Call to Order and Roll Call
The 2nd meeting of the Interim Joint Committee on Licensing and Occupations was held on Friday, July 8, 2011, at 10:00 AM, at the Chas Seligman Distributing Company in Walton, Kentucky. Senator John Schickel, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator John Schickel, Co-Chair; Representative Dennis Keene, Co-Chair; Senators Tom Buford, Julian M. Carroll, Jimmy Higdon, Dan "Malano" Seum, Damon Thayer, and Robin L. Webb; Representatives Tom Burch, Larry Clark, Dennis Horlander, Wade Hurt, Joni L. Jenkins, Adam Koenig, Reginald Meeks, Mike Nemes, David Osborne, Sal Santoro, Arnold Simpson, and Susan Westrom.
Guests: Jennifer Doring, Chas Seligman Distributing Company; Dawn Bellis, General Counsel, Department for Housing, Buildings, and Construction; Bill Walsh, Northern Kentucky business owner; Dan Meyer, Executive Director and General Counsel, Wine and Spirits Wholesalers of Kentucky; Gene McLean, Executive Director, Kentucky Beer Wholesalers Association; and Jason Baird, Executive Director, Kentucky Malt Beverage Council, Inc.
LRC Staff: Tom Hewlett, Bryce Amburgey, Carrie Klaber, Michel Sanderson, and Susan Cunningham.
Approval of minutes
There was a motion from Senator Schickel, seconded by Senator Seum, and the minutes from the June 10, 2011 meeting and the November 23, 2010 meeting were adopted.
Welcoming comments
Jennifer Doring welcomed the committee to the Chas Seligman Distributing Company, giving a brief history of the family business and thanking the members for making the trip to the facility.
Electrical Inspectors
Representative Sal Santoro sponsored HB 487, AN ACT relating to electrical inspections and licensure during the 2011 regular session. The bill did not pass. He told the committee that there are three types of electrical inspectors licensed by the state: 1) state employed inspectors who inspect state facilities and hospitals, as well as performing inspections in counties where there is no local inspector; 2) cities and counties such as Louisville, Lexington and Boone County where electrical inspectors have contracts with local government to perform work; and 3) independent inspectors who are licensed by the state and operate a private business. Recently, the Department of Housing, Buildings and Construction (HBC) has received complaints regarding independent inspectors charging excessive inspection fees. There have also been allegations about inspectors charging a lower fee to simply sign off on an inspection. One of the biggest complaints received is the "call back inspection" where an inspector charges multiple fees by performing incomplete inspections during repeated visits. Another complaint involved inspectors telling electricians to take a class the inspectors were conducting so that they could get their permits. The implication was that if the electrician did not pay for the class they would have a great deal of difficulty passing an inspection. Complaints are handled through KRS Chapter 13B hearings that allow for an appeal process. House Bill 487 would have allowed more city and county control, allowing them to have a contract with the electrical inspector and giving the city or county recourse if an inspector behaved badly. House Bill 487 also set a fee structure to avoid overbilling.
Bill Walsh, a business owner in Boone County for 17 years told committee members about his experience with electrical inspectors. When he first started his business, he had his choice of electrical inspectors. Now he is being forced to use a company from Ohio to inspect his properties. He is failing inspections that were previously passed when local inspectors were hired. The Ohio company's fees are more costly. The Ohio company always requires a call back for re-inspection and requires a drive to Ohio to pay the fee and, once a property has passed, a drive to Ohio to pick up the permit. After filing a complaint with HBC, a resolution was reached.
In response to a question from Senator Webb, Representative Santoro said the Northern Kentucky Area Planning Commission entered into an exclusive contract with an Ohio company allowing this company to inspect businesses in the area. Dawn Bellis, General Counsel for HBC added that there is no prohibition to keep inspectors from outside the state coming into Kentucky if they are licensed and certified by Kentucky. HB 487 would have required counties to have a contract with an electrical inspector or to directly employ an electrical inspector. Also, the county would be allowed to hire more than one inspector. The state will have greater enforcement authority and accountability of these inspectors by establishing inspection protocol.
In response to a question from Representative Westrom, Ms. Bellis said if the actions by out-of-state inspectors took place in Kentucky, a lawsuit could be heard in a Kentucky court.
Representative Clark commented that House Bill 487 would have created a standardized fee structure, a maximum mileage reimbursement, and would encourage cities and counties to have jurisdiction of inspectors handled through fiscal court. This would create a uniform, state-wide system.
In response to a question from Representative Keene, Ms. Bellis said problems have arisen in the current system due to the uniqueness of the electrical inspector program, allowing inspectors who are not state inspectors or under contract to a local jurisdiction to be hired.
Kentucky's Three-tier System for Alcohol Sales
After a brief video on beer distributorship, Senator Higdon, Senator Thayer, and Representative Keene recognized distributors from their districts who were in attendance.
Gene McLean, Executive Director of the Kentucky Beer Wholesalers Association, gave a historical overview of the three-tier system. Before Prohibition, alcohol was unregulated. There were tied-houses, with strong connections between supplier and the retailer. In some cases, the supplier owned the retailer, but the system did not work. There was no oversight, leading to illegal alcohol sales and abuse. Prohibition, an attempt to ban all alcohol sales, began in 1920 and ended in 1933. Prohibition was repealed by the 21st Amendment, giving states regulatory control over alcohol sales. States adopted different approaches. Eighteen states are defined as "control states," meaning that the state acts as the distributor and the retailer of alcoholic beverages. Kentucky is one of 31 states to mandate use of a three-tier system established by statutory authority. The first tier is the supplier or producer, the second is the wholesaler, and the third tier is the retailer. Tax dollars are collected on all three levels. The suppliers pay a federal excise tax. When the product moves to the wholesaler, states collect an excise tax. Kentucky has an 11 percent excise tax on wholesalers. At the retail level, Kentucky collects a 6 percent sales tax. The system ensures efficient tax collection. The three-tier system also encourages moderation and safety because Kentucky law prohibits suppliers from exclusive product placement in a particular retailer.
Dan Meyer, Executive Director and General Counsel for the Wine and Spirits Wholesalers in Kentucky, said the three-tier system works to provide public protection and provide the consumer with more choices. In other countries, there are problems with tainted alcohol and binge drinking due to no accountability. Nonetheless, the system has been under attack since Prohibition ended, with allegations that the laws are antiquated. Examples of attacks on the three tier system include a case in the late 1990s where wineries went to court in an effort to change laws that appeared to discriminate regarding shipments of wine directly to consumers from state to state. In 2005, the Supreme Court found that states may not discriminate against out-of-state wineries in favor of in-state wineries. In Texas, out-of-state retailers sued for their right to ship directly to consumers. The case, known as the Siesta Village case, was settled in favor of Texas' prohibition against receiving shipments from out-of-state retailers. In Washington state, a big box retailer (Costco) wanted to purchase directly from the manufacturer and sell to the consumer, without going through a wholesaler. A referendum on the issue was unsuccessful. Arguments against the referendum were that selling top brands at lower costs is not consumer friendly because it hurts other brands and ultimately leads to fewer consumer choices. Small package stores are hurt by this also. Wholesalers add value and efficiency to the distribution chain. By adding wholesalers, the number of transactions is reduced by approximately 31 percent.
Jason Baird, Executive Director of the State Malt Beverage Council, said that distributors remit taxes on a monthly basis, as defined under KRS chapter 243. Kentucky is one of two states that collect a wholesale tax. There has been a steady increase in collection of taxes on alcoholic beverages from just under $57 million in fiscal year 1993-94 to approximately $111 million in fiscal year 2009-10. Tax amounts differ from product to product. Thus far in fiscal year 2010-11, malt beverage taxes have amounted to $58.3 million, wine has contributed $14.5 million, and distilled spirits have contributed $38.7 million. Sales tax is not reported separately from wholesale and excise tax. The tax rate has also been increasing. In 2005, the legislature raised the wholesale tax from 9 percent to 11 percent. In 2009, the General Assembly imposed a 6% sales tax on all off premise retail sales. Today, Kentucky is one of the top five states in tax rates on alcoholic beverages. Of the contiguous states, only Tennessee's sales tax is higher. Distributors and wholesalers create about 1,900 jobs in Kentucky. They take their responsibility seriously to provide awareness programs such as "We I.D." The malt beverage education program has been successful in giving back funds to communities to support Project Graduation and other underage drinking prevention programs.
In response to a question from Representative Westrom, Gene McLean said that, after the tax increase in 2009, total sales dropped by approximately $2 million. Senator Carroll commented that the history of taxation in the industry had been glossed over. The General Assembly had made a promise to the industry when it increased the wholesale tax. The imposition of a retail tax in addition to the wholesale tax amounted to double taxation.
In response to a question from Senator Webb, Dan Meyer said a study would have to be done to develop an estimate for the loss of jobs and business closing if big box retailers were allowed to sell directly to consumers. Gene McLean added that the ability to track the number of sales for the product would be lost as well as regulatory power and oversight. In response to a question from Representative Koenig, Mr. McLean said there is a license for brew pubs that allows them to produce and sell their products on location; however, there is a gallonage cap. Because these are craft brews, they do not fall in the pre-Prohibition category of tied-houses. Clark Distributing in Versailles has 466 different craft brew products.
Senator Higdon commented that he appreciated the industry's participation, corporate sponsorship, and community support in responsible consumption, Project Graduation, and underage drinking prevention programs.
In response to a question from Senator Thayer, Gene McLean said since the tax increase in 2009 Kentucky has seen a drop of about one million cases of beer per year. Jason Baird said the excise tax collection was less in 2009-10 than in previous years and that there would be a proposal to address this in the near future. Dan Meyer added that another effect the industry was seeing is customers purchasing lesser brands. In response to a question from Senator Seum, Dan Meyer said big box retailers would not be able to purchase products without the approval of the supplier.
Representative Burch commented that Kentucky's tax increases are not the reason people drive to contiguous states to purchase products at a cheaper price.
Representative Clark said the General Assembly made a commitment to the industry during tax modernization that not just the liquor producers, but also the wholesalers, should be at the table. Casinos in Ohio and Indiana are costing Kentucky $800 million a year, and the national economy is hurting everyone.
In response to a question from Representative Jenkins, Dan Meyer said the number of dry territories has continued to shrink since the General Assembly passed a bill allowing local option elections for restaurants to sell liquor by the drink.
Senator Schickel asked if members had any other business to come before the committee. He said the next meeting of the committee will be Friday, August 12, 2011, and that on September 20 the meeting will be at Keeneland, pending approval.
A tour of the building and lunch were available for interested members.
There being no further business to come before the committee, the meeting was adjourned at 11:46 AM.