CO2 Filters
Anheuser Busch (A-B) has requested permission to install CO2 devices
inside the filter lines at no cost to the retailer. A-B contends
the devices filter the gases that push all beers, including Coors
and Miller, through the tapping devices. A-B further contends that
without the CO2 filter, the taste of beer is denigrated. The issue
has been challenged by another brewery.
A public meeting was held in the Iowa Alcoholic Beverages Division
(ABD) board room in July 2005 to discuss the CO2 filters. At that
time, Administrator Lynn Walding requested Assistant Attorney General
John Lundquist to review the issue and submit a letter of advice.
Mr. Lundquist issued the letter on September 9, 2005.
In the letter, Mr. Lundquist stated that Iowa law provides “that
a person who is engaged in the manufacturing, bottling or wholesaling
of alcoholic beverages, wine or beer shall not directly or indirectly
supply, furnish, give or pay for any furnishing, fixtures or equipment
used for the storage, handling, service, serving or dispensing of
alcoholic beverages, wine, beer or food within the place of business
of a retailer.” Starting with that prohibition, various administrative
rules have been promulgated that clarify what is meant by that.
Under 16.1(3) of the administrative rules, equipment has been defined
as “to exclude tapping accessories including faucet rods,
vents, tap hoses, etc. which are used to dispense wine or beer from
kegs of bulk packaging.”
According to Mr. Lundquist, the rule unto itself is contrary to
the statute; however, it is the current rule. If an industry member
does provide tapping accessories, they must collect no less than
the member’s laid-in cost for the equipment; therefore, even
under the current statutory regulatory scheme, distributors of alcoholic
beverages cannot provide equipment used in the dispensing of alcoholic
beverages free-of-charge. The rule does provide that an industry
member may sell, furnish or give wine or beer coil cleaning services
to a retailer for the reasons detailed in the letter. Assistant
Attorney General Lundquist stated his belief that the CO2 filter
constitutes a piece of equipment, not a service; therefore, under
the current rule, at least the laid-in cost must be recovered. He
stated that to add a piece of equipment to the items that may be
furnished free of charge would be contrary to 123.45 and, if challenged,
the rule could be subject to invalidation.
On September 27, 2005, Mr. Walding issued a letter to A-B restating
the advice of Assistant Attorney General Lundquist. (Copies of the
September 9 2005, letter were distributed at the Commission meeting.)
During the Commission meeting, Mr. Walding explained the administrative
rules describe in detail what is meant by tapping accessories and
what exemptions apply under Iowa law. Mr. Walding also stated that
the CO2 filter is a nation-wide issue with several states taking
different approaches. Illinois, for example, issued an administrative
letter allowing the devices as a service, not a piece of equipment.
Under Iowa’s Administrative Procedure Act, members of the
public have a right to petition the Commission to re-examine and
amend or change the rules found in 185 IAC. James Carney, lobbyist
for A-B, exercised that right on behalf of A-B, by filing a Petition
for Agency Rulemaking on October 12, 2005. In the Petition A-B requests
the Commission to amend 185 IAC 16.11 to allow the provision of
CO2 filters to retailers at no charge.
At the meeting, Mr. Carney stated that Tab B on page 2 of the handout
explains what A-B deems to be the public benefits of modifying the
rule. He agreed with the Assistant Attorney General Lundquist that
there is conflict between the Code and the current rule in that
there is a prohibition in place; however, the rule states coil cleaning
services can be provided. Mr. Carney interprets the original intent
of 123.45 as to not put a brewer into a position to induce someone
to do business with the brewer by providing goods and equipment.
A CO2 filter is a $25 piece of equipment of minimal value, costing
less than a penny a day, yet the value of service can be quite expensive.
Mr. Carney asked the commission to consider changing the rule. If
the commission does not feel it has the authority to do so, the
next step is for A-B to seek that modification of the statute.
Ted Powers from Anheuser Busch stated the issue involves lines
– one going from the CO2 tank to the kegs and the other from
the kegs to the tap. Cleaning the line from the keg to the tap is
allowed and is done by swabbing it and physically cleaning it. A-B
is now seeking permission to clean the line that attaches to the
keg with a filter. A-B considers the filter essential to keeping
both lines clean. Mr. Powers emphasized that there is no competitive
or company advantage because the same CO2 tap pushes the beer through,
regardless of brand.
Mike Brewington, a beer distributor who does not carry Anheuser
Busch products, stated that the CO2 filter is a recent unique situation.
All major breweries have their own guidelines for cleaning draft
beer lines. The CO2 filter purifies the gas from the CO2 tank into
the keg. Because CO2 is 99.9% pure from the keg, Mr. Brewington
stated he sees no need for the service. He contends that the money
would be better spent teaching people how to properly wash the glassware
in which the beer is served.
Commissioner Doll agreed that the CO2 is very clean; however, the
problem is with the cylinder. Empty open cylinders are put in the
backs of trucks and impurities can get into the tanks. A-B is concerned
because suppliers do not clean the tanks before loading clean air
into them.
Assistant Attorney General Lundquist commented that his reading
of the Iowa Supreme Court’s decision in Auen et. al. versus
Iowa Alcoholic Beverages Division, 123.45 does not allow diminimus
exceptions. Mr. Lundquist opined that the Supreme Court made it
very clear that the words “indirectly” or “directly”
mean none. The current rule allows “equipment” used
in dispensing beer to be sold at cost; however, the rule does not
allow actual pieces used to bring the CO2 through the keg into the
faucet.
Mr. Lundquist informed commission members that there are two issues
to consider in granting the petition: 1) making a determination
that CO2 filters somehow encompass a service as opposed to a piece
of equipment, 2) determining that the CO2 filters are equipment
and decide whether to further enlarge the already improvident exception
to the rule.
Mr. Walding advised commission members that the commission could
1) initiate rule making to amend the rule; or 2) deny the Petition
for Agency Rulemaking. If the commission grants the petition, some
of the opponents to this system will probably challenge whether
the commission acted beyond the scope of its authority. If challenged,
there is a question as to whether the Attorney General defends the
rule. Mr. Lundquist stated it would be difficult for the Attorney
General’s Office to represent the commission in a judicial
hearing if the commission acted contrary to advice of counsel. Mr.
Lundquist pointed out that if the commission denies the petition,
the petitioners have the recourse to go to the legislature and seek
a statutory change.
Commissioner Doll stated that he would not reject the petition
because the CO2 filter helps all brands. Commissioner Hunter stated
it appeared the commission did not have the authority to grant the
rule making. Commissioner Collins questioned why the issue was brought
to the commission if the commission lacks the authority to make
the decision.
Assistant Attorney General Lundquist explained that any member
of the public is empowered to petition the commission for a rulemaking
and that the commission is required to rule on the request. The
petitioners have other remedies that may be available to them if
the request is denied on the grounds that the commission believes
it is beyond their statutory authority to grant the exception. If
the Petition for Agency Rulemaking is denied, the petitioner can
seek judicial review of the denial or request the legislature to
amend the statute.
| |
Motion: |
Commissioner Collins moved that the Commission
deny the petition on the grounds that the Commission does not
have the authority to rule on it; however, in no way does that
state that the Commission is against CO2 filters, nor could
a decision be made about the value of CO2 filters. Mary Hunter
seconded the motion. A roll call vote was taken: Clayton –
yes; Doll – no; Hunter – yes; Collins – yes;
Stoffer – yes. The motion carried. |
Mr. Lundquist advised that staff will prepare a written ruling
for the chairman’s signature codifying the motion that was
made and stating the reason. The written ruling will be presented
to Mr. Carney.
Electronic Licensing Update
Nicole Gehl reported that although the original plans were to have
the electronic licensing system in place in August, the process
is still in the testing phase with a revised target date of January,
2006. On that date, the system will be available to participating
communities to utilize the system. Licensees will go on-line via
the Internet, submit an application and any supporting documentation
to the local authority who will approve the license electronically.
The approved application will then be electronically forwarded to
the division for final approval.
Financial Report
FY05 Financial Highlights
Jim Kuhlman reported strong liquor sales throughout the state resulted
in total net revenues for the year up $5.6 million. Beer tax was
down slightly; wine tax was up almost 7%. Liquor sales revenue was
up 9.7%. There is a similar trend for the first four months of this
year.
Warehousing contract expenses dropped over ½ million dollars
in FY05. When the state resumed direct operation of the warehouse,
staff predicted a $750,000 savings which was realized. The state
paid the Jones Company $2.4 million in FY04 for providing the service.
The state’s actual expense for the warehouse operation was
$1.9 million in FY05.
Transfers to the General Fund were up $2.2 million last year. There
was an increase to substance abuse treatment transfers of $914,000.
ABD has to transfer 7% of the gross liquor sales for substance abuse
treatment efforts. As sales continue to go up, that amount will
continue to increase; however, that money is subject to appropriation
by the legislature to the Department of Public Health. This year
the appropriation was status quo from the prior year – approximately
$1 million.
Liquor Sales
The dollar curve for liquor sales since 1988 continues to increase
as does the gallonage.
Wine / Beer Tax
Two significant points to note are that the wine tax has continued
to grow in the last 4 years while beer tax collections have leveled
out.
Sales Report
Sales Comparison
The dollar sales comparison year-to-date through October was up
10% showing very strong growth.
Cases, gallons and bottles were up about 8½%.
Product Buy-Out Information
The Product Buy-Out Program continues to be a good investment for
the division. The division continues to buy supplier discounted
products at the end of the month and to make a profit on that investment.
Warehouse RFP Update
The division resumed warehouse operations following the J. A. Jones
bankruptcy. In an effort to see if there was a less expensive alternative
to operating the warehouse, the legislature passed legislation last
year requiring the division to submit invitations to bid. The Department
of Administrative Services issued an invitation to bid in August.
Potential bidders were given three options to bid: 1) the entire
warehouse / transportation operation; 2) transportation only; or
3) warehouse only. The Iowa Alcoholic Beverages Division submitted
a bid on behalf of the state.
In addition to the state, one other company bid on the entire operation.
L B & B out of North Carolina bid $1.71 per case cost. ABD bid
$1.50 per case.
ABD, the only company to bid on the transportation component, was
awarded the bid to provide transportation at .96 per case cost.
The existing state truck drivers will retain their jobs.
Three bids were submitted for the warehouse component. Action Warehousing
bid $1.10 per case; ABD bid .64 per case; and the winning bid submitted
by Crystal Distributing of Cedar Falls, Iowa was .48 per case. The
transition date under the new contract is February 1, 2006. Crystal
Distributing management and ABD staff have met and more meetings
are planned to ensure a seamless transition.
In response to a question regarding the use of inmate labor, Jim
Kuhlman replied that under state law, state institutions and political
subdivisions may use inmate labor and pay a much-reduced wage. The
private sector may also use inmate labor; however, they have to
pay prevailing wage. Staff is exploring the possibility of continuing
to use some inmate labor for minor maintenance work. In response
to Commissioner Collins query, Mr. Kuhlman stated that ABD has hired
a former inmate who has transitioned quite successfully and another
former inmate was hired as a contract employee.
Mr. Kuhlman also reported that ABD has several workers who are
contract employees. If Crystal Distributing decides not to hire
them, the contract employees will be terminated and the state will
have no obligations, including unemployment liability, because they
were contract workers. Two or three warehouse state employees could
lose their jobs; however, under the state’s union contract,
the state is obligated to find those employees state jobs if they
so desire.
Mr. Walding reported that under the terms of the contract, Crystal
Distributing will not pay rent on the warehouse space; however,
they will cover many of the expenses such as electricity and heating
costs. Crystal Distributing must also furnish their equipment. The
new contract is for 5 years with two 5-year options. Crystal Distributing
will also receive an inflationary rate based on three or four federal
indicators – primarily the wage tables and the producer tables.
Crystal Distributing will be responsible for any warehouse shortages.
Staff is devising a system to transfer orders from Crystal Distributing
to the state when the state makes the delivery. Once ABD signs off
on those orders, ABD becomes responsible. Up until that point, any
shortages from any physical inventory, as well as any breakage,
will be the responsibility of Crystal Distributing.
Cost / Savings Analysis
The state first contracted with J. A. Jones Company in 1992 to perform
the warehouse and transportation operations. J. A. Jones Company
successfully retained the contract when it was rebid in 2001. The
contract had an annual price increase escalator clause based on
two federal indicators: the Bureau of Labor Statistics for Wages
and the Consumer Price Index for Diesel Fuel Costs. Each year the
J. A. Jones contract increased. If Jones were still performing this
service in 2005, ABD would have paid J. A. Jones about $2.10 per
case for a total of $2,698,000 to perform the service. The state’s
actual expense for 2005 was $1.9 million, a savings of $750,473
over what would have been paid to J. A. Jones Company.
Based on projected case sales in the coming year of 1.4 million
cases at $1.52 per case which is what the state’s cost was
in 2005, ABD would have spent $2.16 million to perform the service.
An additional $100,000 savings is anticipated by doing the bid process
and partnering with Crystal.
Finally, if the Jones contract were still in effect this coming
year, based on economic indicators and the contract clause, ABD
would have been paying J. A. Jones Company $2.24 per case. Based
on projected cases, the total paid to Jones in the coming year would
have been $3.2 million. Combined projected costs for ABD and Crystal
will be a little over $2 million so expenses will continue to go
down.
Recess
There was a 5 minute recess to prepare for the Open Forum.
Open Forum
Lynn Walding, Administrator of Iowa Alcoholic Beverages
Division
Lynn Walding opened the forum with an overview of Iowa’s wine
production and the recent surge of interest in the business. The
Iowa legislature has made great strides in helping the wine business
grow by dedicating 5% of all wine excise tax collected in the state
to facilitate the Iowa wine industry. In addition, the legislature
created a $25 license allowing retailers exclusively to sell native
wines in on- and off-premises establishments.
The direct shipping issue, a subject of discussion over the past
ten years, heated up when the U.S. Supreme Court took up the oral
argument in the Granholm case. (A copy of the Granholm Decision
handed down in April was included in the handouts and has been posted
on the division’s Internet site.)
Many small wineries thought the Granholm Decision to be a major
victory; however, there were some who said the decision didn’t
go quite as far as some people had hoped. The decision does make
clear that states continue to control the distribution and sale
of alcohol in their jurisdictions through the 21st Amendment; however,
the Commerce Clause, part of the Constitution designed to prevent
low-grade trade wars, is also involved.
The Granholm Decision will not be so dramatic for Iowa because
Iowa is one of 13 reciprocity states allowing any out-of-state wineries
to ship wine directly to in-state consumers. Other states such as
Michigan and New York, have separate regulatory schemes for suppliers
depending upon their residency. In the case of New York, out-of-state
shippers are required to have a warehouse, remit the taxes and have
representation in the state. Michigan bans importation altogether.
Subsequent court cases have resulted in Michigan, New York and
other states declaring their laws invalid. The state of Delaware
has decided it will treat everybody the same and no one can direct
ship. Mr. Walding anticipates there will be a progeny of cases following
the Granholm Decision because the Court did not set out general
guideline policies; it simply dealt with New York and Michigan.
As a result, there is likely to be subsequent litigation to fill
in the blanks.
The Granholm Decision was quite clear that the three tier system
remains subject to regulation of the state.
In another court case, Costco is suing the Washington Alcoholic
Beverage Control claiming that some of the state’s provisions
discriminate in how Costco can do business within that jurisdiction.
Mr. Walding went on to describe that the purpose of the forum is
to research options and determine how to better position the state
and guide the legislature in formulating Iowa’s position.
Questions for consideration include: 1) Is there a better way of
doing business? 2) Should there be some other direct economic development
support of the Iowa wine industry rather than giving the 5% reduction
or giving 5% of the excise tax from wine to the Iowa Wine Growers?
3) Is there a better solution than revamping Iowa’s liquor
regulations?
John Lundquist, Assistant Attorney General assigned
to represent the Alcoholic Beverages Division
The Grandholm Case raises a series of very interesting questions.
Wine distributors and wineries challenged the laws in Michigan and
New York over each state’s regulations with regard to the
shipment and distribution of wine. There was a split in the circuits
as to whether or not the states had the authority and the ability
under the Constitution to treat in-state wineries differently than
out-of state wineries. Ultimately, the U. S. Supreme Court was asked
to resolve the issues. In a 5-4 vote, the Court ruled that states
do not have the authority to treat out-of-state wineries differently
than in-state wineries when it comes to opening markets to their
products. As a result of the decision, many states are now faced
with the question of deciding how to level the playing field making
things fair and equal for everybody.
According to Mr. Lundquist, there are interesting statements made
in the majority opinion that are relevant to the debate. The Supreme
Court held that the states have extraordinary power to regulate
alcoholic beverages. The 21st Amendment, which repealed Prohibition,
gives the states a wide scope of power to regulate alcoholic beverages.
That power; however, is not unlimited. The Supreme Court held that
there are other provisions in the Constitution such as the Commerce
Clause that are equally important.
The Commerce Clause of the Constitution allows or delegates to
Congress the exclusive authority to regulate interstate commerce.
Throughout the years it has become known that states cannot do something
that unduly interferes or affects the flow of interstate commerce.
It was argued that states who establish regulatory schemes that
benefit their in-state producers to the detriment of out-of-state
producers are violating the Commerce Clause by not allowing those
out-of-state producers equal access to the in-state markets. Basically,
the majority opinion held that state policies are protected under
the 21st Amendment when they treat wine produced out-of-state the
same as its domestic equivalent.
Mr. Lundquist went on to explain that there are times when a state
can establish a discriminatory policy that violates the Commerce
Clause, but that will only be upheld if the state regime advances
a legitimate local purpose that cannot be adequately served by reasonable
nondiscriminatory alternatives. The alternatives to justify these
discriminatory practices by New York and Michigan were 1) we want
to have greater control and limit the ability of minors to obtain
alcohol beverages; and 2) states have a legitimate interest in collecting
taxes. The Supreme Court, based upon the record that was presented,
said that the ban on out-of-state direct shipping was not narrowly
tailored to advance those two ends.
Basically the sales-to-minor argument was that minors can order
from in-state wineries as easily as they can order from out-of-state
wineries so how does banning one, promote preventing underage people
from obtaining alcohol beverages when they can still obtain from
the in-state sources. Regarding the issue dealing with taxes, the
Supreme Court said that there are means available through which
tax revenues could be collected that could be applied in a nondiscriminatory
fashion and fair or even-handed fashion in prohibiting out-right
alcohol beverages from being shipped.
Iowa’s reciprocity law allows Iowa wineries to ship wine
to any state allowing equal shipment privileges. According to Mr.
Lundquist, the Supreme Court ruling in Grandholm throws the legitimacy
of reciprocity agreements into question. The majority opinion states
that the rule prohibiting state discrimination against interstate
commerce follows also from the principle that states should not
be compelled to negotiate with each other, regarding the favor or
disfavor status of their own system. Mr. Lundquist goes on to state
that allowing states to discriminate against out-of-state wines
invites a multiplication of preferential trade areas destructive
with the very purpose of the Commerce Clause. So these reciprocity
agreements, statutes are characterized as states trying to position
themselves to get the best outcome for their in-state producers.
Iowa has multiple provisions in Chapter 123 that arguably do benefit
in-state manufacturers over out-of-state entities. Under Iowa’s
native wine statute, native wineries are able to obtain a permit
for $25. Out-of-state wineries have to pay a much higher fee. In-state
wineries can sell wine directly in their place of manufacture (from
the winery). They can also sell at retail from established retail
locations that they may own and can set up a kiosk at the mall with
their product. Out-of-state wineries lack that ability. Under Iowa’s
three tier system, most alcohol has to come from a manufacturer
to a wholesaler who then distributes it to a retailer. When a manufacturer
is allowed to sell directly at retail to the public, the middle
tier or the wholesale tier is eliminated and erosion of the three
tier system takes place.
Mr. Lundquist believes that it is necessary for Iowans to examine
Iowa’s wine and beer laws. There is a movement to look at
opening craft distilleries or native distilleries, allowing them
preferential treatment. Iowans need to examine how the state will
allow public access to alcoholic beverages made by persons out-of-state
as well as those who manufacture in-state. Option may include banning
direct shipping altogether or allowing limited direct shipping by
everyone.
Mr. Lundquist cautioned that although the state tends to treat
wine differently from beer and liquor, the lessons from this case
will apply across-the-board. Although states have broad power to
regulate liquor under the 21st Amendment; the Constitution does
not allow states to ban or severely limit the direct shipment of
out-of-state wine and presumably any other type of alcohol beverage
while simultaneously authorizing direct shipment by in-state producers.
If the state chooses to allow direct shipment of wine, it must do
so on even-handed terms.
Lynn Walding, Administrator of the Iowa Alcoholic Beverages
Division
Mr. Walding distributed a 35 page UPS report for October 2005 showing
the number of Iowans who ordered wine from out-of-state producers.
The Granholm decision does not change that. Mr. Walding pointed
out that the legislature may want to address that issue. Iowa wineries
pay a $1.75 gallonage excise tax which is ultimately passed on to
the consumer while out-of-state wineries pay no tax. The current
taxing scheme gives an advantage to out-of-state producers. According
to Mr. Walding, the Wine Institute and the National Conference of
State Legislators have model legislation drafted that would require
the excise tax to be collected and paid.
Mr. Walding commented the Iowa wine industry is a viable force.
There are two different camps within the wine industry: 1) the purist
who actually produces Iowa wine with Iowa grapes, and 2) the rectifiers
who bring in wine from out of state, rebottle and sell it. Several
other states have struggled with the issue of blending. New York,
referenced in the Granholm Decision, requires that 75% has to be
native wine produced from native grapes with no more than 25% blended
with wine not produced in the state. Other states allow blending.
Assistant Attorney John Lundquist has advised Mr. Walding that under
Iowa law, an Iowa native wine, means the wine has to be produced
in Iowa and that means manufactured in Iowa. Wines blended with
out-of-state wine are not native wine.
Mr. Walding believes that both the consumer and the industry perspective
is that the state needs to better identify what is meant by “native
wine.” He asked whether the label should state the alcohol
content, where the grapes were grown and where the fermentation
took place. According to Paul Tabor and Ron Mark, there is nothing
to preclude a winery from adding that information to the label as
long as the winery obtained federal approval.
Mike White, ISU Extension
To demonstrate the rapid growth, Mr. White pointed out there were
approximately 13 wineries in the state of Iowa in 2000 while there
are 51 today. Currently, there are 271 commercial vineyards and
the number is growing. Of the 70 people who attended the October
2005, meeting held at the ABD, only 8 were from established wineries
while 34 people are in the process of obtaining a native winery
permit.
Mr. White commented that the taxes generated by the sale of native
wines benefit Iowa. A typical Iowa vineyard produces 3.5 tons of
grapes with 150 gallons of wine produced from 1 ton. Each wine gallon
is taxed at a tax rate of $1.75 state wine tax, .05 state tax, 1%
local option tax and .17 federal tax. Taxes could easily reach $2500
per acre per year.
Mr. White added that Iowa is unique in that the Iowa legislature
is very supportive of the wine industry under the umbrella of rural
economic development. The industry has the support of the ABD, the
Department of Agriculture, the Department of Economic Development
and the RC & D as well as a very strong Iowa Wine Growers Association.
Everybody is pushing in the right direction and Mr. White is hopeful
that they can come together to resolve the pending issues.
Mike Heller, Iowa Wholesale Beer Distributors Association
Although the 5-4 Granholm decision was limited to wine, the upcoming
Costco litigation will seek to address a number of other issues
that go to the heart of the three tier system. According to Mr.
Heller, the Granholm decision raised more questions than answers
and he expects the issues to be further defined by the Costco case.
Mr., Heller urged the commissioners and legislators to proceed slowly
and not to over-react. The Iowa Wholesale Beer Distributors Association
in the upcoming legislative session will oppose any changes that
deteriorate Iowa’s three tier system, including any additional
exceptions.
Jim Auen, Anheuser Busch wholesaler from Carroll, Iowa.
Mr. Auen is also a wine distributor and president of the Iowa Wholesale
Beer Distributors Association.
Jim Auen stated that the three tier system is good for the public
and good for the industry because it separates the manufacturer
from the retailer and consumer.
Mr. Auen questioned whether or not it was lawful for an Iowa native
winery to purchase juice from a national brand supplier and co-pack
the product with the native Iowa winery label. It was determined;
however, that practice would not meet state statutory requirements
and that the federal labeling law would not permit the activity.
Chuck McGrigg, Central States Representative from The
Wine Institute
The whole concept of direct shipping was driven by consumers who
desired to get product that was otherwise not available. Iowa was
one of the first states to address direct wine shipments by adopting
the wine reciprocity law. Reciprocity statutes are the first generation
direct shipping laws. Over the years, at the requests and complaints
by wholesalers that the reciprocal shipping bill was no good for
various reasons, the Wine Institute has been crafting a second generation
direct shipping bill called a “ferment bill”. The legislature
in the state of Texas just passed that type of legislation.
According to Mr. McGrigg, there is legal activity all across the
United States. In Indiana, a judge ruled on November 28th that the
Indiana ABC did not have the authority to sell wine directly to
consumers. Pennsylvania leap-frogged the Costco Case and determined
that Granholm also said you can’t sell directly to a retailer
unless the same privilege is afforded to all. California rushed
to judgment and passed Senate Bill 118 which is a permit bill. The
California bill provides 26 pages of exemptions to the state’s
three-tier system and allows California wineries to do almost anything.
In Michigan, the beer wholesalers passed a bill which was not good
for consumers. The bill was vetoed by the Governor. Mr. McGrigg
cautioned the industry to remember that the issue is consumer driven.
Mr. McGrigg believes that the real issue is the big box companies
who want to sell directly to the retailer, eliminating the wholesale
tier. The only way to correct the situation is to disallow it for
everyone. New Jersey gave up the right to sell directly to retailers
in order to keep other issues that were important to them. If this
group of savvy lawyers wins the Costco decision, they may file some
kind of class action and name every state that allows the exemption.
It is better to keep the two issues separate because direct shipment
in the beginning was only about consumers.
Mr. McGrigg advocated a “wait and see” attitude. He
pointed out that once the state enters the game there are two basic
choices: 1) prohibit it for everybody or 2) allow it for everybody.
If there are case limitations or exceptions it might still be in
violation of the Supreme Court decision.
Mr. McGrigg informed commission members that model legislation
has been drafted by the National Conference of State Liquor Administrators
(NCSLA) and the control states through a series of meetings to relieve
pressure from the three tier system. The model legislation goes
further in that it not only pertains to wineries; it also states
that wholesalers and retailers may ship to consumers. Under the
model legislation there is a method to get product to the consumer
with every level of the three-tier system participating. The Wine
Institute advocates the model legislation.
Paul Tabor – Tabor Wines
Mr. Tabor commented that although Iowa native wineries can ship
anywhere, the wineries are very conscientious about not getting
residents in other states in trouble. Wine America members are kept
informed about the court decisions and legislation in all those
states.
Internet sales represent a significant portion of Mr. Tabor’s
business. He commented that different state have interesting laws.
For example, one state has a law that allows an individual living
in a non-reciprocal state to have wine shipped to them if the purchaser
of the wine has visited the out-of-state winery.
Mr. Tabor commented that legislative support in Iowa has been remarkable
in terms of what the wine industry has been able to accomplish.
Iowa’s laws for the native wineries are very progressive and
industry members don’t want to eliminate any of those.
Roger Halverson, Eagles Landing Winery
Mr. Halverson stated the wine industry is exploding in other states
as well as Iowa. He said the impact of direct shipping varies with
the size of the winery but certainly has an impact on big and small
wineries.
Ron Mark, Summerset Winery
When asked whether wineries are growing their own grapes or importing
them, Mr. Mark stated the industry is growing faster than grape
production. Rather than have empty shelves, wineries purchase juice
from surrounding states. Mr. Marks purchases the juice of grapes
from surrounding states that are exactly the same type of grapes
grown in his vineyard and adds the juice to his juice to increase
production. Other wineries are doing the same thing because of the
lack of grapes available in Iowa to produce the wine. When asked
what percentage of grapes is going into Iowa wines, Mr. Marks responded
that he produced 96,000 pounds of Iowa grapes this year which will
be about half of what he needs.
Mr. Walding asked if the definition of juice means wine or grapes.
Mr. Marks’ response was that it can be a “gray area.”
When he recently purchased wine from Ohio, Mr. Marks did not want
to buy bottled wine – only juice - so the supplier furnished
juice that still has some residual sugar – a technical term.
It is a raw product and does its natural fermentation in the stabilization
tanks. Mr. Walding commented that Assistant Attorney Lundquist advised
that wineries can bring in raw grape juice as long as the fermenting
process takes place in Iowa. Mr. Walding states that there has to
be value added in Iowa.
Chuck McGrigg added that most states with a Farm Winery Act limit
the amount of agricultural products that may be imported for the
manufacture of native wine, unless there is a natural disaster.
Iowa’s statute is much different because the statute was crafted
to help the Amana Colonies who produce the product here and bring
the fruit in from other sources.
Daryl Morris – Breazy Hills Vineyard at Minden
Mr. Morris commented that more than 50% of his customers ask if
the grapes used to manufacture the wine were grown in his vineyard.
At this time, with the shortage of grapes and juice, Mr. Morris
explains to the consumer that he cannot raise enough grapes to fulfill
the winery’s needs for a year. He has to buy grapes from other
vineyards in the area as well as grapes and juice from outside the
state. The juice imported by Mr. Morris is 21 bricks - meaning it
still has 21% sugar in it - so it is not fermented. Mr. Morris also
buys only juices that go along with the cool climate varietals that
are raised in this area.
Mr. Morris commented that trying to invoke a tiered system in today’s
Iowa wine business will kill the industry. He pointed out that people
come to the wineries to see the point of manufacture, talk to the
people who make the wine and sample the product. His primary sales
are across the counter with customers constantly asking if they
can ship wine to their relatives in other states. Although his winery
does not do any exporting or shipping across state lines at this
time, Mr. Morris is interested in doing so. When asked if his winery
could be viable using 100% imported grape juice to produce his wine,
Mr. Morris stated he did not know.
David Sherman, Glazers Distributing
David Sherman stated there several state regulators and commissions
throughout the country are being sued. Attorney Generals, who have
to defend the suits, are attempting to change decisions made by
the legislatures; however, the legislatures made a decision on a
system that they thought was the right for their state. Mr. Sherman
suggested that unless Mr. Walding wants to see the Iowa’s
system redesigned by a federal court judge who may or may not have
as much respect for what the Iowa legislature intended, he has the
choice of trying to take control of the regulatory system.
Mr. Sherman asked what happens if direct shipment becomes open-based
under the Granholm Decision. Where does that leave the regulator
in terms of being able to enforce the laws and collect the taxes?
Although Mr. Walding as the administrator can walk into any regulated
establishment in Iowa and do a search and seizure if the need arises,
he cannot do that in other states.
Mr. Sherman believes that everyone who understands the issue feels
that native wineries deserve to do what they do for tourism, products,
jobs and their local communities. The question is how to achieve
a balance without letting the entire system disintegrate.
Dan Krauss, Village Winery
Mr. Krauss commented that Iowa has not properly defined native wine
as to what percent must be native. The definition needs to be strict
enough to rule outside people from taking over the native industry.
There are wineries ready to come into Iowa, open a bottling facility
and be in the native wine business while bypassing the whole system
including the taxation. It is happening in other states and that
is a concern. According to Mr. Krauss, quite a few wineries are
bringing in finished product, bottling it and calling it native.
Les Ackerman – Ackerman Winery
Mr. Ackerman, who is, celebrating his 50th year in the wine business,
agreed there are several regulations that need to be defined. Mr.
Ackerman’s winery makes a Riesling wine with Washington juice
as well as another wine with Oregon raspberries. He stated that
many people buy their juices from different states and make their
wine in Iowa. The wineries bring in juice from other states, manufacture
it in Iowa, adding value to it to make a profit. Ackerman Winery
ships only to 13 reciprocal states.
Mr. Ackerman suggested the state of Iowa has put a lot of effort
into the wine industry – particularly the grape grower. He
believes that the state should proceed with caution and not kill
the young grape growing industry or the wineries in the state of
Iowa.
Mike Brewington – Iowa Beverage Systems
Mr. Brewington applauded the entrepreneurial spirit and the efforts
made by the people involved with Iowa wineries; however, he expressed
concerns about minors getting alcoholic beverages that are shipped
into the state. He cautioned that people need to remember when speaking
about grapes as a “value-added” crop that grapes grown
for making an alcoholic beverage need to be treated differently
from corn and soybeans.
Jerry Fleagle, Iowa Grocer’s Association
When asked, Jerry Fleagle from the Iowa Grocers Industry Association
said the grocers concern is that retailers are treated fairly in
comparison to everybody else that would be selling the product.
They have not formed an opinion regarding Granholm at this time.
Craft Distilleries
Lynn Walding brought up craft distilleries. Iowa’s Economic
Development gave a loan to Jeff Quint in Cedar Rapids to start a
distilling business. Mr. Quint has been trying to get legislation
passed during the past two sessions that would give him exemptions
from taxation, dram shop and other issues required by the three-tiered
system; however, it never got out of committee. Mr. Walding has
offered to guarantee Mr. Quint a listing in Iowa making his product
available to all the Class “E” licensees through the
Iowa Alcoholic Beverages Division.
Summary
Mr. Walding summarized the meeting
- The overall consensus is to hold the course and see what happens.
- Let the judicial process take its course in other jurisdictions
where there are current challenges.
- Although the Assistant Attorney General has advised that some
of Iowa’s laws are probably subject to challenge and at
some point the Commission may have to make a decision whether
to rebut the challenge or concede that Iowa’s laws aren’t
constitutional, the ABD should proceed with caution.
- The ABD has been very supportive of the industry over the past
four years and has lobbied for several of the liberties the wine
industry currently enjoys such as the retail topic permits and
the excise tax.
- The ABD will continue to support the wine industry; however,
the division will need to be very careful in the future to make
sure decisions are in line with the Granholm case.
- Watch carefully what is happening in other states and be ready
to react as Iowa wines are an important part of the state’s
business.
- The three-tier system is the law in Iowa and will continue
to be the law until there is a judicial decree stating otherwise.
- The ABD will convey this message to the legislators in January.
Upcoming Meetings
Commissioners will be contacted at a later time to set the date
and time for the next commission meeting.
Adjournment
The meeting adjourned at 3:35 PM by unanimous consent.
SCOTT DOLL, Secretary | 
