Monday, February 1, 2010

Volume Caps At Risk?

What the hell does "Volume Caps At Risk" mean? Is that the sort of thing that makes sense to anyone? It's not even industry jargon. But I guess I'm not sure what else to call it. But let's define what I mean at the top here, and maybe some of our industry readers can tell us a better way to say it.

Volume Cap: a form of legislation that creates different rules for different sectors of the beverage industry based on the barrelage of output. For example, a rule that says brewpubs can't make more than 10,000 barrels of beer. Or, a rule that says that any brewery under 50,000 barrels only pays 50% of the excise tax. Those are volume caps.

Well, the First Circuit Court of the United States has ruled that such caps may violate the Commerce Clause of the Constitution. A Massachusetts law said that any winery producing less than 30,000 gallons of wine could sell direct to consumers and to wholesalers, while wineries over 30,000 gallons could sell direct to consumer or to wholesalers, but not both. Not surprisingly, according to the court "All of Massachusetts's wineries are 'small' wineries."

The Court held that "... § 19F violates the Commerce Clause because the effect of its particular gallonage cap is to change the competitive balance between in-state and out-of-state wineries in a way that benefits Massachusetts's wineries and significantly burdens out-of-state competitors."

According to the court, since Mass. wineries were only small wineries, all of them could choose to either sell direct to consumers or to sell to wholesalers at their choice. While only out-of-state wineries had to choose between the two options. In other words, "Massachusetts has used its 30,000 gallon grape wine cap to expand the distribution options available to 'small' wineries, including all Massachusetts wineries, but not to similarly situated 'large' wineries, all of which are outside Massachusetts. The advantages afforded to 'small' wineries by these expanded distribution options bear little relation to the market challenges caused by the relative sizes of the wineries. Section 19F's statutory context, legislative history, and other factors also yield the unavoidable conclusion that this discrimination was purposeful. Nor does § 19F serve any legitimate local purpose that cannot be furthered by a non-discriminatory alternative. ... The discriminatory effect is because § 19F's definition of 'large' wineries encompasses the wineries which produce 98 percent of all wine in the United States, all of which are located out-of-state and all of which are deprived of the benefits of combining distribution methods."

It is not entirely clear what the decision would have been if even one Mass. winery was over 30,000 gallons.

So, what does this mean for WI breweries? Do we have any laws that impose volume caps? Off the top of my head I can think of two: the 10K barrel limit for brewpubs, and the 50K/300K barrel limit for excise tax reduction.

Let's take the latter first because I think it is most similar to the Massachusetts law. The tax reduction in Wisconsin says that all breweries pay $2 per barrel of beer sold in the state. A reduction is available if your brewery produces less than 300,000 barrels; that reduction allows the brewery to only pay $1 on the first 50,000 barrels. With Miller's headquarters officially moving to Chicago, that leaves zero in-state breweries producing more than 300,000 barrels (yes, I know the physical brewing facility is still here, but I'm going to ignore that and we can argue over those implications in the comments). Thus, no in-state brewery is subject to the full tax, while all breweries subject to the full tax are out-of-state. Under the logic of the First Circuit this is an undue burden on interstate commerce and violates the Constitution. Thus, the cap must be removed or everyone must get the 50K barrels at the reduced tax. Which do you think is more likely to happen?

The Brewpub law is a bit trickier. In this case it seems to unduly burden in-state breweries. In this case, in-state brewpubs cannot produce more than 10,000 barrels. Yet, out-of-state brewpubs can produce more than 10,000 barrels and distribute into Wisconsin. Thus, it's a bit backwards, but if we simplify the language a little it make some sense. Let's call brewpubs under 10K barrels "small" brewpubs and everything else "big" brewpubs. In-state and Out-of-State "small" brewpubs can distribute here in Wisconsin. But only out-of-state "big" brewpubs can distribute here. This clearly discriminates against in-state brewpubs. One option might be to re-write the law to allow only 10,000 barrels to be used for restaurant purposes, but otherwise the brewpub can brew, and distribute (through the three-tier system of course), as much as it likes.

Some tricky stuff. You can read another interesting take on it here.

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