Ralph at Tuthilltown

In the NEW YORK TIMES, October 15th: http://www.nytimes.com/2010/10/16/business/16rum.html?_r=1&ref=diageo_plc Perhaps now someone will pay attention to this on the Hill and revisit HR 2122, which would limit incentives to 10% of the Cover Over Funds. No free ride for the biggest of the big. R

How many new craft/artisan distillers of whiskey would like the opportunity to export their whiskeys to the EU as "whiskey"? Remember that any product you wish to identify as "whiskey" or "whisky" must be in oak for minimum three (3) under current EU labeling law. So your "Corn Whiskey" or any other whiskey legally identified as "whiskey" in the US which is less than three years in oak is not "whiskey" or "whisky" in the EU. Even if it is "straight" whiskey in the US, two years or more in oak, if it isn't three years minimum, it ain't whiskey or whisky over there. Remember, all they know in the EU for the most part are the very largest brands and no variety in American spirits. Remember, spirits exported out of the US are exempt from Fed and State Excise Tax. Hence the question, were you to have the chance to bring your legal American whiskey which may be less than three years in oak to the EU, would you do so? Just trying to get a read on numbers. I know, I know, you can't keep up with domestic demand. Why reach out to EU when there are so many untapped markets in the US? It's impossible to get a distributor in the EU. It's too expensive to develop that market. I know all the arguments, but the fact remains there's a huge untapped market over there and with no help from anyone we managed to get a solid toehold on the European continent, so I've no doubt if you managed to get a license and produce a good product you're smart enough to figure it out and take advantage of the dearth of American products on EU bars. R

It's on their COLA applications for the three new brands. EIGHT STAR - 10208001000309 SUNNY BROOK - 10202001000022 PM DELUXE - 10202001000039 But for me, on the political/legal side, this is a confluence of three issues: HR 5034, the Diageo deal, and the integrity of the word "whiskey" (which goes to our struggle to gain distinction for legal "American Whiskey" which in EU may not be called whiskey if it is less than three years old; the EU argument is the three year minimum protects the integrity of the term "whiskey" or "whisky"). For the small producer trying to find a market for his (legal American) whiskey, this situation contributes to the EU argument. Likely the blended whiskey will not be permitted in EU. It is politics (and of course "profit") more than anything, certainly not logic. And you're right, so long as it's on the label the consumer has the ability to make himself aware, if they choose to do so. All opinions welcome. That's why I asked.

I agree it is an uphill battle since the law is well established and unchallenged till now. But I can find no record of any American whiskey maker using any neutral spirits other than grain prior to the BEAM applications. I guess the strongest argument is not that the practice is wrong or illegal; but that the law itself is flawed in that it defines "whiskey" as from grain but then permits a brand to be identified as "whiskey, a blend" (which for any consumer implies that it is whiskey blended with other whiskey or at least a material that keeps whiskey in the grain spirits category), when it is a blend with non-grain materials. I agree that the same should apply to fruit spirits. If it's identified as a "apple" product, any blend should be with (at least) another fruit based spirit. Zeroing in on Applejack is perhaps not analogous, in that Applejack is a nebulous term to begin with. Better I think to use Brandy as the comparison. And to be called Brandy it must be from fruit, no neutral spirits added. Brandy is a fruit based spirit. Frankly the use of the term "applejack" in the traditional sense is not what the Fed defines as Applejack. "Jacking" is freeze distillation as the first step in the process, certainly the applejacks produced now are not freeze-distilled. Whiskey is a grain based spirit. Nowhere in the definition of "whiskey" is there any provision for mixture with neutral spirits, regardless the source material. Vodka calls for use of filtering or treatment to make it neutral. Neutral spirits are not so required. The code is ambiguous in this case3 and no criticism of anyone taking advantage of the inconsistencies to make money. But the distillers themselves know the difference. For our part, if it ain't grain, it ain't whiskey..... I appreciate your note and encourage more members to comment either way. R

Here are a couple of basic questions for all you distillers who are making whiskey. Comparing neutral spirits, do you believe that "neutral spirits" made from grain is the equal in flavor and character to neutral spirits made from fruit, or cane? Do you believe that simply raising proof to 190 totally neutralizes the spirit so that all differences disappear and it is truly "neutral", "characterless"? (In spite of the CFR definition.) Keep in mind that "neutral spirits" and "vodka" are not the same in the CFR. R

Sorry to counter this disagreement, but there is no regulation which stipulates segregating a house/abode from a distillery located on the same parcel. Case in point, I live in a house that is no more than thirty feet from our distillery and no fence is required. The question never even came up, though we had two separate visits from investigators when we were in the licensing phase. It is possible that the requirement was something peculiar to the person dealt with. R

Time to take this to DISCUS and inquire the position of the major members, and the Craft members, thus this letter to Fritz Maytag who chairs the Craft group at DISCUS: Fritz Writing to express my concern over the applications by BEAM BRANDS for so-called “whiskey, a blend”. BEAM has filed three COLA applications for three products which are blended with CANE NEUTRAL SPIRITS. The STANDARDS OF IDENTITY are ambiguous, leaving open the notion that any “neutral spirits” may be blended. But it is my understanding, and I’m sure that of all the whiskey makers I know, whiskey is a grain spirit. The pertinent portions of the STANDARDS OF IDENTITY are quoted below (my underlines added): (4) “Blended whisky” (whisky—a blend) is a mixture which contains straight whisky or a blend of straight whiskies at not less than 20 percent on a proof gallon basis, excluding alcohol derived from added harmless coloring, flavoring or blending materials, and, separately, or in combination, whisky or neutral spirits. A blended whisky containing not less than 51 percent on a proof gallon basis of one of the types of straight whisky shall be further designated by that specific type of straight whisky; for example, “blended rye whisky” (rye whisky—a blend). Note the ambiguity, directly contradicting the definition of "whiskey". Class 2; whisky. “Whisky” is an alcoholic distillate from a fermented mash of grain produced at less than 190° proof in such manner that the distillate possesses the taste, aroma, and characteristics generally attributed to whisky, stored in oak containers (except that corn whisky need not be so stored), and bottled at not less than 80° proof, and also includes mixtures of such distillates for which no specific standards of identity are prescribed. Considering the membership of DISCUS (not the micros/craft group), I wonder if DISCUS will take a stand on the protection of the integrity of American whiskey. As a member of the Craft Distilling group at DISCUS, I would like the group to address this issue with DISCUS and get a position statement from the general membership. A thread has been posted on the ADI site for discussion of this topic. I’d love to hear your take on it, given your relationship with traditional American whiskey. TUTHILLTOWN SPIRITS has filed a protest against the applications for permission to use the term “whiskey” in the product unless it is specified as “imitation whiskey”. Others have also filed protests. It is time for the industry at large to file its opinion. Should the ALFD permit BEAM to label their cane blend a “whiskey”, the integrity of American whiskey will be put at risk. I note the struggle between the Scotch Whisky Association/EU and India on the topic of what the Indians call whiskey made with non grain base materials. This issue is directly tied to the issue of HR 5034, which would open the door for Kentucky to declare that “Kentucky Whiskey” can be made with cane neutral spirits, thereby skirting the CFR defining whiskey; and be immune from challenge under 5034. There is no Type of whiskey in the STANDARDS OF IDENTITY for “Kentucky Whiskey”. R

On the question of ABSINTHE and the Swiss attempt to "own" the term, this communication has come to me from the US ITO: Mr. Erenzo: The Swiss Federal Office of Agriculture has given the petitioners for the PGI for Absinthe as well as the stakeholder federal agencies the opportunity to respond to the oppositional arguments. They have until November 17. Apparently, 42 oppositions were registered. Best, Jen Levine International Trade Specialist Office of European Country Affairs International Trade Administration Tel: 202.482.0431 I urge all concerned small distillers to send off their protests to join those already in hand, against the attempt of the Swiss to disallow the use of the term "absinthe" by any product not produced in Switzerland.

It's been a busy day, having just found out about BEAM's new brands, so much to do. The fact of BEAM's COLA applications for so-called "whiskey, a blend" is a wake up call. It has impact upon a number of issues. The Diageo/Virgin Islands deal and the COVER OVER program; the current debate over HR 5034; and now the internationally accepted definition of Bourbon Whiskey. As you see above, we are struggling with the EU on the issue of Labeling Regulations which effectively redefine American Bourbon, by placing a three year minimum on its time in oak, a requirement not in the American regulations, thereby keeping all new or "white dog" whiskey out of the EU though for instance "Corn Whiskey" is a recognized American "type" of whiskey. Now along comes BEAM in the middle of this struggle and applies for COLA approvals for three new brands they call "whiskey, a blend" and which are blended not with grain neutral spirits which are commonly used, but with CANE neutral spirits which are cheaply available and as a result of the Virgin Island/Diageo deal. The prospect holds the promise of cheap non-grain based neutral spirits. Since the CFR does not make the clear distinction between Cane and Grain when it allows "neutral spirits" to be blended with whiskey, there is ambiguity in law. The ambiguity does not exist in the minds of most whiskey makers or consumers. Whiskey is a grain based alcoholic spirit. Should BEAM be permitted to use cane neutral spirits in their whiskey, the struggle to convince the EU to honor the US definition of Bourbon Whiskey or any other type of American whiskey spirit will be made more difficult since it will call into question on the international level the American definition of "whiskey" as, in some cases, not necessarily a grain spirit. R

This would be a good topic to be raised by the CRAFT DISTILLERS COUNCIL at DISCUS. See what that yields, and what DISCUS position on this might be. To Joe's comment above, the definition of a MICRO SPIRITS PRODUCER and the use of those terms "artisan" or "craft" is a topic which must be addressed by your Federal Legislators as part of the effort to distinguish between the big alcohol and small alcohol producers as it relates to the payment of a discounted Excise Tax by small producers. This topic is well covered in another thread so I won't go into it, but your comments reiterate the need for a Federally defined term that makes the distinction. It is possible to protest the applications by BEAM. We have done so. The TTB ID numbers of the applications in question are: EIGHT STAR - 10208001000309 SUNNY BROOK - 10202001000022 PM DELUXE - 10202001000039 The following is the text of our comments to the TTB ALFD, you are welcome to borrow from them if you wish to file a protest against these label applications: To Whom It May Concern At the Alcohol Formula and Labeling Division: I have just been made aware of BEAM’s three (3) COLA applications for so-called “whiskey” made with cane neutral spirits. The application numbers for these COLA applications are: EIGHT STAR - 10208001000309 SUNNY BROOK - 10202001000022 PM DELUXE - 10202001000039 I present my comments for consideration when reviewing these applications: The CFR defines “whiskey” as “the distilled spirit of a fermented mash of grain”. It allows for “blended whiskey” or “whiskey, a blend” to be combined with “neutral spirits” without specifying “grain neutral spirits” which is the traditional material used. This is an ambiguity in the composition of the law, the absence of the qualifier “grain neutral spirits”. The brands which are being introduced by BEAM are blended, whiskey with CANE neutral spirits, an eventuality of the deal between Diageo and the VI which was unforeseen by the Fed when the regulation was written; and the presumption all these years, as the result of common practice, was that the reference is to GRAIN neutral spirits, thereby in keeping with the definition of “whiskey” which is a grain spirit. The exploitation of this ambiguity by the big spirits producers was made possible by the recent Diageo/VI deal and the neglect of the Ways and Means Committee to bring HR 2122 to debate (which bill would have placed a 10% cap on the amount of subsidies Territories could offer corporations such as Diageo as enticements to locate in those territories). But that is a political problem. The availability of cheap cane neutral spirits will, if its use is permitted in the blending of whiskey, undermine American whiskey reputation worldwide. Approval of the BEAM applications for COLA approval will undermine the nature and character of what we know as traditional American Whiskey; it is a GRAIN based spirit. Approval of the COLA applications for these non-whiskey products and permitting the use of the term “whiskey” for a product containing cane based spirits would cause confusion among consumers and effectively negate the definition of “whiskey” as a grain based spirit. The consumer believes whiskey to be grain based. It would also call into question the credibility of all American whiskeys on the international level at a time when the export of small batch American whiskey is growing and the economy is in need of increased export. Please take these into consideration. What the applications describe is NOT American Whiskey. Ralph Erenzo, Founder/Partner Tuthilltown Spirits Gardiner, NY DSP NY 15001 [/b] Thanks Collin. The email for the ALFD is: alfd@ttb.treas.gov

BEAM BRANDS has applied for three COLA approvals for: PM DELUXE, EIGHT STAR and SUNNY BROOK whiskeys. The use of the word "whiskey" is questionable. The CFR allows for the use of "neutral spirits" in "blended whiskey", without specifying "grain neutral spirits". But the definition of "whiskey" specifies it is the distilled spirit of a fermented mash of grain. The use of cane neutral spirits derived from cane and molasses from the Virgin Islands under the COVER OVER program that has resulted in a very sweet deal for rum makers who move their operations to the Virgin Islands (read more about this issue in the thread about DIAGEO and CHARLES RANGEL). And the savings has not gone unnoticed by the big whiskey makers. BEAM is taking advantage of the ambiguity in the CFR by the use of the phrase "neutral spirits" which is not specific to grain. My question is, do the micro distillers see this as a subversion of the Standards of Identity? You who are grinding grains and making fine whiskeys, you whose feet have been held to the COLA fire more than once over the minutia of the regulations, you who will have to compete with BEAM's cheaply produced, so-called "whiskey, a blend"; how do you feel about this development. By the way, BEAM is not the only major manufacturer who is aggressively pursuing this line of business. The real point: If the COLA is approved, BEAM will have redefined whiskey as not specific to grains. Ralph

NEW DEVELOPMENT: CLEAR SPRINGS DISTILLING COMPANY, and JIM BEAM BRANDS, have filed a COLA application for three new brands: "BEAMS EIGHT STAR", "SUNNY BROOK" and "PM DELUXE" "blended" whiskeys. The applications are a first salvo in the kind of branding war which could result from the passage of HR 5034, as well as impacts which are related to the current COVER OVER flap involving DIAGEO and the VIRGIN ISLANDS. On the application the products are described as "whiskey", it is "a blend". The Standards of Identity leave open the opportunity for a distiller to blend "neutral spirits" into whiskey in blends. However, section "b" which defines "whiskey" clearly states it is the distilled spirits of a mash of FERMENTED GRAIN. It is likely in writing "neutral spirits" into the CFR, the writer never anticipated the possibility that a producer might substitute Cane Neutral Spirits for Grain Neutral Spirits. So I put it to the distilling community, is it whiskey if it is blended with Cane Neutral Spirits and is not completely a spirit from grain? The implications are fierce. BEAM is not the only producer preparing to make the switch. It will affect the farmers who grow corn. It will affect the nature and definition of "whiskey". Both the COVER OVER program and HR 5034 come into play. The COVER OVER program as it is now, with no limits on financial incentives (paid with US tax dollars) the VI can pay to such as Diageo or other big producers of cane neutral spirits will create an uneven playing field. HR 5034 makes it possible for the State of Kentucky to redefine "Kentucky Bourbon" (which is NOT a class of whiskey under US law) allowing for the mixture of cane spirits rather than grain spirits. Under 5034 it will be impossible to challenge that change and the Kentucky whiskey makers will redefine whiskey. This is important. If BEAM acquires a COLA for the new brand, it sets the precedent and "whiskey" as we know it will be redefined. R

Just returned from Scotland and a whirlwind tour of various distilleries in Garvin, Inverness, Dufftown and Edinburgh. At the Garvin plant, making use of various heat recovery and methane generation systems, the plant is producing 120% of it's total energy needs; therefore SELLING BACK the excess to the grid. It has been our belief at TUTHILLTOWN that small distillers can reproduce these systems on their scale and become PRODUCERS of power rather than strictly consumers of power. If you are considering startup, take this into account. If you're already running, get your State and Federal energy agencies involved. There is also the possibility to produce fuel from fermentation of algae, which grows at an accelerated rate when fed with CO2 from your fermenters. There is every reason to believe it is possible for a small distillery to move "power" from the "cost" side of your accounting system to the "income" side. R

Agreed. Tuthilltown Spirits has already paid our dues and taking our seat at the table so to speak (notwithstanding a seat at the "kids' table"). And also agree totally, DISCUS has the duty to look first after it's primary membership, and we ain't it. I think it benefits the small distiller making a serious go of it to join the DISCUS Craft Distilleries club, it comes with some very important benefits. That said, and at the risk of repeating myself (who, me?) I'm going to go off a bit on this; DISCUS is not the appropriate Agency of the small distillery movement. A separate distinct organization with its own management, financing and voting membership (of DSP owners) is necessary for the micro producers to be fully represented. Clearly we will plant a much smaller footprint on the marble floors of the Capital when we represent ourselves sans DISCUS. However (and don't think for a moment that DISCUS does not know this) we, all of us individuals and partners, we who have put our own money and time and effort (my update on the old "blood sweat and tears" thing) into our small businesses, we are the Faces, the PEOPLE of the spirits industry. The multinational corporations comprising the DISCUS memberships are suits and attorneys (not disparaging either, I have both). When we talk to our Legislators we are the voices of real people with real families and employees with families. Our partners are the local farmers who grow our grain or fruit or herbs. For many of us our entire families are involved. Hell, Wasmund has his sainted Mother pacing the malting floor pulling a rake. This fact, the fact of our Humanity is a massive counterbalance against the weight of any corporation. This is why the independent Micro Producers must take an active role in organizing and working together, speaking as one on important issues that affect our businesses. It's why they must also get political, there, I've written it, it's in print, the dreaded mandate: "Get political." But in it's simplest form it's just perhaps a half hour of time writing a letter, or just picking up the phone and calling a Legislator's office to voice your concerns as a voting, tax paying citizen and employer. I had an earlier experience with this sort of thing in the competition sport climbing world, when World Cup and World Championship Competition Climbing were being invented; the work done by a Committee of the Union of International Alpine Associations (UIAA). When the sport wanted to get into the Olympics, it required a separate governing body not beholding to any other governing body/organization. The Committee (I was the American Delegate) advised the UIAA it needed to break away. The UIAA refused to allow it, afraid it would lose control over the group. The UIAA would not allow the Competition Committee to set up its own bank account or take on contracts (dreams of TV revenue in their heads); all necessary to get Olympic recognition so a sport would come under consideration for inclusion. It went on for years and may be still unresolved. Sport Climbing never did make it to the Olympics, for better or worse. All this with Not-For-Profit sporting organizations. In this case there is "profit" to be considered, considerable profit. The stakes are very high. A tightly held national governing agency controlled by and for profit making members will have the final word over its committees or councils or advisory boards. Given the right and opportunity to control, the parent organization will always exert its final control when it deems fit. It must. In my opinion, the fairest way forward would be for ADI to organize itself as THE independent national representative body for the Micro Spirits Industry; and that it should then become a full voting member of DISCUS and serve as the de facto "Advisory Council" for DISCUS. The tax issue is a major step forward. Getting it passed will establish Micro Distilling in Federal Law and the Tax Code as a real thing. The additional benefit will be street cred for the nascent industry. It can be done. There is precedent. It is about the right things: jobs, agriculture, economic development; the timing is good. At this point it seems the best DISCUS can do for us on this issue is to do nothing. If the organization will not take up the staff with us, I hope they will stand down entirely and voice no opinion at all, overt or otherwise.

FARM DISTILLERS be aware, the Department of Ag and Markets is requesting we apply for a vendors permit, classifying us as "middlemen" and therefore we need to register with Ag and Markets as such. The fee is not at issue, it is modest. However, we disagree with the determination that we are required to acquire the permit. We are a Farm under New York State Law, running a "farm operation" and selling the goods we produce, which are "farm products" at the Farm. We are not middlemen. If you are holding a Farm Distillery permit and doing business with local growers, we suggest you enter into leases for the land or trees producing your raw materials, thereby making them a part of your Farm Operation and ensuring your goods are "Farm Products". The leases are simple and your attorney should be capable of drawing one up that does not intimidate your growers. In order to qualify their lands as your Farm Operation you must show you are financially responsible for the crop. This also applies to the Department of Environmental Conservation; if you are not a "farm" producing "farm products" your effluent is "industrial waste" and requiring a whole raft of permits for its disposal. Being a "farm" producing "farm products" that effluent is considered to be "food waste" and much more easily disposed of. R

This link is very helpful if you are following this thread and looking for alternative information sources. http://cruciansinfocus.com/category/diageo/

The following has been provided to the US TRADE OFFICE as the beginnings of their talking points on the question of the EU restrictions on new American Bourbon and other American whiskey types. Please review and add some flesh to these bones. I'm hoping to provide the USTO with a dossier of support and justifications for their discussions at the bi lateral trade talks in November. TALKING POINTS: • PROVENANCE, the US recognizes and respects the provenance of Scotch Whisky, quid pro quo is required in the recognition that Bourbon and Rye Whiskeys, in fact ANY whiskey legally produced in the US under US regulations must be equally recognized. • DEFINITION, the labeling regulations conflict with the agreement to respect the American provenance of Bourbon and Rye and other American made whiskeys. The conflict arises in the LABELING requirement whisky/whiskey be aged three (3) years in wood. This is recent and is in keeping with the definition of SCOTCH whisky, not AMERICAN whiskeys. The EU may not, logically, agree to respect the rights of US producers exclusively to produce AMERICAN WHISKEY, then redefine American whiskey by restricting the sale by imposing restrictions on the labeling of American whiskey, so that the actual product conforms with the definition of Scotch whisky. • CONSUMER CONCERNS, the argument of the Scotch Whisky Association and the EU is the protection of the authenticity of “whisky” so that the consumer is certain what they are getting and not confusing a non whisky with whisky as recognized by the Scotch Whisky Association. This is a reasonable protection for Scotch Whisky, but not all whisky/whiskey is Scotch Whisky. What the EU regulations pertaining to labeling must address in seeking to protect the consumer is the IDENTIFICATION of the whisky/whiskey source which then goes to the TYPE of whisky/whiskey is in the package. • SUGGESTION, may include requirement for AMERICAN whiskey to state on the label that this is an AMERICAN WHISKEY, thereby ensuring no one will mistake it for Scotch Whisky (which is by the way a specious argument since it would say BOURBON or RYE WHISKEY on an American made whiskey); and this is supported in US regulations which specify that Scotch must be made in Scotland, if the spirits come from the US it won’t be mistaken for Scotch. It seems obvious enough, but there is a problem in EU law. In the correspondence announcing the agreement, it is stipulated that AMERICAN whiskeys are distinct to America and American producers and made under US law. In the same correspondence noting the US agreement to respect EU labeling regulations that recognition is taken away since we are prohibited calling our legal whiskey "whiskey" in the EU unless it is aged three years in oak, which is not required under US law. It is required and agreed, EU producers honor our labeling requirements when exporting to the US; yet we do not require the Scotch producers to change their methods to comply with American methods. The issue is quite clear. We are not making Scotch whisky. The EU agrees, the US agrees; but the conflict is in the contradiction between the agreements and their specific regulations. R

Heard from Congressman Hinchey's office. They are looking into the HR 5034 issue. I requested the Congressman's position on 5034 and was asked for a summary of the issue, I provided the following: Our position, as with most of the 200 craft distillers across the US, is 5034 will undermine the Commerce Clause and cause confusion among the consumers. It is a bill designed to strengthen the monopoly of wholesalers who, due to the so-called (but actually non-existent) "three tier system", operate as the de facto "gatekeepers" when it comes to what new products are introduced at the State level. It will mean small wineries, brewers and distillers are further constrained from entering the marketplace. This is particularly problematic since it means local farmers who grow the raw materials used by craft distillers will suffer as well. The success of new distilleries introduction of new brands into the State markets is already having a direct positive economic impact upon rural agriculture in New York. One example how 5034 could be a problem: Suppose Kentucky introduces a law further parsing out the definition of the term "bourbon", thereby prohibiting any but Kentucky bourbon from sale in Kentucky under the name "bourbon". Under 5034, Kentucky would be immune from challenge, thereby eliminating the State of Kentucky from the list of states to which we New York bourbon makers might sell our products; though those products are legally bourbon under Federal law. 5034 helps ONLY the wholesalers, who already enjoy a legally mandated monopoly in most States on the distribution of alcoholic beverages. It hurts the small and new producers and brand owners. It hurts the retailer since the availability of product is limited to what the wholesalers determine worth selling. It hurts the consumer by allowing the wholesaler to determine what is available to the consumer, rather than the marketplace determining success and availability of new products. We urge the Congressman to come out solidly AGAINST 5034. In response Hinchey's office assured me they would take this directly to the Congressman for his consideration. Feel free to use any of the above in your correspondence with YOUR Legislators on the issue of HR 5034. R

Here is the proposal we are fielding for reduced Federal Excise Tax for micro producers: Small-scale spirits producers need a similar reduced-rate federal excise tax structure to continue to innovate, create U.S.-based manufacturing jobs, support U.S. agriculture, support tourism through visitor centers and tasting rooms, and compete effectively in the marketplace with reasonably-priced handcrafted spirits. This differential is particularly critical as distribution channels for spirits consolidate and the economic downturn makes marketing handcrafted spirits more challenging. The following structure is proposed to bring balance to small distilled spirits producers:  Tier one/medium- and large-scale producers — 100% rate  Tier two/small-scale producers — 20% rate Tier Two would rise or fall in relation to Tier One whenever excise rates are adjusted. Reduced excise tax rates should apply to the first 60,000 proof gallons of spirits sold if producers sell no more than 100,000 proof gallons per year. Producers pay the lower tax rate on the first 60,000 pg, the higher rate on production from 60,000 - 100,000 pg. Once production passes the 100,000 gallon mark the full tax rate applies to all the goods produced by that producer. Reduced rate apply to:  Brands directly owned by producers  Brands manufactured for third parties The above proposal was the result of two years of effort by the ad hoc Tax Committee of the ADI and is the outcome of discussions here and in the field with micro producers in the US. At this point, we have received a draft of the "Proposal" from Congressman Maurice Hinchey (D-NY), here is the preliminary statement upon which the proposed legislation will be built: Proposal: To provide a reduced rate for small-scale spirits producers similar to the reduced-rate federal excise tax structure granted to micro-breweries and small wineries. Tier 1 distilleries would, by definition, produce over 100,000 proof gallons per year and would pay 100% of all excise tax on all gallons. Tier 2 distilleries would pay 20% of the federal excise tax on gallons produced up to 60,000. From 60,000- 100,000 gallons they would pay 100% of federal excise tax and production could not exceed the 100,000 gallon threshold. These reduced rates would apply to brands directly owned by producers and brands manufactured for third parties. We are informed by the Legislative Assistants at both Senator Gillibrand and Congressman Hinchey's offices they anticipate some resistance but since there is precedent already set in law giving the proposed discounted rate to the beer and wine producers, it is entirely reasonable to expect the micro spirits producers' proposal will have legs. Now it's up to all you out there in the spirit world to continue to communicate with your Federal Legislators and get them to sign on this proposal when the bill is introduced. Note: The amount agreed by ADI membership and published in the newsletter in the definition of a Micro Spirits Producer as a maximum was actually 65,000 pg. We have addressed this with the Congressman's office and the number is to be 65,000 pg as published. This issue was raised at the DISCUS so-called Micro Distillers Council. The reported response to the producer who raised the issue, "he was nearly shouted out of the room" by the DISCUS CEO. This is an example of how our interests will occasionally diverge from those of DISCUS. And keep your fingers crossed. R

I received a call the other day from the Senior Director of the TECHNICAL BARRIERS TO TRADE office at the Capital. In November he will head for Geneva for bi-lateral talks on various trade issues among the US, EU and other countries. He told me the issue of the definition of "whiskey" or "whisky" will be brought up as a topic of discussion, opening the way for possible revision or clarification of the labeling rules for non-Scotch whisky/whiskey. In case you are not fully up to date, the issue is the effective banning of all new whiskeys (under three years in oak) from the EU, though they meet the US regulations and are considered whiskey/whisky by the US Federal Government, in particular Bourbon and Rye Whiskeys. New distillers making legal, approved bourbon or rye which is aged under three years in oak are prohibited from using the descriptive "whiskey" or "whisky" on any product sold in the EU, specifically including American Bourbon and Rye. We are attempting to get the ITO to specify that the three year requirement is for SCOTCH whisky, but that American whiskeys are defined by American law. It is the same position taken by the US pertaining to Scotch whisky which is defined in the CFR as "a product of Scotland made under the regulations of that country". After over a year, we have gotten favorable response from the US TRADE OFFICE and their commitment to take this issue up at the November meeting. It is unlikely to be resolved at that meeting. We anticipate there will be time required to argue this out and perhaps some pressure must be brought to bear upon EU lawmakers to make the change. But it is moving forward. Anyone considering exporting their whiskey to the EU has a stake in this, contact your Legislators and tell them to weigh in on the issue with the OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE. R

We have explored this option and decided our production could not stand the hit and allow us to keep our regular customers supplied. The Duty Free shops are high volume (depending upon the location) and the vendors expect serious discounts for the product, deeper than a national distributor would require. It is a lucrative market if you can get in and keep up. Duty Free shops are typical operated by independent companies who pay a percentage of their gross to the airport management company, sometimes as high as 60%. The Duty Free shop is typically in a "Duty Free" zone and is therefore considered "export". No State or Federal excise taxes are paid on exported goods. Check first before you start selling and claiming export since there are rules to follow on reporting export sales (not to mention paperwork). R

I received an untimely notice of a Public Hearing on HR 5034 in Washington, DC which was held on September 28th. Unfortunately there appears to have been no notice of the hearing to the general public posted till September 27th, which is when I received it. I wanted very much to attend, but unfortunately I was on the last day of an overseas trip. Had I received it earlier certainly I would have changed my trip to attend. I'm wondering if anyone else heard of this Hearing soon enough to do something about it, like submit a letter if not attend. But in the meanwhile, here is a report which appeared in the WINE AND SPIRITS DAILY giving an apparently even handed account of the notable comments. It's a shame we were not represented. Here is the report: The House Judiciary Committee Hearing on HR 5034, the Comprehensive Alcohol Regulatory Effectiveness (CARE) Act, got under way in the US on Wednesday (29 September). Here, we hand over to Wine & Spirits Daily in the US for coverage of the hearing on its first day. Several Congressmen testified on the act in the first session. Reps. Mike Thompson (D-Calif.) Peter DeFazio (D-Oregon and co-chair of House Small Brewers Caucus) and George Radanovich testified in opposition to the bill. Meanwhile, Reps. Bruce Braley (D-Iowa), Ed Towns (D-N.Y.) and Gary Miller (R-CA) are all co-sponsors of the bill. HR 5034 has 148 co-sponsors in the House but none from the Senate. THE WINE INSTITUTE - NO PROBLEMS WITH STATE REGULATION Tracy Genesen, on behalf of The Wine Institute, argued that “HR 5034 is a drastic solution to a problem that does not exist”. She explained to the committee that small- and medium-sized wineries often have a hard time finding distribution, so it's especially difficult for them to enter states that bar direct-to-consumer shipping. “Wholesalers tend to focus almost exclusively on the well-know high-volume wines to the exclusion of the smaller, lesser-known brands,” she said. Genesen claimed that wholesalers “ordinarily do little in exchange for the high costs they charge small and medium wineries. Not surprisingly, wineries that succeed in obtaining wholesalers often complain that the wholesaler fails to maintain contact with restaurants or wine shops after making an initial sales call.” As a result, US wineries "have an interest in even-handed regulation permitting them to ship wine directly to consumers and retailers”. But, wholesalers “have an interest in maintaining” their grip on the three-tier system. She went on to say that HR 5034 benefits wholesalers “at the expense of producers, retailers and consumers”. The “only state alcohol regulations that are truly vulnerable”, she said, "are ones that discriminate against out-of-state businesses”. HR 5034 “gives states free reign to pass intentionally and facially discriminatory statues that foreclose out-of-state wholesalers and retailers from market access,” she said. HR 5034 is “not about protecting the overwhelming majority of state alcohol regulations at all”. Instead, the bill “is about protecting wholesalers from competition... . What wholesalers want is nothing less than a power grab designed to protect their market share … the opportunity to develop in-state cartels, free from competition from out-of-state wineries, breweries, retail outlets, and other wholesalers.” HARPOON BREWERY - MORE DIFFICULT FOR SMALL BREWERS TO FIGHT FRANCHISE LAWS Rich Doyle, chairman and CEO of Harpoon Brewery, gave the small brewers' perspective by speaking on behalf of the Brewers Association. He noted that beer distributors are “very important to small brewers”. He said that the “current system has also served the public well” but passage of HR 5034, “even in its amended form, risks exposing that delicate balance to unintended consequences”. A big issue for small brewers is state franchise laws, which protect “wholesalers from dominant large brewers”. “I have worked through franchise agreements mandated by state laws with dozens of wholesalers (but) those negotiations are always tough because state laws provide wholesalers with strong leverage.” The proposed legislation “would undeniably make this situation worse”, he argued. “Not only would we be playing away, but the state-based referee would not have any concern about being tempered by federal oversight.” He said he “appreciates the threat that wholesalers feel to their business from a change of the status quo, and more power flowing to large retailers. However, we do not think that solving a problem for wholesalers by creating a problem for brewers makes sense”. In closing, Doyle stated: “I respectfully urge the Committee to refrain from reporting HR 5034. Federal legislation is not needed to better address underage drinking, drunk driving, or other problems.... Our industry is already adequately regulated at the federal and state level … .” MICHIGAN LCC - STATE REGULATION IS "UNDER SIEGE" Meanwhile, Nida Samona, chairperson of the Michigan Liquor Control Commission, supports the legislation. She said: “Michigan and other states continue to be challenged with lawsuits whose goal is to eviscerate effective state regulation of alcohol beverages, by opening the floodgates and allowing entities over whom state regulators have little or no control to distribute alcoholic beverage free of the oversight and rules that govern in-state licensees.” She brought up out-of-state retailers as an example. The Specialty Wine Retailers Association sued Michigan for the right to ship direct to consumers. She claims the District Court sued against Michigan's position and “rather than face the additional costs of litigating”, the state legislature “restricted the ability of all retailers [in-state and out-of-state] to ship to consumers”. She believes that, because states are being subjected “to this type of expensive and uncertain litigation where a state may be forced to expend great manpower and incur great defence costs … a federal statute is needed to confirm the primacy of State regulation over dormant commerce clause and antitrust challenges that might apply to other products.” Furthermore, HR 5034 “is also needed to help states defend against attacks that are motivated by economics not for public health reasons”. MARIN INSTITUTE - REGULATION IMPORTANT TO PUBLIC WELFARE Michele Simon, research and policy director for the Marin Institute, argued on behalf of public advocacy groups. “It is irrelevant to us if the bill favours any particular party's economic interests,” she said. Instead, their “goal is to advance policies to reduce alcohol harm”. HR 5034, she said, is very important in preserving public welfare. But, “as long as the public and policymakers think this is all just an industry food fight, the science and the historical context to support strong state regulation gets lost in the shuffle. While the fight between alcohol distributors and producers presents an obvious disagreement of economic interests, HR 5034 must not be dismissed as industry infighting.” She said that the “benefits of state alcohol control are significant”, such as “lower consumption”, “less alcohol-related harm”, and a source of revenue for state programmes. “State laws and regulations controlling alcohol sales were passed to help protect the health and safety of the public; however, certain special interests are challenging state regulatory authority and threaten to undermine the very protections every state has established.” “Maintaining the integrity of the three-tier alcohol control system is necessary for ensuring the health and safety of the public,” she said. UTAH AG – ANHEUSER-BUSCH COMPARED TO ARTISAN WINERY Utah Attorney General Mark Shurtleff is all for the Care Act. “Alcohol … is a unique product both constitutionally and physically,” he said. “It is restricted for good reason … . The people of Utah feel differently about alcohol than the people in Detroit. That is the beauty of the American system. Just because alcohol can be sold like toothpaste, doesn't mean it should”. Shurtleff pointed out that Utah is a control state and that it “takes alcohol very seriously”. Referring to the US Supreme Court's ruling in favour of interstate wine shipments from 2005, Shurtleff noted that the court “believed that the Michigan system impermissibly harmed a poor artisan out-of-state winery”. But now “fast forward” five years and ask, “where are the states in trying to understand what this decision meant? The answer is the legal waters are muddier, not clearer.” Shurtleff contrasted that “small artisan winery” where “now we have Anheuser-Busch InBev … using the same theory … to say they are being discriminated against in Illinois. Last I checked, A-B InBev was everywhere. How are A-B InBev and a small winery similarly situated? I don't know.” And then you also have “out-of-state retailers saying that the Granholm decision means that out-of-state, remote sellers of alcohol have the same rights as entities licensed to sell alcohol in the state. There are 2,966 accounts that sell alcohol in Utah and Utah does a fine job regulating them. We cannot regulate 521,000 accounts that sell alcohol across the country.” Here's the money shot from the AG: “Michigan has been hauled into federal court over this very issue of retailer shipping. Texas and New York were sued too. Michigan lost at the district level. Texas and New York won at the 5th and 2nd circuits. What am I to tell the Utah legislature? Go with the Texas and New York ruling, or race to the bottom and abandon regulation to be safe from a Michigan-type decision?” HARVARD PROFESSOR - BILL IS PROTECTIONIST AND NEEDLESS Testifying on behalf of the Beer Institute, Harvard Law School professor Einer Elhage made the case that not only is the new Care Act not necessary, because most of the legal conflicts have been “largely resolved … and that none of the cases has resulted in deregulation”, but that the Act would still “allow many types of protectionist state laws and could allow state regulations that conflict with federal antitrust statutes or other important Congressional Acts”. LAW SCHOOL PROFESSOR - CARE WOULD "PRESERVE" MODERATION Professor Steve Diamond, from the University of Miami School of Law, testified in favour of HR 5034. Post-Prohibition state laws have been largely successful in controlling the “appetite for drink … and the pursuit in profit in selling it,” he said. The three-tier system, he said, created an environment where “no particular segment of the industry was to feel disproportionately over-regulated”, but rather to create “a culture and a climate of control. They were aimed just at the few. The alcoholic was not the only problem consumer; the gangster was not the only problem seller. The aim was moderation in drinking, moderation in selling, and moderation in law-making”. Was it perfect? "Of course not," said Professor Diamond, but it still “commands respect” and HR 5034 is a “moderate, reasonable effort to preserve this programme of moderation” *** If you choose to respond here to the points made please do it methodically so that others will be able to use your comments as talking points. But more importantly please get your responses and your phone calls to your Legislators and local press to counter the misleading "logic" of the bill's advocates. This is a snow job. Let your Representatives know.

Guy raises the question of "content" in the proposal. The proposal made by the Committee, led by Melkon had a very high production number for a "micro" distillery. All discussion on total volume during the leadup to the proposal capped production at 65,000 proof gallons. The larger numbers were added in an effort to entice some of the larger Micros (I know, contradiction in terms), but the number was scaled back when such as TITOS did not elect to participate. For my own part, I think the lower number, 65K is more appropriate. We know from our own experience that the terms "micro" or "craft" or "artisan" are difficult to apply to operations with volumes reaching 1,000 proof gallons. The numbers went back and forth during the discussions in the thread and the final figure which seemed acceptable to all participating was the 65K cap. That is what is being proposed. Up to that point, the proposed rate would be 20% of that paid by those making over that amount. A top cap figure would also be included, passed which a so-called micro would graduate to the next level and ALL their production would be taxed at the 100% rate. Please all, keep contacting your Federal Legislators. This is perhaps the most important Federal work we can do for all us. Don't let up. R

Guy, I'll report on that in the TAX thread. Some of the Committee work was adjusted before I went for my meetings. R

This issue is heating up. Check out what the WASHINGTON TIMES had to say on Friday: 6:23 p.m., Friday, September 17, 2010 We may be witnessing the single worst example of corporate welfare in a generation. With all due respect to the crowd favorite, Archer Daniels Midland, the new contender essentially could give its product away and still make a profit - thanks to the generosity of the American taxpayer. At the heart of the rip-off is a policy known as the "cover over" tax subsidy, which provides Puerto Rico and the U.S. Virgin Islands (USVI) a rebate on the federal excise taxes U.S. consumers pay when they buy rum produced in those territories. There are virtually no restrictions on the use of the money - though Puerto Rico currently uses 94 percent of the revenues to support investments in infrastructure, health, education and environmental preservation. (The additional 6 percent is spent on marketing for the island's rum industry.) To increase its revenue from the program, the Virgin Islands' government two years ago signed an agreement with the British liquor conglomerate Diageo in which the company agreed to move its Captain Morgan rum distillery from Puerto Rico to USVI. Under the agreement, which makes the federal government's policy of paying farmers not to grow crops look penurious, the USVI government will give Diageo nearly half of all cover-over revenues generated by Captain Morgan sales. The deal also gives Diageo a 90 percent corporate income tax reduction and exemptions on real property taxes, gross receipts taxes and excise taxes on materials and equipment. Diageo also will receive a state-of-the-art distillery financed with a $250 million USVI government bond, with future cover-over revenues used to repay the bond. At the end of the initial 30-year contract, which Diageo can renew at will for an additional 30 years, the facility will be deeded to the company. Though economic incentive programs to lure jobs and industry to an area are nothing new, few can match this deal on the cost per promised job. During the agreement's initial 30-year life span, Diageo could receive about $2.7 billion in direct payments, tax benefits and facilities. Yet, under the agreement, Diageo promises to hire just 40 workers - just 32 of whom must be USVI residents. That is well over $2 million per job per year. Worse, about 350 jobs were lost in Puerto Rico - meaning the Diageo deal produced a net loss of 310 jobs. If you cost this out, it means the U.S. government, in effect, is paying a foreign company more than $19 million for each job it kills. Another extraordinary distinction of the deal is that the direct subsidy Diageo will receive is worth about twice the cost of its rum production (even excluding the cost of the free manufacturing facility). The cost of producing a gallon of rum in a Puerto Rican distillery is $3.07 per "proof gallon." Diageo will receive as much as $6.38 per proof gallon for producing the same rum. This means the company could sell the rum for 1 cent plus the excise tax and still make money. Legislation that would put a 10 percent limit on the amount of cover over-revenue that can be paid directly to a private company has been introduced in both the House and Senate, but former Ways and Means Committee Chairman Charles B. Rangel, New York Democrat, buried the House bill. The Senate bill was referred to the Finance Committee. At a time when the United States is facing seemingly intractable unemployment problems, Congress shouldn't be lining the pockets of foreign companies - and especially shouldn't be paying a company $19 million for every job it destroys. Following the November election, if not sooner, House Ways and Means Committee Chairman Sander M. Levin, Michigan Democrat, and Senate Finance Committee Chairman Max Baucus, Montana Democrat, should schedule hearings to re-examine the purpose of decades-old cover-over tax rebate policy. There is something amiss when U.S. territorial governments use federal tax revenues to provide lavish subsidies to private firms. If Congress turns a blind eye to this outrageous corporate welfare giveaway, it will confirm the worst fears of many voters: that politics today is an inside game between those seeking favors and those giving them away - with the hapless taxpayer as the involuntary banker. Such abuses need to end. Naomi Lopez Bauman is a public-policy consultant and an adjunct fellow with the Pelican Institute in Louisiana.