House Bill 1641

Dear Member,

We at Family Wineries of Washington State are writing to you out of concern over sweeping winery licensing changes proposed in House Bill 1641. This bill in its present form was introduced on January 24^th, 2012, less than 24 hours before the public hearing on the proposal in the Washington State House of Representatives. 

The justification for this licensing proposal as we understand it is to address a concern among some in the industry that many wineries are not actually meeting the requirements of their federal permits to manufacture wine and therefore may be in danger of losing those permits.  The proposed approach is to extend certain privileges, notably tasting rooms, to such non-manufacturers.  Essentially these are proprietors who are effectively operating as distributors and retailers and are unwilling or unable to meet the requirements necessary to hold a federal basic permit as other than a wholesaler.

We have no objection to the extension of special privileges to a new class of non-manufacturing wholesalers We do however strongly object to the inclusion of wine manufacturers who choose to manufacture wine by means other than fermentation in this new class of non-manufacturers. While in the first case new rights are granted, in the second case existing rights are severely curtailed.

The proponents of this bill have repeatedly and incorrectly asserted federal law requires that a winery must produce wine by fermentation in order to comply with its federal permit and that “production” under federal law is “fermentation.”  This assertion is false. A winery premise and proprietor may be so licensed under federal law that no production by fermentation is required.  Further under federal law any change in the tax class of a wine is considered “production.” Therefore it is also possible to “produce” wine under the federal definition by blending, amelioration, or fortification if any of these actions result in changing the tax class of the wine (for one example from under 14% alcohol to over 14%. See section 1, part A of your federal form 5120.17 “report of wine operations premises). The only reason the federal government distinguishes between fermentation and blending is to extend the small producer’s tax credit to “producers.” The state has no similar credit and hence no reason to make such a distinction between production under the federal definition and manufacture of wine by blending.  We believe this fundamental flaw in understanding of the federal regulations has been used to justify an unnecessary and damaging re-categorization of blending as “non production.”

The proposed licensing revisions would do the following things which concern us for the stated reasons:

• Eliminate the broadly defined word “manufacture” from the domestic winery license and replace this with the presently undefined word “production.” A “manufacturer” is currently defined as “a person engaged in the preparation of liquor for sale in any form whatsoever.”  The proposed definition of “production” is “with respect to wine, the creation of wine by fermentation …” We object to this provision because it limits the ways that a winery may be licensed under federal and current state law for no apparent purpose.
• Under the bill, wineries would be required to “produce” at least 200 gallons per year by fermentation on a “three year rolling average.” In the latest revision of the bill, made on January 26^th, this 200 gallon requirement was amended to allow a winery not meeting the minimum production level in any year to demonstrate to the Liquor Control Board that they are a “viable commercial wine-producing operation” according to criteria to be determined by the Board at a later date. We object to this provision because the federal law currently contains no annual minimum production level by fermentation and no specific minimum threshold at all beyond effectively “more than zero” gallons. The federal standard is designed for maximum flexibility.  The proposed standard appears designed specifically to reduce that flexibility.  Obviously compliance with this provision is much more likely to be an issue for the smallest wineries than for the largest. The alternative to demonstrate a “viable commercial wine-producing operation” according to currently unspecified criteria seems to serve no purpose other than to allow the establishment by the Board of a standard for what constitutes a winery large enough to be considered “commercial.” We believe that manufacturing of wine for sale is sufficient evidence of commercial wine production to negate the need to demonstrate further.
• Domestic wineries would be limited to buying bulk wine only from other domestic wineries (by definition only Washington wineries).  This is completely inconsistent with federal law which provides no such restriction. As far as we are aware this is unprecedented -- no other state has such a restriction.  Inexplicably, no such restriction applies to the proposed new “nonproducing” license which allows “purchase of wine in bulk” without limitation as to origin.
• New language is created defining the relationships between wineries and owners of the brands they manufacture.  We are concerned that this language potentially conflicts with federal trademark law and serves to solve no problem that has been identified to the industry.
• A new category of license is created for “nonproducing wine sellers.” As noted above while this category extends new privileges (for example on-premise wine tasting) to those who can presently only qualify for a federal basic permit as a wholesaler, it requires that other categories of federal licensees (one example a proprietor with a premise licensed as a bonded wine cellar and a federal basic permit to blend wine) be lumped into this category. Such proprietors would be stripped of numerous privileges they currently have including off-premise tasting rooms, off premise warehouses, and the right to ship wine to retailers via common carrier.  Wineries that are not meeting the requirements of their federal basic permits to produce or to blend will need to change to a federal basic permit as a wholesaler to be in compliance with their practices.  We see no reason to require proprietors currently in compliance with their federal basic permits to be re-licensed as federal bonded wineries with a basic permit to produce wine, and further to require these proprietors to produce at least 200 gallons of wine per year through fermentation, just to avoid being lumped into the new nonproducing category and lose privileges in the process. 

A copy of the latest version of the bill is attached.  When reading this proposal please be advised that some of the changes in the current version, including all of the changes in sections 6 and 7, are useful changes to implement I-1183 and other non controversial updates to the law such as changes to farmers market sales language.  Regrettably the inclusion of this language in the bill will make it slightly harder to follow the proposed licensing revisions which occur in sections 3 and 4, and proposed new section 5. The new definition of wine “production” occurs in section 8 at item 35. 

We believe a much simpler and less complicated approach to achieving the stated objectives of this proposal is to amend this proposal to restore wine manufacturing as the basis of the domestic winery license in RCW 66.24.170 and to replace the currently undefined phrase “wine of its own production” with the phrase “wine of its own manufacture” throughout sections 3 and 4. We further propose elimination of the new definition of “production” in section 8.  Since this would return us to the present situation where “production” is not defined, we propose to change the name of the new “nonproducing license” to “negociant license.”  We chose the term “negociant” to avoid use of the word production which we believe, as noted above, is confusing.  Finally we propose the deletion of sections 3.(3), 3.(4), 4.(3), and 4.(4) which include the minimum production language, buying bulk wine only from Washington wineries, and the dangerous brand restriction language.

With our proposed amendments (which are also attached) we believe the new concept of a nonproducing/negociant license is beneficial to some in the industry and harms none.  We are opposed to the proposal in its current form because, as noted above, it will require needless re-licensing of wineries for federal purposes, restricts currently legal practices, creates unprecedented production minimums, and moves wine law in Washington in the direction of more complexity, not less.

We urge you to contact your legislators with your concerns at your earliest convenience.  For more information on our proposed revisions please contact us at board@familywineriesofwashington.org.

Thank you for reading and considering our concerns in this regard.

Sincerely

The FWWS Board