Wineries and Breweries can all sell their product “in bulk” to each other for “manufacturing purposes.” SB-652
  • There is a new Distiller’s Agent’s permit whose holders can conduct samplings on Package Store premises and solicit orders from wholesalers. They have an initial five day grace period before they must hold the permit. SB-828
  • Distilleries in wet areas may sell up to 3,000 gallons per year to consumers for on-premises consumption.
    • Hours of sale are the same as for Mixed Beverage permits.
    • Mixed Beverage gross receipts tax applies.
  • Distilleries in wet areas may sell up to 3,500 gallons per year to consumers for off-premises consumption.
    • No more than two 750 ml bottles per customer per thirty day period.
    • Bottles must be marked “commemorative,” signed and dated by the distiller. SB-905

Wineries

Thanks to Senator Nelson, wineries will be able to serve wine until 2:00 AM on New Year’s Day. SB-131.

Senator Carona’s SB-950 is a little more complicated. Under current law, wholesalers are obligated to buy wine (and distilled spirits) from the product’s “primary American source,” but wineries can buy any wine from any Non-Resident Seller. Under SB-950, wineries have to play by the primary source rule, too. The primary American source is the product producer or the entity closest to that producer in the commercial chain. SB-950 makes clear that this applies to the primary source available to Texas buyers and that there can be only one primary source per product in Texas except for wines produced outside the U.S. Non-Resident Sellers must register their products with the Commission and prove they are the primary American source. They need not provide this proof for rare or vintage wines bought at auction.

Finally, many producers sell none, or only a portion, of their production into Texas themselves. So, the same winery may sell different brands via different primary sources. In such cases, the entity importing the wine into Texas may prove its source bona fides to the Commission gatekeepers by a letter of authorization from the product manufacturer.

The big news in wine this session may be about what did not pass. SB-451 by Carona and HB-2537 by Geren were filed as identical bills requiring wineries to be “bona fide manufacturing operations.” Representative Geren’s bill passed out of the House only slightly modified to require that wineries produce at least 200 gallons of wine each year. Senator Carona changed his bill to require wineries to produce 51% of the wine they ship to Texas consumers. That bill never made it out of the Senate Business and Commerce committee.

Soon, HB-2537 was sent to the Senate and then the Business and Commerce committee where it was amended to add the SB-451 language, along with enhanced reporting requirements for wineries. This bill was voted out of his committee but never garnered enough votes to be called for debate on the Senate floor.

Later, Senator Carona’s SB-451 language was added to HB-2818, a bill dealing with local option law that was still moving late in the session, but the language was stripped by the conference committee, allowing the unoffending HB-2818 to pass.

Stay alert, oenophiles. This isn’t the last we’re going to hear about curtailing wineries’ shipping rights.

Regulatory Revisions

This session has brought a change in the licensing application system long recommended by the Commission. Since 1935, applications for beer licenses and wine and beer permits have been made to the county judge, while applications for all other forms of permits have been made directly to the Commission. SB-1035 by Senator Carona changes that so all applications will be filed with, and all fees paid to, the Commission. (Who will then pay five percent to the county.) Applicants, and not the county clerk, must now arrange for publication of the requisite notices. (SB-1035 and SB-1090 below each contain slightly different versions of publication requirements for applicants.  It’s likely that the amendments will be harmonized; however, if found to be irreconcilable, the amendments as set forth in SB-1035 will prevail.)  If the Commission finds that all facts stated in the application are true and no “legal grounds” exist for denial, then it will issue the permit or license.

If a “protest” is filed, the Commission “shall investigate” and, if there are “reasonable grounds” for the protest, the Commission shall reject the application and require the applicant to re-file with the county court, and pay a $25.00 filing fee. As with current law, the hearing on the application must be held within five to ten days. If the county judge issues an order granting the license/permit, the Commission may still deny the application if it finds “legal reason” to do so.

In current practice, the meaning of “protest” and the standards for who may file one and what constitutes “reasonable grounds” are a matter of internal agency policy rather than law or regulation. Time will tell whether these matters migrate to an enforceable rule.

Two bills tinker with the credit law this session. In HB-1953, Representative Thompson suggested that wholesalers receiving checks from retailers be required to present those checks for payment within five days of receipt and the Legislature agreed. The justification for this change is that it will keep those devious wholesalers from threatening the commonweal by giving scofflaw retailers surreptitious credit by holding on to checks.

A retailer becomes “delinquent” on the 11th or 26th day of the month, depending on when the liquor was purchased. In practice, however, the revocation of permit rights associated with delinquency begins when the agency publishes the “delinquency list.”  In recent years, there has been some controversy surrounding the gap between date and publication with the Commission vowing to reduce the gap to zero through successive rule changes and retailers, speaking mostly through the Package Store Association, insisting that there must be some reasonable amount of time to correct disputed bills before the retailer loses its right to purchase product. Into this affray steps Representative Geren with HB-2806 mandating that a retailer does not become delinquent until the end of the fourth business day after the due date for the bill. End of discussion.

As all the organized world knows, in Texas we not only license people but locations and, with few exceptions, there is only one license/permit per location. Problems arise when the permittee loses its ability to conduct business on licensed premises without a cancellation of the permit. The problem, of course, falls on the landlords who can now neither collect rent from a vanished or defunct tenant nor convince the Commission to issue a new permit to a qualified applicant at the location. (At this point, the naïve and uninitiated might remember the agency’s long standing practice of placing permits and licenses in “suspense” thereby disassociating them from particular locations and “clearing” that location for the issuance of another license/permit. We are assured that life is never that simple for those who labor under the heavy burdens of public power.) Senator Watson passed SB-409 to solve this very problem. Under this bill, the Commission may issue a new permit/license to a location, all other things being equal, if (i) the Commission has initiated an action to cancel or suspend the license/permit and (ii) the old permittee has been evicted under a “final non-appealable court judgment.” As fine as this bill is, it sheds no light on where the landlord might find succor while the eviction action wends its sauntering way though the court system or whether this whole bandobast is an unconstitutional taking.

In HB-2460, Representative Thompson insisted the Mixed Beverage and Private Club permittees ought not to be allowed to possess liquor tax stamps unless they were actually affixed to a liquor bottle. So let it be written, so let it be done.

This session, the Mother of all code tinkering is SB-1090 by Senator Carona, changing around a dozen parts of the code, some important, some not so much. (For example, it is now permissible to refer to the Administrator as the “Executive Director”). Here are what we think of as the highlights of this bill:

  • The definition of “beer” is slightly altered. (But the code continues to equate “ale” with high alcoholic content malt beverages).
  • The definition of “negligence” is reduced to one provision adopting the Penal Code definition.
  • Off premise wine and beer retailers can only sell in “unbroken original containers” (as opposed to a Solo cup with a lid and a straw).
  • Storage permittees may now use facilities they lease instead of own.
  • Wholesalers may now pre-arrange and pre-announce promotional activities to retailers and consumers for malt beverages as well as distilled spirits and wine.
  • Malt beverages can now be co-packaged with consumer items like wine and distilled spirits.
  • Malt liquor tap handles must be accurately labeled like beer handles.
  • Any dispensing machine “operated by the consumer” is an offense to the peace and dignity of the State and will not be tolerated.
  • Manufacturing and wholesale tier members can now tell people where their products are sold at retail.
  • Manufacturing tier members cannot allow their branded vehicles to be parked on a retailer’s premises for longer than five hours. (No, we’re not making this up.)

Local Option

HB-2818 by Representative Sheffield fixes two long time problems with local option law. Under the new law, if an area is wet for wine and beer off premise and mixed beverages, the Commission can issue wine and beer permits.  Similarly, if an area is wet for wine and beer off premise and mixed beverages in restaurants, the Commission can issue wine and beer permits to applicants that also qualify for a food and beverage certificate.   This is a big change, particularly for those retailers who only want to sell beer and wine but were forced into obtaining a mixed beverage restaurant permit, with its higher tax burden, because of the local option.

Perhaps the most difficult issue in the always bizarre area of local option law comes up when a justice precinct wants to alter a status set by prior election in a justice precinct. Under current law, that election must be held in the same territory as the prior election; a condition that is often impossible to meet. Representative Sheffield has changed this, authorizing precinct elections according to current boundaries.

Tax

In HB-3572, effective January 1, 2014, Representative Hilderbran reduced the gross receipts tax levied on Mixed Beverage and Private Club permits from 14% to 6.7%. The trick is that he also applied a new 8.25% sales tax to those sales, effectively transferring the burden for a portion of the former 14% Mixed Beverage Gross Receipts Tax from the business to the consumer. Curiously, although this latter tax is a sales tax, the permitholder is not afforded the right to retain 0.5% of the amount of taxes due from the taxpayer as a reimbursement for its cost of collecting the tax and remitting it to the Comptroller, nor will it retain 1.25% of any prepaid taxes based on a reasonable estimate of its tax obligation as with the regular sales tax.

In 2011 the economic picture was dire so a law was passed requiring a pre-payment of September 2013 excise taxes in August 2013 just to get us to the end of the fiscal year in the black. Apparently the State is in the chips this year because in SB-559 Senator Duncan repeals that inconvenient requirement.

Reading the Tea Leaves

As is often the case, there is talk of an “interim study” for liquor issues. Senator Carona has made it publicly clear that he intends to bring his version of regulatory justice to the recalcitrant wine industry. It is rumored that Chairman Smith in the House is asking for topics for his own interim study on alcoholic beverages. The Commission vows to bring those aggravating “wine issues” to that table.

On other issues, the ban on Executive Branch lobbying notwithstanding, the Commission’s agenda for 2015 includes passage of the following bills that didn’t make the cut this time:

  • SB-1039 by Carona: This bill would criminalize subterfuge and impose a decade of disqualification of those caught doing it. Neither the bill nor the agency offers us any usable definition of what subterfuge might actually mean in practice.
  • SB-962 by Carona: Authorizing the Commission to deny an application for label registration if they suspect the applicant is doing something wrong somewhere. (Without having to suffer the inconvenience of actually having to prove anything.)
  • HB-34 by Menendez: Creating a permit for BYOB establishments.
  • SB-870 and 883 by Van de Putte: This bill aimed at harmonizing and rationalizing marketing practices rules adopted by the agency. (Allow beer distributors to offer consumer knick knacks worth more than a buck? Never happened.)

And so the wheel will keep turning. Stay alert, Citizens. We’ll keep you posted.

 

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