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Kentucky legislature passes death-knell law to state wineries.

Listening to the cash-rich distributors, the Kentucky legislature passed a bill removing the right of self-distribution, which may prove to be the death knell of its state's wineries.

Kentucky (State Appellation)

Kentucky’s Legislature Cashes In ~
Will Kentucky’s Wineries Have to Cash Out?

Shipping and Distribution Laws: Wineries Lose, Consumers Lose

by Tricia Houston
February 5, 2007

As the bells tolled at midnight on December 31st, 2006, a collective sigh of resignation and despair could be heard in the Kentucky wine industry. For at that very moment, the bill SB82, passed in 2006 and signed into law by Governor Ernie Fletcher, became law. And the future of Kentucky’s wine industry would now hang in the balance.

While there has been much press on the recent decision of U.S. District Court Judge Charles R. Simpson III’s December 26th ruling on the Cherry Hill Vineyard lawsuit, in essence those cards had already been dealt with the exception of one word. Go back one year, to January of 2006, to understand the dynamics of the ruling.

After the May 2005 U.S. Supreme Court ruling in Granholm v. Heald, Kentucky found itself as one of many states in violation of that verdict and the wheels of the new legislative session in January 2006 began to turn at a remarkably fast pace. While the Granholm decision may have initially been a shipping issue, it quickly became clear that its interpretation in the state of Kentucky would not just level the shipping field; rather, it would eliminate the privilege of limited self-distribution by the state’s small wineries.

As the laws stood prior to SB 82, small wineries (with a designation as either a small farm winery or a small winery) had the right to ship upon a visit to the winery only, either in-state or out of state, but out-of–state wineries could, under no circumstances, ship into Kentucky. Additionally, for the past ten years, these same wineries had some limited self-distribution capabilities. If a small winery approached a distributor who was not interested in carrying their product, they could then directly sell to licensed retail operations or a licensed restaurant. Because small wineries had the benefit and experience of those ten years, when the bill was introduced to eliminate that option, the wineries knew exactly what this would mean to them, especially those located in dry counties.

The steamroller bill, dubbed SB 82, was passed through the Senate, before the wine industry could gain any leverage or express an opinion.
The steamroller bill, dubbed SB 82, first landed in the Senate on January 13, 2006, introduced by Senator Gary Tapp. In a rushed vote, it was passed through the Senate, before the wine industry could gain any leverage or express an opinion. Thereafter, it went through a series of amendments before reaching Licensing and Occupations on January 18. It ran through two readings and was received in the House on February 7. By March 22, it had passed all three readings and was passed by the House. Because of amendments, it was in the Senate again and passed on April 10 with the same overwhelming vote. It was signed into law on April 18, 2006, scheduled to take effect January 1, 2007.

The Best Legislation Money Can Buy

Nothing which the wineries and grape growers within the state said or did had any effect. Meetings with state officials, letters to the press, and calls to the committee members all fell on relatively deaf ears, silenced by the volley of lobbyists and cash. The wholesalers had bought deep into the pockets of the legislators, with incidences of tens of thousands of dollars in contributions taking place from the time the bill was introduced until it was passed.

Even face-to-face meetings with the lawyers from both the wholesalers and the wineries yielded nothing more than the “agreement” to provide a new license to allow the creation of a Small Farm Winery Distributors License as a vehicle to help the small wine industry. In the end, that, too, has turned into no help for our industry.

U.S. District Court Judge Charles R. Simpson III’s December 26 ruling allowed for only one change in SB 82: The removal of the word “visit” from the shipping portion of the statute. Cherry Hill had also challenged on other issues. First, on the provision limiting the ability to ship to wineries producing less than 50,000 gallons a year; and then asserting that limiting shipments to two cases per a specified amount (the amount is yet to be determined) and the creation of the Kentucky Grape and Wine Council allows Kentucky businesses to be treated differently than out of state businesses. Simpson allowed all of those challenges to fail and remain as is written in SB 82.

In the end, both the consumer and the wineries in Kentucky have lost.

With the loss of the ability for limited self-distribution, many of the small wineries will not be able to get their product to the state consumer, without causing undue stress on their ability to sustain a marginally profitable business. So the consumer is left with less choice, even within the boundaries of their own state. And the shipping issue is less than desirable--it is worse, and consumers should be enraged. As I continue to watch the nationwide shipping issue unfold, it becomes more and more complicated.

How to Bankrupt Small Wineries

In Kentucky, the state will require the out-of-state winery to apply for and receive a $100 small winery license. As I have had to fill out the forms myself, I know how time consuming and complicated that can be. To get that license, they will have to get a state sales tax ID from the state as well.
With the loss of the ability for limited self-distribution, many of the small wineries will not be able to get their product to the state consumer, without causing undue stress on their ability to sustain a marginally profitable business.
And while I must have an on-premises inspection to get this license, after speaking with an ABC official yesterday, I was told that it would not be feasible to have inspections on out-of-state wineries, so that would be waived. Additionally, since Kentucky still has a predominance of dry counties and moist (where part of the county is wet, part dry), out-of-state wineries will also not be able to ship into any of those areas. In essence, what out-of-state winery is going to want to jump through all these hoops to ship a couple of cases of wine? My guess is none, so we might as well agree that there is no shipping into Kentucky from out-of-state wineries. Kentucky wineries will also be responsible for knowing and applying for any permit or licenses that any other state which allows shipping has in their laws, many of these too costly or prohibitive for a small winery here to consider. Shipping in or out of the state seems highly improbable, and consumers are left with what they had before - the choices on their retailers’ shelves.

Many of the wineries that I have talked with directly have voiced concern about their ability to survive in this hostile environment. For a number of Kentucky’s wineries, which are located in dry territories, their fate is worse yet, without the ability to get their product out of the tasting room. While we continue to try to be hopeful and optimistic about the future of the wine industry in Kentucky, there is a great deal of negativity and doubt about the small winery’s ability just to survive. It is a sad situation, as before this took place, we had a great deal of enthusiasm and energy. Now, who knows?

~ Tricia Houston, Regional Correspondent

To comment on Tricia’s writings and thoughts, contact her at t.houston@appellationamerica.com


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