Marc Sorini, general counsel for the Brewers Association (BA), and Katie Marisic, BA director of federal affairs, gave members a rundown on pending legislation and new regulations in 2022, during the Craft Brewers Conference (CBC) in Minneapolis last week.
The main focuses for the discussion included the U.S. Treasury Department’s competition report, additional COVID-19 pandemic relief, “fourth category” competition and direct-to-consumer (DTC) shipping.
White House Economic Advisor Gives First ‘Absolute Confirmation’ of Government Action
In February, the Treasury, in partnership with the Department of Justice (DOJ) and Federal Trade Commision (FTC), released a 64-page report on competition in the beer, wine and spirits industries.
Sorini praised the report as a “very positive development,” and acknowledged that comments from the BA were cited “more than any other trade association.” However, he noted that President Joe Biden and the Treasury are “limited” in how they can directly address concerns of competition, as bev-alc regulations vary by state.
Sorini categorized next steps following the report into three buckets: what can be done immediately, what is going to “take rulemaking” and what will require elected officials to make change at the state level.
Steps that can be taken immediately include relevant federal entities focusing on trade practice enforcement of “large market participants” and conduct that could have “substantial competitive impact.” This includes an evaluation of category management practices, mergers and acquisitions that discourage competition – including horizontal acquisitions of wholesalers – and supply chain disruptions.
“A lot of the large retailers have outsourced much of their buying to large players,” Sorini said. “And in theory, it’s supposed to have a ‘rising tide lifts all boats’ effect, but in practice …that ‘category captain’ may be the one who’s controlling the mouse and controlling shelf sets in a way that keeps small independent brewers out of the shop.”
He noted that while these evaluations are within the “immediate” bucket, “immediately doesn’t mean immediately, immediately,” as investigations can take years to work through.
In the “rulemaking” bucket, Sorini noted actions the government can make, some of which will require the “modernization” of laws or regulations first.
“The devil is in the details,” Sorini said. “Because I suspect that the changes in the rules that the Brewers Association wants to see might not be exactly the same as changes that say the Beer Institute wants.”
Sorini was encouraged that rulemaking will be coming, following remarks from White House economic advisor Dr. Tim Wu, during General Session II of CBC. For what Sorini said was the first time, Wu gave “absolute confirmation” that the TTB will explore new rules.
“The White House loves craft beer,” Wu said during his address. “And sees some of what’s been happening with the craft beer movement, now into its third decade here, if not longer, of a model for how the U.S. economy should be.”
Wu said the White House will be helping to “promote competition,” try to counter “some of the long term trends of consolidation” in the industry, as well as “violations of existing trade practice rules,” including “commercial bribes” and “pay-to-play schemes.”
“We’re also concerned and we’re always on the lookout for regulations, both state and federal, that may impose disproportionate burdens on small- and medium-sized businesses,” Wu said. “And we think that should be a fair playing field.”
Rulemaking that the BA is encouraging includes: updated labeling requirements, including allergen and alcohol content labels; identification of practices that “put retailer independence at risk”; consideration for the “reap” of current tied house exceptions that allow producers and wholesale to provide shelf schematics to retailers; and the simplification of permit applications or label changes to better serve smaller producers.
Additionally, the DOJ and FTC may adjust their merger guidelines, which Sorini said should be more skeptical of arguments of “synergies” of merging companies resulting in lower costs to consumers. He noted that more weight should be put on the impact of horizontal acquisitions, and other “non-price impacts.”
The third and final bucket includes actions addressed in the Treasury report that cannot be directly altered by the federal government, including state franchise laws, DTC shipping, and a possible reconsideration of state three-tier structures, although Sorini emphasized that the BA has “never wanted to tear down” the three-tier system, but instead make it “more hospitable to small producers.”
Additional Pandemic Relief May Come, Though Much Will Likely Be End-of-Year Considerations
About 1,500 breweries were given a total of $460 million in early 2021 through the Restaurant Revitalization Fund (RRF), created to give financial relief to businesses impacted by the COVID-19 pandemic. The fund, which originally offered $26.6 billion to businesses, was exhausted by May 2021, excluding more than 170,000 businesses, according to Marisic.
Marisic noted that the $26.6 billion was only meant to be a “placeholder,” or a “start to show how well the program worked,” and that $60 billion was originally supposed to be allocated to the program.
“When we talk about doing more for the Restaurant Revitalization Fund, we’re not talking about adding funding,” Marisic said. “We’re talking about fully funding, we’re talking about fulfilling the promise that they made when they worked to pass this legislation.”
To address this, two pieces of legislation are currently in contention: the Relief for Restaurants and other Hard Hit Small Business Act (H.R. 3807), and the Small Business COVID Relief Act of 2022 (S.B. 4008). The former, which passed the House on April 8, would add $42 billion in funding, while the latter, which has yet to be voted on and has no vote scheduled, would add $40 billion.
Both bills provide more “flexibility” to give “all applicants some amount of funding,” which Marisic said would address issues of access from the original RRF round.
Other legislation that could help breweries in recovery include:
- The Unmerchantable Goods Tax Credit, which would provide a 90% tax credit for goods that perished during the first six months of the COVID-19 pandemic (March 13-September 30, 2020). Marisic noted that the BA is working with other industries, such as the BI and the National Beer Wholesalers Association (NBWA) to support the legislation, but it’s “likely going to be an end-of-year piece of legislation”;
- The Employee Retention Tax Credit, which provides a refundable tax credit equal to 50% of wages paid by employers from March 12, 2020 through January 1, 2021. The BA is helping push for an extension of the credit, which was supposed to last through 2022, but instead expired in Q3 2021 to pay for the country’s infrastructure bill, according to Marisic;
- Economic Injury Disaster Loans. Breweries that were approved for the loans, but did not receive the full amount, are likely eligible to apply for more money, Marisic said. The program still has money left in it, and the deferment date for loans has been pushed, so borrowers do not have to pay back the first part of their loan until “30 months after you receive the note.”
Spirits Associations Pushing Hard for Excise Tax Equivalency
The “hottest product” right now in bev-alc is spirits-based, ready-to-drink canned cocktails (RTDs), Sorini said. To further compete with flavored-malt beverages (FMBs), spirits producers and the Distilled Spirits Council of the United States (DISCUS) are advocating for spirits-based products with ABVs similar to FMBs to have lower excise tax rates, equivalent to beer.
“The popularity in this new fourth category of liquor products has given a facially attractive argument for the liquor industry to say ‘Hey look, here’s a can of White Claw, here’s a can of High Noon [Sun Sips], …These are both 5% alcohol, shouldn’t they be taxed the same?’” Sorini said. “It really treats ethanol as sort of a generic commodity that then has various delivery vehicles, but it should all be treated the same, to which we say, ‘No.’”
States that have debated RTD tax cuts in 2022 include:
- Alabama (bill pending, but “unlikely to progress in 2022,” according to Sorini);
- Arizona (defeated);
- Hawaii (defeated in House);
- Kentucky (“stalled”);
- Maryland (defeated);
- Minnesota (“unlikely to progress in 2022”);
- New Jersey (defeated in 2021, pending in 2022);
- Ohio (still being explored, but “yet to materialize”);
- Oklahoma (still being explored, but “yet to materialize”);
- West Virginia (defeated).
Other RTD-related legislation being explored in some states include attempts to remove liquor from state-controlled systems and the “better treatment” of spirits “within the state license system.”
Dormant Commerce Clause May Awaken and Address DTC Shipping
Only 12 states allow interstate DTC shipping of beer. This not only restricts breweries’ access to consumers, but puts state DTC laws at risk of the dormant Commerce Clause, which prohibits states from favoring in-state commerce from out-of-state commerce, Sorini said.
“This is something that we think it’s high time to change,” he continued.
He pointed to California as a “bellwether state,” as it recognizes it is “vulnerable” to a “potential Commerce Clause challenge” with its existing intrastate regulations, and works to “harmonize the California law with federal law.”
On the federal level, the BA is backing the USPS Shipping Equity Act, which would allow the United States Postal Service to ship alcohol in states where private carriers are already allowed to.
Marisic called the existing regulations “pretty ridiculous,” noting that it stems from pre-Prohibition legislation, which was created to prevent wet states from shipping alcohol to dry states.
While legislative attempts to allow USPS alcohol shipping have been introduced before, this is the first time the BA is “fully supportive of it,” as the trade association “wanted to make sure that they check all the boxes,” including guaranteeing that legislation would not “supersede” state laws, Marisic said.
Not only would the legislation create more competition in DTC shipping, and create a new revenue stream for the USPS, but it would also allow for greater access to both breweries and consumers in more rural areas, Marisic said.
“Sometimes even in states where shipping is legal, [breweries] don’t have access to a cost efficient shipping method for them to get the product to the consumers who want their product,” she continued. “And if there’s anything that we have learned from the pandemic, it is that people want beverage-alcohol and other things delivered directly to their doorstep, and we really think that the postal service should be allowed to ship alcohol as well.”