ALCOHOLIC BEVERAGE CONTROL LAW: UPDATE ON CURRENT AND

FUTURE LEGAL ISSUES IN THE INDUSTRY

CLE Credit: 1.0 Sponsor: Alcoholic Beverage Control and KY Distillers’ Association

Wednesday, June 12, 2019 10:40 – 11:40 a.m.

Stopher Galt House Hotel

Louisville, Kentucky

A NOTE CONCERNING THE PROGRAM MATERIALS The materials included in this Kentucky Bar Association Continuing Legal Education handbook are intended to provide current and accurate information about the subject matter covered. No representation or warranty is made concerning the application of the legal or other principles discussed by the instructors to any specific fact situation, nor is any prediction made concerning how any particular judge or jury will interpret or apply such principles. The proper interpretation or application of the principles discussed is a matter for the considered judgement pf the induvial legal practitioner. The faculty and staff of this Kentucky Bar Association CLE program disclaim liability therefore. Attorneys using these materials, or information otherwise conveyed during the program in dealing with a specific legal matter have a duty to research the original and current sources of authority.

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TABLE OF CONTENTS

The Presenters ................................................................................................................. i

Alcoholic Beverage Control Law: Update on Current and Future Legal Issues in the Industry ........................................................................... 1

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THE PRESENTERS

Eric Gregory KY Distillers’ Association 614 Shelby Street Frankfort, Kentucky 40601 eric@kybourbon.com ERIC GREGORY, President of the Kentucky Distillers’ Association, is a veteran communicator with more than 30 years of experience in governmental affairs, marketing, journalism and strategic public relations. As KDA President, Gregory oversees all aspects of the 139-year-old association that promotes, protects and elevates the Commonwealth’s signature Bourbon and distilled spirits industry, including the famous Kentucky Bourbon Trail® experiences. Kentucky’s historic distilleries produce 95 percent of the world’s Bourbon, a rich heritage that dates back more than 200 years. Today, Bourbon is America’s official native spirit, a leading export and a thriving symbol of Kentucky craftsmanship and tradition. Mr. Gregory joined the KDA in 2008 after seven years as Governmental Affairs Manager at East Kentucky Power Cooperative. He previously served as Vice President of Public Affairs for Preston-Osborne, a prominent Lexington public relations, marketing and research firm. A graduate of the University of Kentucky, Mr. Gregory began his career as an award-winning journalist for the Lexington Herald-Leader. He also served as a reporter and editor at the Honolulu Advertiser, and has been nominated twice for the Pulitzer Prize. Mr. Gregory is a native of Henderson, Ky. He and his wife, Ellen, live in Midway, Ky., with their three children. And if you ask about his favorite Bourbon, his response will always be, “Kentucky Bourbon.”

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Stephen B. Humphress Kentucky Department of Alcoholic Beverage Control

1003 Twilight Trail Frankfort, Kentucky 40601 steve.humphress@ky.gov

STEPHEN B. HUMPHRESS is the general counsel for the Kentucky Department of Alcoholic Beverage Control (ABC). Mr. Humphress began working as an attorney at the ABC in 2001 and now has 18 years’ experience as a state government attorney. Mr. Humphress has been appointed by both Republican and Democrat Kentucky Governors to serve as the ABC’s General Counsel, and he has been General Counsel for twelve (12) non-consecutive years. He received his law degree from the University of Louisville School of Law and was employed in private practice until joining the ABC. Mr. Humphress is the leading expert on Kentucky’s complex alcoholic beverage laws. Because of his unique knowledge, state and local government officials and industry members actively seek his input on Kentucky alcohol law issues. In recent years, he was instrumental in proposing and drafting several comprehensive bills with bipartisan support that modernized and drastically improved Kentucky’s alcoholic beverage laws. Mr. Humphress was the primary author of the comprehensive 2012 Governor’s Task Force report on Kentucky alcohol laws and he has written several published articles and reference materials as well. He recently received the Governor’s first Red Tape Reduction Award for eliminating fifty percent (50%) of the ABC’s outdated and unneeded regulations. He is a nationally sought speaker on various alcoholic beverage law issues.

Anthony M. Zelli Dinsmore & Shohl LLP 101 South Fifth Street Suite 500 Louisville, Kentucky 40202 anthony.zelli@dinsmore.com

TONY ZELLI is a partner in the Litigation Department at Dinsmore & Shohl LLP where he represents clients in Kentucky and Indiana state and federal courts in an array of matters, including cases involving complex business and commercial, product liability, personal injury, health care, construction, copyright and trademark, insurance coverage, administrative, and criminal issues. Mr. Zelli represents individuals and businesses in the hospitality and alcoholic beverage industry. In his alcoholic beverage law practice, Mr. Zelli provides counsel to alcohol producers, distributors, and retailers on a variety of issues. He regularly assists these businesses with federal permitting, state and local licensing, compliance, enforcement, and litigation matters. Mr. Zelli received a B.S. in Finance from Ball State University and his J.D. from Brandeis School of Law at the University of Louisville.

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ALCOHOLIC BEVERAGE CONTROL LAW: UPDATE ON CURRENT AND FUTURE LEGAL ISSUES IN THE INDUSTRY

Eric Gregory, Stephen B. Humphress, and Anthony M. Zelli I. ECONOMIC IMPACT OF BOURBON IN KENTUCKY

A. A 2019 economic impact study shows Kentucky bourbon provides the following benefits to the state:

1. $8.6 billion per year industry in economic output. 2. 20,100 jobs in Kentucky. 3. $1 billion yearly payroll. 4. $235 million yearly in state and local taxes. 5. $2.3 billion in capital investment.

B. This economic impact has exploded over the past 10 years. Growth

compared to 2009 to the current year is:

1. From 19 in-state distilleries to 68 in-state distilleries, an increase of 258 percent.

2. From eight counties with a distillery to 32 counties with a distillery,

an increase of 300 percent. 3. From 794,091 barrels filled to 1,715,541 barrels filled, an increase

of 116 percent. 4. From 4,600,962 barrels in inventory to 7,475,311 in inventory, an

increase of 62 percent. 5. 237 percent increase in the tax-assessed value of inventory. 6. 137 percent increase in barrel taxes paid. 7. Average pay per job from $77,007 to $94,899, an increase of 23

percent. 8. Industry jobs from 9,848 to 20,124, an increase of 104 percent. 9. 127 percent increase in payroll. 10. 237 percent increase in the tax-assessed value of inventory.

C. Kentucky Bourbon Trail® & Craft Tour® stops have increased from

298,621 in 2009 to 1,404,926 in the past year, a 370 percent increase.

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D. By 2020 – an anticipated $10 billion in economic output, 24,000 jobs, and $1.2 billion payroll.

E. $2.3 billion in capital projects completed or planned by 2022.

II. KENTUCKY BOURBON’S PLACE AMONG UNITED STATES SPIRITS

EXPORTS

A. “American Whiskey” is the largest export category among United States spirits.

1. Total United States distilled spirits exports – $1.8 billion. 2. “American Whiskey” exports – $1.2 billion.

B. Kentucky bourbon makes up $500 million of 2018 exports.

1. Kentucky bourbon exports grew 15 percent worldwide in 2018. 2. European Union is the largest export market for Kentucky bourbon

at $200 million – with a 10 percent annual growth rate the past five years.

C. Top export countries for Kentucky bourbon:

1. Spain. 2. United Kingdom. 3. Japan. 4. Germany. 5. Australia. 6. Canada. 7. Mexico. 8. New Zealand. 9. France.

D. Emerging export markets for Kentucky bourbon:

1. India. 2. China. 3. Russia.

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4. South Korea. 5. Vietnam.

III. WHY IS KENTUCKY BOURBON BOOMING?

A. Free trade agreements in the 1990s leveled the international playing field and opened new markets to Kentucky bourbon.

B. Rise of premium small batch and single barrel whiskey. C. “Mad Men” effect – growing cocktail culture excites consumers, especially

millennial drinkers. D. The Kentucky Distillers’ Association creates the Kentucky Bourbon Trail®

tour – bourbon tourism explodes. E. Modernization of Kentucky alcohol laws and Prohibition-era policies!

IV. RECENT CHANGES TO KENTUCKY LAWS HAVE HAD A POSITIVE IMPACT

ON THE BOURBON INDUSTRY

A. In 2014, the General Assembly passed House Bill 445. Among other changes, this bill included a Kentucky Bourbon Barrel Reinvestment Credit. This pours $23 million back into distilling communities.

B. In 2016, the General Assembly passed Senate Bill 11, which created

sweeping reforms to Kentucky alcohol laws. Specific to distilleries, the bill allowed distilleries to become more tourist-friendly. Among other things, licensed distilleries could obtain retail drink licenses and sell retail souvenir package bottles on premise.

C. In 2017, the General Assembly passed House Bill 100, the “Vintage Spirits

bill.” This allowed retailers otherwise authorized to sell distilled spirits to sell “vintage distilled spirits.”

D. Also in 2017, the General Assembly passed House Bill 183. Specific to

distilleries, this allowed distillers to sell drinks of their distilled spirit products to consumers at fairs and festivals.

E. In 2018, the General Assembly passed House Bill 400, the “Bourbon

Without Borders bill.” This bill allows tourists to ship bottles to the home of visitors of a licensed distillery, winery, or certain retailers. It also allows visitors to sign up for a bourbon club subscription that allows distillers to ship a monthly order to the visitor’s home.

V. FUTURE CHALLENGES FOR THE KENTUCKY BOURBON INDUSTRY

A. While Kentucky is synonymous with bourbon, other states have seen bourbon’s growth and are attempting to create a more favorable environment in hopes of capturing a larger market share.

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B. All 50 states have distilleries. As of August 2018, there are 1,835 distilleries operating in the United States.

• Kentucky is now ranked 11th in the United States in number of operating distilleries.

C. Other states have adapted by changing laws and reducing fees to attract

the next generation of distillers, jobs, and investment:

1. California, New York, Washington, Texas, and Colorado have two to three times as many distilleries as Kentucky.

2. Illinois is considering allowing satellite tasting rooms and limited

self-distribution. 3. Rhode Island permanently exempted wine and spirits from its 7

percent sales tax. 4. Colorado has allowed distillery “pubs.” 5. New York has increased allowed marketing funds, repealed

regulations, and allowed distillery restaurants and sales by the drink.

6. Washington has repealed limits on sales, allowed distilleries to

participate in special events, and raised production limits. Washington had 0 distilleries in 2005 – it now has 122.

D. Distilled spirits is the most highly taxed industry in Kentucky.

1. 34.4 cents of every dollar output goes to taxes. 2. Seven different taxes on every bottle of spirits in Kentucky:

a. Aging barrel tax (local). b. Aging barrel tax (state). c. Case tax. d. State excise tax. e. Federal excise tax. f. State wholesale tax. g. State sales tax.

3. Sixty percent of every bottle of spirits in Kentucky goes to taxes.

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4. All but one of the top 10 distilling states has lower spirits taxes than Kentucky.

E. Retaliatory tariffs have impacted the industry.

1. Canada, China, Mexico, and the European Union enacted

retaliatory tariffs ranging from 10 percent to 25 percent on U.S. whiskey last year.

2. American whiskey exports grew 28 percent in the first half of 2018

as large distillers stockpiled products overseas before tariffs took effect.

3. However, exports of American whiskey plunged 11 percent in the

second half of 2018. 4. European Union exports plummeted 13.4 percent in the second half

of 2018 – the EU is the largest Kentucky bourbon export market. 5. Distillers have been impacted – Brown-Forman projects $125

million loss this year if tariffs remain. 6. Long-term consequences are possible from a trade war. 7. Collateral damage could harm farmers, cooperages, trucking,

hospitality, and other businesses that depend on Kentucky bourbon’s success.

VI. FURTHER LEGISLATIVE/REGULATORY STEPS NEEDED TO MODERNIZE

KENTUCKY ALCOHOL LAW

A. Address tax issues to help Kentucky compete for new distilleries and investment.

B. E-commerce: Order alcohol online for shipping and delivery. C. Incentivize and encourage counties and communities to go wet. D. Seek parity between beer, wine, and spirits. E. Let distilleries sell unique bottles to help drive tourism. F. Lobby more reciprocal states for spirits shipping (currently only 12 states

have reciprocity).

G. Extend the reduction of the federal excise tax. H. Permanently repeal the capitalized interest policy. I. Promote free and fair trade.

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VII. BACKGROUND OF KENTUCKY ALCOHOL STATUTES

A. In 1933, the Twenty-first Amendment was ratified thereby ending “Prohibition” through repeal of the Eighteenth Amendment. In 1935, Kentucky enacted the “Kentucky Alcoholic Control Act” which became KRS Chapters 241, 242, 243, and 244 after the Kentucky Statutes were “Revised” in 1942. These statutes are still the basic framework for Kentucky’s current alcoholic beverage laws.

B. Historically, the issue of alcoholic beverage sales was very divisive and

political in Kentucky. Given the difficulty of passage of alcoholic beverage laws, they become a patchwork of sometimes conflicting provisions enacted at different times for a specific purpose outside of a specific statutory scheme.

C. In 2012, a Task Force on the Study of Alcoholic Beverages was created for

the purpose of simplifying and modernizing Kentucky’s alcoholic beverage statutes. After six months of study, the 22 member Task Force issued a comprehensive report that made 34 recommendations for law changes.

D. In 2013, the Kentucky legislature enacted Senate Bill (SB) 13 which was

comprehensive alcoholic beverage legislation that codified all 34 Task Force recommendations.

E. Passage of SB 13 began a new dawn for alcoholic beverage legislation in

Kentucky. From 2014 to 2019, the legislature has enacted significant legislation amending Kentucky’s alcoholic beverage laws each year.

F. Legislative changes in one year have been building blocks which allowed

additional beneficial changes in subsequent years. Kentucky is now one of the nation’s leading states for alcohol law modernization efforts.

VIII. 2014 LEGISLATIVE CHANGES

A. Senate Bill 83: “SB 13 clean-up bill.”

1. SB 83 corrected a few inadvertent drafting errors and systematic problems resulting from passage of SB 13 in 2013.

2. A new subclass B “craft” distiller’s license at a reduced $1,000

licensing fee was created for smaller distilleries that produced 50,000 gallons or less per year.

3. “Weak cider” was defined to mean cider containing 7 percent or less

alcohol by volume (ABV) and caused it to be treated as a malt beverage. Weak cider containing 7 percent or less ABV was able to be sold at retail establishments where malt beverages are sold.

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B. Senate Bill 213: “ABC Hodge Podge bill.”

1. Brewers and importers were prohibited from requiring a distributor to pay a sum of money in order to distribute a beer product(s) in a designated territory (“pay to play”).

2. Any county was permitted to enact ordinances to allow licensed

small farm wineries to sell wines at the winery premises on Sunday. Alternatively, voters can also approve Sunday sales at a licensed small farm winery by a special precinct local option election.

C. House Bill 415: “Regulatory License Fee bill.”

1. HB 415 amended KRS 243.075 to impose certain requirements on

qualified cities and counties allowed to impose regulatory license fees. Counties and cities are required to set fees “at a rate that will generate revenue that does not exceed the total of the reasonable expenses actually incurred by the city or county in the immediately previous fiscal year for the additional cost, as demonstrated by reasonable evidence, of: (a) Policing; (b) Regulation; and (c) Administration.”

2. Cities/counties must audit their expenses annually and adjust rates

to ensure that the rate imposed by the city/county does not generate revenue that exceeds the total of its demonstrated reasonable alcoholic beverage related expenses actually incurred by the city/county in the immediately previous fiscal year.

3. Licensees were provided judicial remedies and reasonable attorney

fees if a city/county failed to comply with requirements.

D. House Bill 475: “State Parks bill.”

HB 475 created a special moist precinct local option election whereby voters could approve alcoholic beverage sales only at a Kentucky state park located in a dry territory.

E. House Bill 331: “City Classification bill.”

HB 331 eliminated the old city classification system of either first, second, third, fourth, fifth, or sixth class. Passage of HB 331 was only made possible due to SB 13 (2013) that amended alcohol laws to provide more equal treatment and alcohol rules for all cities.

F. House Bill 445: “Bourbon Barrel bill.”

HB 445 provided tax modernization by allowing certain income tax credits for property taxes paid on distilled spirits stored/aging in barrels. The law also moderately adjusted tax rates (staggered reductions over years) for malt beverages and wine.

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IX. 2015 LEGISLATIVE CHANGES

House Bill 168: The “Beer Bill” or the “Kentucky Lobbyist Employment Act.”

A. HB 168 amended KRS 243.110 to protect Kentucky’s three-tier alcohol distribution system by specifically prohibiting a brewer from also holding a distributor’s license.

B. Prior to HB 168, the Kentucky Alcoholic Beverage Control Board v.

Anheuser-Busch, Inc., 574 S.W.2d 344 (Ky. App. 1978) holding allowed Anheuser-Busch to acquire a beer distributorship in Louisville, Kentucky to distribute its products in Jefferson County only. When Anheuser-Busch purchased an Owensboro distributor-ship in 2014, the uneasy truce was broken resulting in the filing of HB 168.

X. 2016 LEGISLATIVE CHANGES

A. Senate Bill 11: “The ABC bill.”

1. SB 11 was derived from a prior 2015 bill, SB 81, which was a joint Department-industry bill.

2. The population requirements in KRS 242.125 were eliminated so

that any sized city could hold a local option election to become wet separately from a dry or moist county.

3. KRS 244.290 and 244.480 allowed ALL cities and counties,

regardless of population, to enact ordinances to permit licensees to remain open and sell distilled spirits, wine or malt beverages on Sunday or after midnight.

4. All city and county local alcohol licenses (except in Jefferson

County) expired on the same date as corresponding state licenses. 5. A new type of moist precinct local option election was created

whereby voters could approve alcohol sales only by distilleries located in the dry territory.

6. A licensed distillery was allowed to sell retail souvenir package

bottles of any distilled spirit produced at that distillery location or at a different Kentucky distillery location. Distillers were permitted increased souvenir package sales of up to 4.5 liters per visitor per day.

7. Cities and counties were given authority to enact ordinances which

permitted distillery alcohol sales on Sunday. 8. Distilleries were granted increased free sample sizes of 1.75

ounces of distilled spirits per visitor per day.

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9. As a new three-tier system exception, licensed distilleries were permitted to obtain a retail drink license and have retail alcoholic beverage drink sales at the distillery premises.

10. A rectifier’s license “Class B” at a reduced fee of $825 per year was

created for operations rectifying fifty thousand (50,000) gallons or less of distilled spirits per year.

11. A “bed and breakfast” business was permitted to obtain an NQ3

retail drink license that allows it to sell alcoholic beverages to registered guests staying at the business.

12. A charity was allowed to obtain the special auction license and

auction or raffle all forms alcoholic beverages (distilled spirits, wine, and malt beverages) as a fundraiser.

13. As a new three-tier exception, a brewer was permitted to sell limited

amounts of its produced malt beverages by the drink for consumption on the premises. A brewer was also permitted to sell “growlers” (refillable jugs) for off-premises package sales.

14. The maximum production cap for a small farm winery license was

increased from 50,000 gallons per year to 100,000 gallons per year. A small farm winery has many three-tier exception retail privileges that a winery does not possess.

15. The maximum production cap for a microbrewery license was

increased from 25,000 barrels per year to 50,000 barrels per year. A microbrewery has many three-tier exception retail privileges that a brewery does not possess.

16. As a three-tier exception, a licensed microbrewery was permitted to

sell its own malt beverages, by the package and by the drink, to consumers at fairs, festivals, and other similar types of events located in wet territory. Small farm wineries already had this privilege.

17. Brewers and distributors were permitted to give refrigerated coolers

to retailers as a trade practice exception. 18. Powdered alcohol was banned. Powered alcohol is similar to “Kool-

aid” or “Crystal Light” as it is a powder that can be mixed with water to produce an alcoholic beverage drink.

XI. 2017 LEGISLATIVE CHANGES

A. House Bill 183: “ABC Clean-up bill.”

1. HB 183 was a Department written bill with both substantial changes and clean-up amendments.

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2. A county judge executive was given discretion to order that a local option election be held on the same day as a primary or regular election day.

3. The moist local option election statutes were amended to be

consistent and have essentially the same rules for each type of moist election. The only differences were the territory size authorized to hold an election (county, city or precinct) and the type of business authorized to sell alcoholic beverages (limited restaurant, small farm winery, golf course, qualified historic site, state park, horse race track, distillery, etc.).

4. The Department was given authority to issue advisory opinions and

declaratory rulings on questions regarding the alcoholic beverages laws. A regulation, 804 KAR 6:020, sets the procedures for requesting an advisory opinion.

5. The Department was provided administrative subpoena power to

subpoena records for investigations regarding hidden ownership or other violations.

6. The Department was given authority to issue an emergency

suspension order to immediately suspend a license, prior to hearing, if the business poses a threat to public health, safety, or welfare. Licensees have expedited due process rights.

7. Jurisdiction for judicial review appeals of Board Final Orders was

placed in the Circuit Court for the county containing the licensee or applicant, instead of Franklin Circuit Court. Department was permitted to request that a circuit court dissolve the automatic court stay of Board Final Orders for “good cause shown.”

8. Licensing statutes were updated to reflect modern business types

and structures for purposes of application requirements. (i.e., corporations, LLCs, LLPs)

9. Social security numbers were no longer required for local option

petitions and license applications. 10. Local county and city ABC Administrators were no longer required

to execute and post a bond before serving in that office. 11. All cities and counties were treated equally with regard to quota

retail drink licenses (QD) licenses. These licenses were now available in all cities and counties. Cities and counties had discretion to prohibit such licenses by ordinance if desired.

12. Quota retail package license retailers were permitted to deliver

packages of distilled spirits and wine to consumers’ homes. Package retailers were already authorized to deliver packages of malt beverages to consumers’ homes.

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13. Restaurants were no longer required to have any seating requirement to obtain an NQ2 license. A restaurant was simply required to maintain 50 percent food sales from its gross sales. Hotels were also no longer required to have any seating requirement to obtain an NQ2 license.

14. A supplemental bar was no longer required to be a permanent

constructed structure. A supplemental bar could now include a temporary structure which allowed it to be used, then broken down and stored to provide more room space if needed by licensee.

15. Small farm wineries were permitted to obtain a distiller’s license to

produce brandy. 16. As a three-tier exception, distillers were permitted to sell drinks of

its distilled spirit products to consumers at fairs, festivals, and other similar events. Small farm wineries and microbreweries already possessed this privilege.

17. The special temporary alcoholic beverage license provided the

same rights in all cities and counties and the state fee was reduced to $100 per event.

18. A nonprofit organization, not just a charity, was permitted to obtain

a special temporary alcohol auction license. In addition to alcoholic beverage sales as a fundraiser, alcoholic beverages could also be donated for consumption by patrons at a charity or non-profit event. The state fee for this license was reduced to $100.

19. Constitutional commercial free speech rights of Kentucky

businesses were recognized by permitting all forms of advertising unless specifically prohibited by Board regulation.

20. Independent contractors were permitted to contract with a licensee

and perform services relating to licensed alcoholic beverage activities for a licensee without having to obtain a separate license. Licensee was responsible for acts of independent contractors and employees.

21. Consumers were expressly prohibited from bringing their own

alcoholic beverages onto licensed premises (“corkage” and “BYOB”).

22. The Board was given the same discretion as local governments in

permitting alcoholic beverage sales after hours and on Sunday to holders of extended hours supplemental licenses (ESLs). As a result, 804 KAR 4:230 now provides more business flexibility for sales times by ESL holders.

23. Board was given more authority to allow minors on premises by

regulation for those businesses types that could adequately monitor

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and prevent alcohol sales to minors. As a result, 804 KAR 5:070 now adds to business types that can permit minors on their premises.

24. Retailers were permitted to use loyalty cards and allow discounted

prices on alcoholic beverages for points and promotions. 25. Retailers were permitted to sell products below cost for bona fide

“close out” sales upon written request and approval by the Department.

26. Licensees were no longer required to have their name and license

numbers printed in the front window. (“The Scarlett letters”). 27. Creditors were given more clear direction on security interests in

alcohol inventory consistent with modern commercial loan transactions and uniform commercial code. Landlords given direction on what to do with abandoned alcohol of a prior tenant.

28. After only one year, brewers or distributors were no longer allowed

to provide free refrigerated coolers to retailers.

B. House Bill 100: “Vintage Spirits bill.”

1. Retailers who sell distilled spirits, by the drink or by the package, were authorized to sell “vintage distilled spirits.” Vintage distilled spirits could be purchased from a non-licensed individual.

2. A “vintage distilled spirit” is a distilled spirit in its original

manufacturer’s unopened bottle or container that is not otherwise available for purchase from a licensed wholesaler within the Commonwealth.

C. House Bill 319: “Local Option bill.”

1. Before a petition for a local option election can be circulated, a person/group was required to first file an “intent to circulate petition” with the county clerk. A copy of the unsigned petition must be filed with that intent.

2. Petitions must be filed by the last Tuesday in January in order for a

local option election to be held on the primary election day that year. Petitions must be filed by the second Tuesday in August in order for the election to be held on the regular election day that year.

3. If a person or group desired to hold a local option election on a date

other than a primary or regular election day, the person/group must pay for the costs of the election. To ensure payment of these costs, the person or group must post a bond for the costs of the election within five days of the filing of the petition. The county judge executive sets the cost of the bond.

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D. Senate Bill 120: “Second Chance bill.”

Criminal convictions no longer automatically disqualified an applicant from holding an alcoholic beverage license. Department was only permitted to deny a license application if crime for which the person was convicted directly related to the person’s ability, capacity, and fitness required to perform the duties and discharge the responsibilities for the license being sought.

XII. 2018 LEGISLATIVE CHANGES

A. House Bill 400: “Bourbon Without Borders bill.”

1. Distiller was specifically permitted to deliver or ship limited amounts of distilled spirits ordered by a Kentucky visitor directly to the visitor’s home. If a visitor signed up and paid for a bourbon club/program subscription at the distillery, distiller was permitted to ship a monthly order to the Kentucky visitor’s home.

2. A small farm winery (“SFW”) was permitted to deliver or ship limited

amounts of wine directly to a Kentucky visitor’s home. If a Kentucky visitor signs up and pays for a SFW sponsored subscription wine club/program at the SFW, SFW could ship a monthly order to the visitor directly to the Kentucky visitor’s home.

3. A liquor package store with 80 percent of its monthly gross sales

receipts from sales to Kentucky residents (“package store”) could deliver or ship limited amounts of alcoholic beverages to Kentucky customers. If a visitor signs up and pays for a subscription to a distilled spirits or wine club/program at the package store, the package store can ship a monthly order to the Kentucky visitor.

4. All shipments had to be made through a licensed common carrier.

Packages had to be clearly marked "Alcoholic Beverages, adult signature (21 years of age or over) required." Shippers must request adult-signature-only service from the licensed transporter. For deliveries to consumers, a licensed transporter was required to request and inspect government-issued identification for proof of age.

5. Orders could not be delivered in Kentucky dry territories. Other

states’ laws controlled whether a shipper could ship to a visitor’s home in other states.

6. The shipper of alcoholic beverages, not the licensed common

carrier delivering them, was liable for any violations for delivering alcoholic beverages in dry territory. As an affirmative defense, the shipper was not liable if the purchaser represents in writing that the delivery address is located in wet territory.

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B. Senate Bill 110: “The Quota License bill.”

1. In the hope of encouraging local economic growth and new business opportunities, the Board repealed its regulations that arbitrarily limited the number of quota retail package licenses and quota retail drink licenses available in communities based on population ratios. In response, the legislature re-established quotas for quota retail package (QP) licenses by statute. There are no longer any limits on the number of quota retail drink (QD) licenses.

2. SB 110 simply codified the prior Board quota regulations into

statute. For wet counties, the statutory quota was set at one (1) QP license per every 2,300 county residents with a minimum of two (2) QP licenses to avoid monopoly situations.

3. The statutory quota for QP licenses for wet cities located in dry

territories was set at one (1) QP license per every 2,300 city residents with a minimum of two (2) QP licenses to avoid monopoly situations.

4. Wet cities were granted authority and process to request and

receive a higher specific quota number in excess of the general population ratio based quota number.

C. House Bill 136: “Microbrewery bill.”

1. A microbrewery was no longer required to use an invoicing system

(sell and buy back their own produced beer to, and from, a distributor on paper) in order to sell their own produced malt beverages at retail to consumers with certain limitations. (Small farm wineries have the same ability.)

2. Since an invoicing system is no longer needed, a microbrewery was

no longer required to have a territorial agreement with a distributor in order to sell produced beer sold at the microbrewery.

3. A microbrewery had no limit on the amount of its malt beverages

that it can sell by the drink for consumption at the microbrewery. A microbrewery could only sell malt beverages by the package for consumption off the microbrewery in the amount of thirty-one (31) gallons per person per day (not more than three (3) cases in case format).

4. A microbrewery was required to pay all excise, wholesale and sales

taxes directly to the Department of Revenue.

D. Senate Bill 98: “City EDC bill.”

A cheaper entertainment destination center (EDC) license was created for local governments (or management company holding the license as their

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agent). The EDC licensee fee was set at $2,577 per annum for local governments or their agents.

XIII. 2019 LEGISLATIVE CHANGES

A. House Bill 256: “Dry Territory bill” or “Wine for Wife bill.” 1. KRS 242.230 generally prohibits a person from selling or giving

alcoholic beverages to another person in dry territory. An exception was created whereby a person can give (not sell) their spouse or others an alcoholic beverage in a private residence or private party/event. Exception required alcoholic beverages to be lawfully purchased in wet territory.

2. Caterers located in wet territories were authorized to cater a private

party/event in dry territory and serve alcoholic beverages to invited guests. The private party host was required to purchase the alcoholic beverages at the caterer’s licensed premises located in a wet territory. Caterer could not sell but only serve the purchased alcoholic beverages at the private party (no open bar).

B. Senate Bill 29: “Regulatory License Fee bill” (again) (effective June 27,

2019).

HB 415 (2014) only permitted “qualified cities” and counties containing them, to impose regulatory license fees. “Qualified cities” were simply the old 3rd and 4th class cities that existed on August 1, 2014. Smaller cities (old 5th and 6th class cities) and counties could not impose regulatory license fees. HB 415 amended KRS 243.075 to now permit any city with less than 20,000 residents, and any county that does not contain a city that size, to impose regulatory license fees.

XIV. TENNESSEE WINE & SPIRITS RETAILERS ASS’N v. BLAIR (FORMERLY

BYRD)

A. First United States Supreme Court case in over a decade involving alcohol regulation.

B. Issue is whether Section Two of the Twenty-first Amendment empowers

states, consistent with the Dormant Commerce Clause, to regulate liquor sales by granting retail or wholesale licenses only to individuals or entities that have resided in-state for a specified period of time.

C. Blair may answer a number of issues unresolved by the previous Supreme

Court case, Granholm v. Heald, 544 U.S. 460 (2005).

1. Granholm held that state laws in New York and Michigan that permitted in-state wineries to ship wine directly to consumers, but prohibited out-of-state wineries from doing the same, were unconstitutional.

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2. For all goods other than alcohol, the Dormant Commerce Clause prevents states from requiring different treatment of in-state and out-of-state economic interests to benefit the former. In Granholm, there was no question that Michigan and New York’s laws discriminated against interstate commerce in violation of the Dormant Commerce Clause.

3. However, alcohol is different because of the Twenty-first

Amendment. Section One of the Twenty-first Amendment repealed the Eighteenth Amendment. Section Two of the Twenty-first Amendment states:

The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.

4. At issue in Granholm was whether the Twenty-first Amendment’s

passage negated or limited the impact of the Dormant Commerce Clause with respect to state regulation of alcohol.

5. The Court looked at the history of the Twenty-first Amendment. The

aim of the Twenty-first Amendment is to allow states to maintain an effective and uniform system for controlling liquor by regulating its transportation, importation, and use.

6. However, the Amendment does not give states the authority to pass

non-uniform laws in order to discriminate against out-of-state goods. The Court held that state regulation of alcohol is limited by the non-discrimination principle of the Dormant Commerce Clause. When a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, just like other products, the Dormant Commerce Clause invalidates such laws.

7. While states have broad power to regulate liquor under Section

Two, this power does not allow states to ban, or severely limit, the direct shipment of out-of-state wine while simultaneously authorizing direct shipment by in-state producers. If a state chooses to allow direct shipment of wine, it must do so on evenhanded terms.

8. Granholm led to big changes in the industry, specifically the

development of the direct to consumer market. D. Granholm, however, only dealt with the Twenty-first Amendment as applied

to producers/manufacturers of alcohol. It did not specifically address any issues with the other tiers of the three-tier system. In fact, many subsequent courts have narrowly construed Granholm, applying it only to producers, though results have been mixed.

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E. In addition, while Granholm addressed alcohol regulation across state borders, Blair addresses residency requirements for conduct arguably occurring within state borders. Here, states are arguably exercising their “core §2 power,” the power “directly to regulate the sale or use of liquor within [their] borders.” Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 713 (1984).

F. Three-Tier System – after repeal of the Eighteenth Amendment, most

states created a system of alcohol regulation called the three-tier system. It was designed to, among other things, prevent vertical monopolies (i.e. brewers/distillers controlling distribution and sales channels), preserve competition, and effectively collect taxes.

1. The three-tier system divides license holders into three tiers:

producers, wholesalers, and retailers. 2. Producers (distillers, vintners, brewers) are at the first tier. They are

allowed to sell alcohol only to the second tier. They typically cannot sell directly to retailers.

3. The second tier consists of wholesalers (who sell and deliver

distilled spirits and wine to retailers) and distributors (who sell and deliver beer to retailers). The wholesalers/distributors sell alcohol to retailers, the third tier. They typically cannot sell directly to consumers.

4. Retailers, in turn, sell alcohol to the consumer, either at a package

store or by the drink. 5. Granholm only addressed state liquor laws which discriminate

against out-of-state producers and their products.

G. Factual Background

1. Tennessee has a statute requiring all retail liquor store licensees to have maintained residency in the state for at least two years prior to applying for a new license, and for ten years prior to applying for a renewed license. In addition, for corporations, these residency requirements apply to every director, officer, and shareholder. Many states have similar residency requirements for retailers and wholesaler/distributors.

2. For many years, national alcohol retailer Total Wine & More sought

to enter the Tennessee market, but had been impeded by these residency rules. Nevertheless, the Tennessee ABC became aware that Total Wine & More and another out-of-state retailer were going to apply for a license anyway, which would likely lead to litigation.

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H. Proceedings in the district court (Byrd v. Tennessee Wine & Spirits Retailers Ass’n, 259 F.Supp.3d 785, 797-98 (M.D. Tenn. 2017)):

1. Tennessee’s Attorney General filed suit in Tennessee state court to

obtain a declaratory judgment regarding the constitutionality of the residency requirements to hold a retailer’s license. The Tennessee Wine and Spirits Retailers Association, a trade association for in-state retailers, later joined that suit as a defendant, arguing that the residency rules were valid. The case was removed to the U.S. District Court for the Middle District of Tennessee.

2. The district court determined that the durational residency

requirements were unconstitutional. See Byrd, 259 F.Supp.3d at 797-98.

3. Based on the statutory language of the residency requirements, the

district court found that the requirements were facially discriminatory. While the Twenty-first Amendment does give Tennessee power to regulate alcoholic beverages, the district court “agree[d] with the Fifth Circuit that 'state regulations of the retailer and wholesaler tiers are not immune from Commerce Clause scrutiny just because they do not discriminate against out-of-state liquor.’” Id. at 790, 793 (quoting Cooper v. Texas Alcoholic Beverage Comm'n, 820 F.3d 730, 743 (5th Cir. 2016), cert. denied sub nom. Tex. Package Stores Ass'n, Inc. v. Fine Wine & Spirits of N. Tex., LLC, 137 S.Ct. 494 (2016)). Additionally, nondiscriminatory alternatives could achieve the durational-residency requirements' purposes – citizen health and alcohol regulation. Id. at 796-97. The district court therefore determined that Tennessee's durational residency requirements violate the Dormant Commerce Clause and granted the out-of-state retailers’ motion for summary judgment. Id. at 797-98.

I. Proceedings in the U.S. Court of Appeals for the Sixth Circuit (Byrd v.

Tennessee Wine & Spirits Retailers Ass'n, 883 F.3d 608 (6th Cir. 2018)):

1. A split Sixth Circuit panel affirmed the district court with somewhat different reasoning. It discussed the history of the Twenty-first Amendment and focused on Granholm and another U.S. Supreme Court case, Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984).

2. In Bacchus, the Supreme Court examined Hawaii's tax exemption

at the wholesale tier for okolehao, which is a root from an indigenous shrub, and pineapple wine. There, the question before the Supreme Court was “whether the principles underlying the Twenty-first Amendment are sufficiently implicated by the exemption for okolehao and pineapple wine to outweigh the Commerce Clause principles that would otherwise be offended.” Id. at 275. The Supreme Court noted that Hawaii did “not seek to justify its tax on the ground that it was designed to promote temperance or to carry out any other purpose of the Twenty-first Amendment,

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but instead acknowledges that the purpose was ‘to promote a local industry.’” Id. at 276. Thus, the Supreme Court determined that the Twenty-first Amendment did not immunize Hawaii's law “because the tax violates a central tenet of the Commerce Clause but is not supported by any clear concern of the Twenty-first Amendment.” Id.

3. The Sixth Circuit reviewed a number of other courts – including the

Second, Fourth, Fifth, and Eighth Circuits – that had struggled to answer the question of whether Dormant Commerce Clause scrutiny only applies when an alcoholic beverages law regulates producers or products and, conversely, whether the Twenty-first Amendment automatically immunizes a state law regarding retailers and wholesalers. There is some language in Granholm that suggested that the Court was potentially limiting the application of the Dormant Commerce Clause to producers and products.

4. The Sixth Circuit, following the Fifth Circuit, ultimately determined

that the Dormant Commerce Clause applies to all tiers of the three-tier system, and invalidated the Tennessee residency requirements. The court held that

[a] fair reading of this passage leads to one conclusion: the Supreme Court discussed the relationship between the dormant Commerce Clause and the Twenty-first Amendment in the context of ‘producers’ simply because Granholm involved statutes addressing that step in the three-tier system. The Supreme Court did not give any indication that the Twenty-first Amendment automatically protects laws regarding wholesalers and retailers. Byrd, 883 F.3d at 622.

5. Judge Sutton dissented and would have upheld the two-year

residency requirement. He reviewed the history of alcohol regulation both pre- and post-Prohibition and attempted to glean several core principles.

6. He believed “[a] consensus remains that the Twenty-first

Amendment ‘created an exception to the normal operation of the Commerce Clause.’” Id. at 632. (quoting Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 712, (1984)). While the size of that exception is up for debate, “a few constant rules remain.” Id. “On one side of the ledger, the Commerce Clause still limits state efforts to regulate activity outside of a State’s territorial domain.” Id. (collecting cases).

7. “On the other side of the ledger, exceptions to the normal operation

of the Commerce Clause remain alive and well in some areas – in particular the in-state nature of alcohol distribution. The States retain ‘virtually complete control’ over “how to structure the[ir] liquor distribution system[s].” Id. (quoting Granholm, 544 U.S. at 488). States retain the authority: “(1) to ban alcohol completely, (2) to

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distribute liquor exclusively through state-run monopolies, or (3) to operate distribution systems, including through regulations that require retailers and wholesalers to reside in-state.” Id. at 632-33 (citing Granholm, 544 U.S. at 489). Since the distribution of liquor implicates a state’s “core interests” after the repeal of Prohibition, such regulations are generally “protected under [§2] when they treat liquor produced out of state the same as its domestic equivalent.” Id. (quoting Granholm, 544 U.S. at 488). State authority in this area is virtually limitless, with respect to Commerce Clause.

8. Accordingly, he believed that Granholm “drew a line between

regulation of (out-of-state) producers and regulation of (in-state) wholesalers and retailers, requiring rigorous review of the former and deferential review of the latter.” Id. at 633. Accordingly, the residency requirement for retail licenses was, in essence, a wholly in-state regulation and is constitutionally valid.

J. Why is this a big deal? It’s a big deal because the case has the potential to

expressly apply Granholm to wholesalers/distributors and retailers. If that happens, then dozens of state statutes and regulations could come into question.

1. At least 21 states impose some form of durational residency

requirement on alcohol retailers and wholesalers. Among them:

a. Kentucky imposes a one-year residence requirement on individuals before attempting to obtain a license. See KRS 243.100(1)(f).

b. Indiana imposes a residence requirement both on

individuals and those holding stock in a corporation seeking to hold a retail license. See Ind. Code §7.1-3-21-5.

2. There are many more state laws that impose other forms of

residency-related restrictions on retailers or wholesalers. For example:

a. Illinois and New York prohibit out-of-state retailers, but not

in-state retailers, from shipping wine directly to in-state consumers. See 235 Ill. Comp. Stat. 5/6-29.1(b); N.Y. Alco. Bev. Cont. Law §§100(1), 102(1)(a)-(b).

b. Virginia creates an exception to its personal import ban that

favors in-state retailers. See Va. Code §4.1-310(E). c. California prohibits out-of-state wholesalers, but not in-state

wholesalers, from selling liquor directly to in-state retailers. See Cal. Bus. & Prof. Code §23366.2.

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3. A broad ruling invalidating the Tennessee statute could lead to a wave of litigation seeking to invalidate other states’ restrictions in a number of areas.

4. State alcohol regulators would need to figure out how to incorporate

more non-local businesses into their regulatory structure. Alternatively, they would need to remove regulations favorable to local businesses.

5. Ultimately, it may lead to significant consolidation of the wholesale

and retail tiers of the three-tier system.

K. Potential Outcomes:

1. A broad holding that there is little or no restriction on the application of the Dormant Commerce Clause by the Twenty-first Amendment. As noted above, this could have major implications for the three-tier system and the privileges local wholesalers/distributors and retailers enjoy in many states.

2. The most likely outcome is a more narrow ruling. The Court, for

example, could determine that while the two-year residency requirement is invalid, the state has an interest in requiring some residency for a license holder. Or it holds that the residency requirement is invalid for in-state package store, since the state has sufficient control since it is a brick and mortar store within the state’s borders. This could remove barriers for out-of-state retailers seeking to operate in a state without creating a borderless market for alcohol sales.

3. The least likely – but still possible – outcome is that Granholm is

overturned, in whole or in part, and the Court will strengthen states’ ability to regulate alcohol under the Twenty-first Amendment. Granholm was a 5-4 decision with Justices Kennedy, Scalia, Souter, Ginsburg, and Breyer in the majority, and Justices Stevens, O’Connor, Rehnquist, and Thomas in the dissent. Given the change in makeup of the Court and the non-traditional split in Granholm, it is a possibility, though an unlikely one.

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