“Those who love the law and their sausages should never witness either being made”
This quote from an anonymous 19th century German legislator was well suited to the just concluded Washington Legislative session. We had originally planned to include this update in our spring newsletter, but given the number of topics raised in the past session, we will limit this update to legislative issues. This means you can expect another update in short order to inform you on other work we have been doing.
This update is a bit lengthy but the topics are complex, and, unfortunately, despite what you may have heard, not much has been solved. These issues are very important to our industry and will not go away until they are addressed in an effective and comprehensive fashion. Read on.
”STAKEHOLDER COALITION” BILL
This bill, which passed the Legislature, was drafted by the members of the so called “Coalition of Stakeholders”. This coalition, you may recall, included the Beer and Wine Wholesalers, the Washington Wine Institute, and large grocers, among others. FWWS was excluded from participation in the Coalition deliberations; therefore you will not be surprised to learn that the bill does little for small wineries. The changes agreed to and recommended by the Coalition were essentially a lowest common denominator collection of what was acceptable to this group. To see who controlled the coalition, one need only look as far as the first sentence of the bill which reads:
“The legislature recognizes that Washington’s current three tier system, where the functions of manufacturing, distributing, and retailing are distinct and the financial relationships and business transactions between entities in these tiers are regulated is a valuable system for the distribution of beer and wine.”
They may as well have added: “Take that Costco!”
General overview of the Bill
The bill addressed three areas of Washington wine law:
1) Trade practices by suppliers, such as point-of-sale merchandising.
2) Prices charged by suppliers.
3) Interests an industry member in a supplier tier of distribution may hold in a retail tier business, and vice versa.
These topics are addressed by expanding the reach of the State and the authority of the Liquor Board to regulate private economic activity, expanding the scope of money and money’s worth prohibitions, and reinforcing the “whatever is not permitted is prohibited” interpretation of the statute. These effects go against the stated goals of FWWS which are to eliminate unnecessary regulation and mainstream the purely commercial aspects of wine trade into the ordinary commercial codes applicable to other businesses.
An additional problem with the bill is its poor drafting throughout, which, when combined with its complex definitions and its expansion of existing prohibitions, appears to have many unintended consequences. A complete listing of the potential problems raised by the bill is beyond the scope of this update but we will endeavor to point out some of the most glaring problems as they relate to the main features of the bill.
What the Bill Does:
Repeals Minimum Mark Up
The repeal of the minimum ten percent markup over distributors cost is perhaps the one thing that this bill accomplishes cleanly. Virtually all industry members including FWWS testified that the ten percent minimum mark up was too small to be meaningful and should be repealed. The good news is that the legislature repealed a meaningless regulation. Unfortunately the benefits of repeal of a meaningless provision are, by definition, not terribly meaningful to small wineries. One positive effect of this provision is that it will allow wineries to lower the price of inventory that they are desirous of “blowing out”.
The prohibition against extension of moneys or money’s worth from producers or distributors to retailers is reinforced and expanded under the bill to include money advanced under any “agreement”, or “business practice or arrangement”.
Much has been made of the allowance under the bill for suppliers and distributors to give corkscrews, coasters and other branded promotional items to retailers. Just one example of the consequences of the overly broad restrictions under the bill, when taken together with the multiple and often overlapping definition of wineries as “Industry Members’”’, “affiliates,” and “retailers,” is the apparent prohibition against wineries (defined in this case as an industry member or distributor) any longer being able to give such promotional items directly to retail customers. Since this appears to be an example more of poor drafting than intent, we will have to wait to see how the WSLCB chooses to interpret the bill.
Tied House “Reform”
The bill includes provisions for cross tier ownership of interests in wineries by retail tier interests and vice versa.
It accomplishes this by allowing certain ownership interests between various newly defined and sometimes overlapping categories of ownership. The reinforced restrictions on advancing money (mentioned above) when combined with these overlapping definitions create even more potential for problems. The bill provides a short, specific, and narrow list of exceptions to the prohibition on advancing money. Incredibly, money for investment, corporate dividends or distributions of cash from partnerships or limited liability companies is not included among the allowed exceptions!
The bill also provides parties alleging that such relationships provide “undue influence” over purchasing decisions or a number of other undesirable influences listed in the bill, the right to challenge the investment relationship after the fact. Further such a claim of undue influence need only be made to the Liquor Board, rather than, as in the case of any normal anti trust complaint, and as FWWS had suggested, in a court of law. Such complaints can, under the bill, be made by any party whether or not actually harmed by the alleged behavior or even a part of the industry. The complaints must be addressed by the WSLCB and penalties could include a divestiture order, a draconian outcome that would undoubtedly be chilling to such future investments. Giving the incredibly broad prohibition of advancing money’s worth through “business practices” and the specific prohibitions listed, any number of business arrangements could potentially run afoul of these restrictions.
In order to comply with the court ruling in the Costco case, the bill ends price posting. Unfortunately rather than recognizing the entire concept as unnecessary, the Legislature retained the requirement for wineries to list their prices. Now such lists, rather than being posted on line, must be maintained at the winery’s licensed location. The bill is silent on whether this list might be in electronic form or whether it might be modified from the field.
What the Bill Does Not Do
Volume or Other Discounts
Uniform pricing remains. Volume discounts are not allowed by the bill. You still have to charge the same price to a retailer who buys one bottle of wine from you the same price you charge a retailer who buys 50 cases of wine from you.
Ban on Credit
The ban on extension of credit remains under the new bill (money has a time value therefore extension of credit is advancing money or money’s worth). The wholesalers succeeded in getting an exception for EFT transfers, which benefit them, but refused to allow a similar exception for small wineries to accept checks by mail (please see Omnibus bill discussion below).
Summary of Coalition Bill
The bill extends rather than reduces the reach and scope of the State’s police powers with regard to wine regulation, confuses and complicates significant areas of trade, and reinforces the idea that no business practice should be allowed unless specifically listed in the statute. The bill is a poster child for why FWWS was founded and shows we still need to pass our fundamental reform bill to change the wine statutes.
TAX REPORTING RELIEF ACT
This was our attempt to change state wine tax reporting requirements for wineries removing less than six thousand gallons of wine annually. This bill would have allowed over 80% of Washington wineries to choose annual (versus monthly) State excise tax reporting. Alas the bill did not pass out of committee for the second year in a row.
We did make quite a bit of progress over the past year. We crafted the bill so that the Washington Wine Commission (whose dues are collected through the excise tax reporting process) found the delays in receipt of their revenues acceptable. By the way, if you happen to see Rick Small, Robin Pollard or another WWC board member, please thank them for their cooperation! The bill encountered (constructive) criticism from the California Wine Institute whose suggestions were adopted and made for a better bill as regards applicability to small out of State wineries. Unfortunately these changes for somewhat arcane reasons required re-introduction to the House commerce committee during a busy time frame. This situation was terminally complicated by a $250,000 fiscal impact statement from the Washington State Liquor Control Board, an obvious non-starter given this year’s budget constraints. This fiscal note which relates to computer system costs is frankly baffling to us since this bill should require less, not more, staff time from the WSLCB and no change whatsoever to their computer systems.
We plan to address this fiscal note with WSLCB staff and re-introduce the bill in the next session. We also plan to press the Wine Institute to support the bill which they have not done in the past.
This bill, which we initially supported because it made many minor improvements in the liquor codes, was unfortunately used for mischief before it was passed.
Throughout the Joint Select Committee process the “Coalition of Stakeholders” insisted that any discussion of credit be limited to electronic funds transfers (EFT’s) which typically take up to five days to settle, and thus violated the COD requirements for wine and beer sales. One of two compromises on credit we proposed to the Committee suggested that we would accept the coalition’s proposed changes for EFTs (which virtually none of our self distributed members use) if the same policy applied to checks (which virtually all of our self distributed members use). Our compromise was rebuffed by the wholesaler’s lobbyist and received no support from the Wine Institute’s representative to the coalition. The five day exception from COD requirements for EFT transfers was slipped as an amendment into the House version of the bill and is now law.
We intend to see if a changed definition of “checks as cash” under this bill will allow the Liquor Board to extend this gracious treatment to checks as a policy position. If we are not successful, we will be running a separate bill to extend these payment terms to checks. We will not rest until self distributed wineries get parity on the issue of COD requirements.
A further amendment to this bill, also slipped into the House version enacted the Coalition’s views on retail to retail sales of wine. Such sales will now be allowed but only between licensees under common or corporate ownership. In other words, one grocery store in a chain can now “resell” wine to another branch but a Mom and Pop wine store may not resell inventory to another store or restaurant. FWWS had vehemently opposed this grossly unfair limitation. Ironically, the bill limits the amount of wine that can be so transferred to twenty cases per year, a poison pill sure to limit the usefulness of the change even for the corporations it applies to.
This bill would have allowed direct shipping to consumers from out of State retailers. We supported this bill because we firmly believe that Washington must take leadership on allowing such shipments. Easing direct shipping requirements is currently being considered (and fought by the wholesale lobby) in numerous states around the country. We believe success nationally will open up many new opportunities for wine sales by Washington wineries. Incredibly, this bill failed even though it had the support of both the WSLCB and the prevention community in Joint Select Committee testimony. Both recognized the short comings inherent in the current system. The Wine Institute was officially neutral on the bill, which they opposed in the previous year because it was non reciprocal (an obviously impossible goal).
If this bill is run again, we will lobby for it actively and will press the Wine Institute to support it.
We wish we could provide you with a more positive report, but much remains to be accomplished before Washington State will have “the perfect legal climate for wine.” Please let us know if you have any questions or comments by sending us an e-mail or posting on our blog. Thanks.
EHB 2040 is available on the State Legislature website for your reference.