Wednesday, October 31, 2012

Special Halloween Bulletin: Zombie regulatory proposal stalks Olympia, threatens to consume winemaker’s brains!

Dear FWWS Member,

You will probably recall that with your help FWWS was able earlier this year to defeat a sweeping change in State winery licensing laws. This proposal which would have created an entirely new and unprecedented category of “non-producer” was shown to the industry 24 hours before its first legislative hearing. This proposal confused brand ownership with premise ownership, premise ownership with premise licensing, and production with manufacturing. Unfortunately some bad ideas, like zombies, are hard to kill and this bad idea threatens again.

While we are fully prepared to continue to fight this fundamentally misguided proposal, we are concerned that a number of you have expressed sympathy with one aspect of the proposal that we believe is misleading, unfair and generally a head fake;  namely that a “Winery” as opposed to a “Non-producer” must actually “produce by fermentation” at least 200 gallons of wine annually on a rolling 2 year average. 

Let us say right up front that we completely understand the underlying sentiment this provision addresses. Specifically that those who don’t put their hands on at least a ton and a half or so of grapes every other year aren’t, in our opinion, “Real Winemakers” for whatever that’s worth, and whatever that means. The devil, or perhaps we should say zombie, is in the details of “for whatever that’s worth and whatever that means.”  We believe it is vitally important that FWWS members are in solidarity in their opposition to this concept as well as the remainder of the misguided “Non-producer” proposal which, as we hope you will come to understand by taking the time to read and consider the following discussion, accomplishes nothing beyond putting financial stress on the smallest wineries and misleading consumers. Please read on, if you dare...

Please remember that we value your input and in fact this posting is in response to such input.  The best way to continue this discussion is to make a detailed response to this posting.  We look forward to hearing from you.

Happy Halloween and best wishes for a successful conclusion to the 2012 harvest!
Discussion of the “What is a winery?” or “Minimum Fermentation” proposal
The current federal regulatory situation.
·         A winery must have a “Basic Permit” to make wine.  This can be as a bonded winery, bonded wine cellar, or tax paid wine bottling house.  The Feds do not make a distinction as to who may “call themselves” a winery.
·         A Bonded Winery, probably the most common form of winery Basic Permit must “produce” “more than zero gallons” of wine (federal policy specifically recognizes one gallon as “more than zero”), at least every other year. “Production” is defined as either the creation of wine by fermentation or any change in the tax class of the wine so created. The most obvious and common of these tax class changes would be blending across the 14% alcohol threshold.
·         The TTB does not require that wine sold under a winery’s brand be produced on the winery’s owned premise.  In fact, the only reason that the federal government is concerned about where such wine is “produced” is to correctly apply the ninety cent per gallon federal “small producer’s tax credit” and to be sure that this credit is earned, and is not applied twice to the same wine.
Current State regulatory situation
·         Current Washington State law defines wine “manufacturing” but not wine “production”.
·          The winery licensing statute grants “Domestic wineries” what the LCB considers “special privileges” (e.g. tasting rooms, direct wholesale privileges, direct to consumer shipping etc.)  which apply to wine of their “own production.” Arguably the term “production” is unnecessary and manufacturing would serve equally well since Washington has no small “producer” tax credit.
·         The State’s working definition of “wine of its own production” is based on a Memo from the 1990s memorializing a discussion between the State Attorney General’ office and WSLCB licensing staff. This Memo suggests that production must include “Crushing, aging in bulk, or bottling“ (notice that the word “fermentation does  even appear in this working definition).
·         Deceiving the public through false labeling claims is already specifically prohibited by State law.
·         There is no limitation on the use of custom crush by wineries.
Situation if “Non Producer” proposal is enacted:
·         Creates new category of “Non-producer”
·         Defines wine “production” as synonymous with “Fermentation” and only fermentation
·         Introduces the unprecedented concept of a minimum production requirement (by fermentation, and substantially above the federal minimum) for all wineries.
·         Production requirement for Domestic Wineries would be raised from the prevailing federal standard applied to Bonded Wineries of “more than zero gallons” to a new standard set at a minimum of 200 gallons on a rolling 2 year average (by fermentation only).
·         Custom crush would be disallowed for wineries “producing” below the new threshold. These wineries would now be categorized as “Non-producers” and presumably prohibited by rulemaking from using the term “winery” on their label or enjoying the many so called “privileges” of being a full-fledged winery.
·         Wineries meeting the minimum threshold for production through fermentation could continue to make unlimited amounts of wine under custom crush arrangements. Same as the current situation.
·         There are numerous other bizarre aspects of the proposal including a prohibition on wineries importing bulk wine from out of state (currently permitted if the wine is appropriately labeled). Even more bizarre is that such importation would be allowed by “Non-producers.”  This and other aspects of the proposal are beyond the scope of this discussion.
Discussion and FWWS Objections to the Proposal
We believe that the “what is a winery” licensing concept accomplishes nothing beyond disadvantaging the state’s smallest wineries, confusing manufacturing with production, and misleading the public with regard to, for lack of a better description “wine authenticity.”
Disadvantaging the smallest wineries:
Currently a winery can literally meet the requirements for compliance with their federal basic permit in a broom closet, assuming said closet has plumbing and climate control.  More to the point, virtually every winery in the state can meet the federal standard in a corner of their tasting room and then make their wine in a custom crush facility. The proposed change would require that all wineries must purchase a “bricks and mortar” facility large enough to ferment 200 gallons of wine.  Otherwise the change in law has virtually no effect.  Imagine if California had required Steve Jobs to rent a large manufacturing facility to build his first computers.  Even today’s Apple more than likely does no manufacturing in house. What purpose is served by making a winery owner who may have just dumped their entire 401(K) into a twenty acre biodynamic vineyard to invest in a garage sized crush facility if that’s not in their business plan for the immediate future? These are exactly the businesses, namely the smallest startups, who can least afford this significant expense and most need to conserve their capital.
Confusing Manufacturing with production.
“Production” is a term that the federal government uses to define an activity eligible for the small producer’s tax credit. The state has no need of such term since it has no such tax credit. Winemaking is simply “manufacturing.” Linking the manufacturing of a product to ownership of the facility is nonsensical. What matters is who owns the product (the brand) how they sell it and, as far as the consumer is concerned, whether they execute well.  Consider Apple again.  Their iPhones are made by entirely by others. Do consumers care? Does their home State of California care? For another example does a prospective homebuyer care if a home builder owns, rents, or leases his shop and equipment? For that matter does the buyer care whether the builder put’s another company’s carpenter or even foreman on their payroll for a particular job?  More likely the homebuyer cares about the end product and the reputation of the builder.  If the state wants to micro manage this aspect of a small winery’s business plan, what’s next?  Suggesting that a small winery can’t borrow crush equipment?
Deceiving the Public
 Presumably some proponents of the minimum fermentation requirement believe that some people without any crush facility “aren’t really making wine” because their wine is made at a custom crush facility.  If so, how is it different than what the largest wineries do?  How do we know if this hypothetical small winemaker isn’t haunting the crush facility on a daily basis like an anguished spirit?  Even if they only make cursory visits to the crush facility how is this any different than the Seattle business tycoon who “always wanted to be in the wine industry,” buys an Eastern Washington winery, never  gets their hands dirty and visits only for media events?
So let’s assume a small winery without a crush facility is labeled with the odious title of “non producer” under the proposed licensing scheme. What should the public take away from this?  That if they buy wine from a “real winery” they are somehow buying authentic wine made by the hands of a real winemaker?  And how are the millions of gallons of wine made by the state’s  largest wineries more authentic than 199 gallons of wine actually made by hand (or foot) of a real person?  Is the big commodity produced wine “real wine” because the owner of the brand fermented more than 200 gallons of wine?
We believe there is no problem that needs to be fixed.  It’s already illegal to say anything misleading on a wine label.  The proposal as conceived does nothing to provide regulatory clarity (far from it) and discriminates against the business practices of the smallest wineries while doing nothing to curtail the identical practices by large wineries. 


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