Hopped Up On Regulations: 5 Ongoing Concerns for Brewers

Often enough — and, likely more often than they’d prefer — brewers operate in a world of uncertainty. Will that new recipe taste good? Will my current canning machine meet my needs, or should I upgrade now? Is that new hot style a trend or just a flash in the pan?

At ShipCompliant, we like to bring clarity and guidance to beverage alcohol regulatory compliance. But we also have to admit that, as much as we might want to, we can’t control regulatory decisions. Instead there are a number of issues that are still undetermined and all we can do is wait and see how they play out.

Just because things can be uncertain doesn’t mean we can’t still talk about them. And so, we present here a brief look at some of the bigger uncertainties affecting the beverage alcohol industry, and in particular, how they affect beer producers and the sale and distribution of beer.

 

Taxes — What’s the Future of the CMBTRA?

It was a major coup last year when Congress passed the Craft Beverage Modernization and Tax Reform Act (CMBTRA) as part of the larger Tax Cuts and Jobs Act (TCJA). For years, advocates and lobbyists for the brewing industry strove to pass the CMBTRA (in particular, Brewers Association is owed a lot of credit). The bill began as a modest proposal to decrease the tax burden on small-sized producers, but ballooned as larger brewers and wine and spirits producers latched on. Despite garnering widespread support in both the House and Senate, the bill was languishing before its hasty joinder into the TCJA.

While the bill brought many benefits to the industry, the hastiness of its enactment resulted in some confusion and problems early on. There were questions about how would these reduced rates (or credits, for the wine industry) be filed with the TTB, how should importers claim the tax benefits, and how exactly would the bill’s new permission for brewers to transfer products in bond among each other work?

In the ensuing months, many of these initial problems have been addressed by the TTB. That does not mean, though, that all issues have been resolved. Indeed, perhaps the biggest uncertainty surrounding the CMBTRA is will it last? It is critical to remember that the CMBTRA has an expiration date on it. As written and passed into law, the special rates and procedures set up by the CMBTRA are set to lapse after December 31, 2019.

Many industry groups are working feverishly to get Congress to make the CMBTRA permanent — and hopefully to clean up some of the less-polished provisions while they’re at it. At present Congress is distracted by the elections, and who knows what will happen after November. Whether it can set aside political wrangling long enough to take action on the CMBTRA in the next year is, to repeat a phrase, uncertain, but there is reason to hope.

Any industry members who want the benefits of the CMBTRA to remain in place after December 31, 2019 would do well to reach out to their representatives in Congress and support other efforts by any state or national guilds or associations they are members of.

 

International Trade — What’s Up With Tariffs?

For an industry whose biggest domestic member is actually a subsidiary of a Brazilian-Belgium conglomerate, it should be no surprise that international trade issues can have a big effect on the beer producers. And so it was that, when the U.S. government announced it was imposing tariffs on a number of foreign products, brewers were quickly impacted.

At immediate issue are two tariffs that impact the supply chains and ability for brewers to expand their operations. (Note, so far, unlike wine and bourbon, beer itself has not been made subject to a tariff, only the component parts necessary to produce and distribute beer.)

The section 232 tariffs add a 25% tariff on all foreign produce steel (except steel produced in Argentina, Australia, Brazil, and South Korea) and a 10% tariff on all foreign produced aluminum (expect aluminum produced in Argentina and Australia).

The section 301 tariffs solely affect goods imported from China, but they deal with a much broader swath of commercial goods, including machines used to wash and sort seeds and grains, safety and relief valves, and other electronic appliances. Those tariffs are already in effect, but there are now proposed tariffs on goods that will have a further impact on brewers, such as iron and steel tanks and casks (i.e. kegs) and component parts of taphandles. Hearings on this latest group of section 301 tariffs took place in late August with the U.S. Trade Representative now determining whether (and when) to implement them.

Whether these tariffs are wise, productive, or otherwise merited is a much bigger discussion than there’s room for in this post. For now, we merely want to let brewers know that these tariffs are in place and are having an effect, though how they will ultimately play out is very much up in the air. The Brewers Association has a very handy review of these tariffs and what their impact on the beer industry is, where you can also share your personal experience with these tariffs.

 

Sales Restrictions — Will Rules on Taproom Sales, Self-Distributions, and Franchise Restrictions Continue to Evolve?

Perhaps one of the most important developments for the beer industry (likely on par with the rise of IPA) has been the trend toward loosening restrictions on when and how brewers can sell and distribute their products. With Georgia changing its rules last year, brewers in every state now have at least some ability to sell their beer directly to their customers.

Being able to sell pints in supplier-owned taprooms, or even being able to sell six-packs and growlers for take-away consumption, has given brewers the invaluable ability to interact directly with their customers and develop the necessary connections to popularize their brands. Without taking anything away from the benefits and positive aspects of the three-tier system and supplier-distributor relationships, these self-selling permissions undoubtedly enabled the craft beer industry to become what it is today.

However, that does not mean that everything is settled. On one hand, there are ongoing efforts to expand these permissions, to remove size restrictions and other limitations that still inhibit the craft beer markets in many states. But on the other, retrenchment is still very much at risk.

Or even when a positive bill moves forward, it can be waylaid by contrary forces. Recent examples from Texas and Maryland showcase how things can go wrong even if they begin with the best of intentions. Ongoing efforts to change the laws in Wisconsin also demonstrate the pitfalls that can stymie easing of regulations.

And these are just rules that affect how brewers can sell from their own facilities. There are many more other sales restrictions that the industry is looking to relieve. These include greater permission for brewers to self-distribute to local alcohol retailers, and bringing some renewed sense of fairness and commonsense to the numerous franchise restrictions that states impose. While these restrictions may have once made sense, it’s increasingly difficult to justify them in the current state of the beer industry, with many small producers competing for space among a dwindling number of distributors.

Brewers and their trade organizations continue to make efforts to expand their ability to control their own distribution lines. How these efforts will play out over the next several years, though, is (wait for it) uncertain.

 

Regulatory Enforcement — How Will TTB And Other State Actions Proceed?

One of the driving stories this year in regards to beverage alcohol regulation has been the spate of enforcement actions taken by the TTB and state agencies in response to trade practice violations. Several accounts of distributors paying out hundreds of thousands of dollars in settlement claims, or even of the California winery that lost its Basic Permit for a day, have brought this issue to the fore.

Part of this trend comes from a renewed commitment from federal and state regulators to police trade practice violations. It also benefited from increased funding for the TTB’s investigation division, which has enabled the TTB to put more resources into the effort.

How these enforcement actions will play out is unknown, with the TTB playing its cards close to the vest. It’s certainly possible that after making a quick splash, these actions will fizzle out. Or, perhaps, they could lead to a larger change in the industry, with even the largest industry actors (and therefore those most immune from the risk of fee-based penalties) changing their practices to comport with the stated principles of trade practice restrictions.

As a matter of odds, the likely result is somewhere in the middle, with a few high-profile cases with large fees assessed, or even extended losses of permits, that eventually returns to the previous state of quietude. For now, brewers would do well to take note that these enforcement actions are going on and to make sure that they are staying in compliance will both federal and state rules.

 

Commerce Clause v. 21st Amendment — What’s Going On In The Courts?

Last, but certainly not least, there are several rather interesting court cases moving through the dockets, which have the potential to bring a profound change to beverage alcohol regulations.

In June, the U.S. District Court for the Western District of Missouri invalidated several of the state’s restrictions on certain advertisements, noting that the state’s claim that they were necessary was undercut by the numerous exceptions to those restrictions that the state allowed. Notably, the Court did not consider the 21st Amendment in its analysis, which generally gives states a tremendous amount of power in arguing the validity of their regulations. If this case is upheld by the 8th Circuit on appeal, it could create a whole new world of legal review of state regulations. (You can find a rather nice review of the case and its implications here.)

Then, in August, the 6th Circuit Court of Appeals ruled that a Tennessee law requiring that applicants for a Tennessee retailer license be residents of the state for at least the last two years. This particularly affected corporate retailers, as the residency requirement applied to all officers, directors, and stockholders of corporate applicants. Following the logic of the seminal 2005 U.S. Supreme Court case Granholm v. Heald, the 6th Circuit found that the 21st Amendment does not shield a state’s regulation from scrutiny under the Commerce Clause — and critically, the Court applied the Granholm ruling to retailers, not just suppliers.

These are just two examples, but they are on the forefront of judicial review of beverage alcohol regulations.

Bringing change through litigation can be very expensive and time-consuming. But often enough, major changes in laws have had to come from the courts (and certainly, not just when it comes to beverage alcohol regulation). How they will play out, whether they represent upcoming revolutions in beverage alcohol regulations or just odd blips on the radar, though, is unknown.

 

What’s Next?

What the future may bring is inherently unknown. Even the best predictors can be thrown for a loop. But as they say, forewarned is forearmed. Knowing what the future could bring is itself a tool that everyone should take advantage of. Hopefully, having some awareness of these ongoing regulatory issues will serve you well. After all, getting that new strain of hops to make good beer is only the start of the process — you have to also be able to sell it compliantly.

 

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