Call to Order and Roll Call
The 5th meeting of the Interim Joint Committee on Licensing and Occupations was held on Friday, October 9, 2015, at 10:00 AM, in Room 129 of the Capitol Annex. Representative Dennis Keene, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Representative Dennis Keene, Co-Chair; Senators Joe Bowen, Julian M. Carroll, Jimmy Higdon, Paul Hornback, Ray S. Jones II, Christian McDaniel, and Dan "Malano" Seum: Representatives Tom Burch, Larry Clark, David Floyd, Dennis Horlander, Reginald Meeks, Charles Miller, Brad Montell, David Osborne, Ruth Ann Palumbo, Sal Santoro, and Arnold Simpson.
Guests: Marc Guilfoil, Director of Racing, Susan Speckert, General Counsel, Kentucky Horse Racing Commission; Drew Faulkner, Vice President, American Distilling Institute; Stacy Kula, Stoll Keenon Ogden PLLC.
LRC Staff: Tom Hewlett, Bryce Amburgey, Jasmine Williams, Michel Sanderson, and Susan Cunningham.
Approval of minutes from August 14, 2015 and September 11, 2015
A motion to approve the minutes from the August 15, 2015 and September 11, 2015 meeting was made by Representative Osborne and seconded by Representative Floyd. The motion carried by voice vote.
Licensure of historical racing machine suppliers
Susan Speckert, General Counsel for the Kentucky Horse Racing Commission, said that the commission would have legislation in the 2016 legislative session that will amend the distribution of the wagering tax on historical horse race wagers. It will also license the operation and manufacturers of historical horse race wagering equipment. The bill will amend the Standardbred purse supplement fund and Standardbred Breeder Incentive Fund.
In 2014 the General Assembly placed an excise tax on historical horse race wagers. A portion of that tax is distributed to purse supplement funds, based on the type of live racing that is being conducted at that track. The commission proposes to clarify that, when two or more tracks offer different breeds of live racing and have formed a joint venture to offer historical horse race wagering, the excise tax will be divided between the applicable breed development funds. Keeneland and Red Mile have formed a joint venture to offer historical race wagering at the Red Mile. This bill would clarify how the excise tax would be divided between the Thoroughbred purse supplement fund and the Standardbred purse supplement fund. The rate of the tax would not be affected.
The KHRC has the specific authority to license every participant in pari-mutuel horse racing, including individuals and entities such as race tracks, tote companies and advance deposit wagering (ADWs) companies. The commission does not have the specific authority to license the entities that manufacture and sell historical horse race wagering equipment, or the specific authority to license the play of those machines at race tracks that offer this type of historical horse race wagering. The commission will ask to amend KRS 230.260 to grant it permission to license the manufacturers and vendors of historical horse race wagering systems. This would be one license for one system with an annual license not to exceed $50,000.
This amendment will also give the KHRC authority to grant a specific license for historical race wagering at horse race tracks. This annual license fee will not exceed $100,000. Currently the race tracks are required to pay for the cost of the testing of the wagers and the terminals to certify compliance with Kentucky law. With the change, the vendors of the historical race wagering equipment will be required to certify their product before it is marketed in Kentucky. KHRC charges the tracks a monthly fee to cover the cost of certifying these machines. Currently Kentucky Downs has 488 historical race wagering terminals, Ellis Park has 177 terminals, and Kentucky Red Mile Joint Venture has 902 terminals. The KHRC anticipates a regulatory cost increase due to inspection and certifying of these machines. The commission will ask for flexibility in changing fees in order to study the actual regulatory cost.
All four of the race tracks that will be affected by these changes have written letters of support for these amendments. These proposed amendments will not authorize historical race wagering and do not have any impact on current litigation. KHRC believes that historical race wagering should be taxed and properly regulated.
In response to a question from Representative Floyd, Ms. Speckert said that the language was broad. Currently there are two manufactures, RaceTechRBG and EncoreRBG. The tracks either buys the historical racing machines outright or lease them from the manufacturer. The entities that actually own the system that would be licensed. However, there could possibly be another type of business arrangement that the commission is not aware of at this time.
The Supreme Court found that the regulation establishing historical horse racing as pari-mutuel was properly promulgated by the KHRC. The commission has the authority to regulate pari-mutuel wagering on historical horse racing. The Circuit Court is in the discovery phase on an appeal of the legality of historical horse racing, with a trial date set for September of 2016.
In response to a question from Representative Clark, Ms. Speckert said the KHRC is estimating the cost of fees. However, licensing vendors, manufacturers or entities that own the equipment and require them to test and certify all the equipment prior coming to Kentucky it will decrease the regulatory time and costs to the commission. Race tracks perform all testing on tote equipment. KHRC believes the companies who create the product should be responsible for time and cost of certification of their machines.
In response to a question from Senator Hornback, Ms. Speckert said Keeneland and Red Mile have formed a joint venture called KRM LLC. This company is located at the Red Mile and offers historical horse race wagering. Because both tracks are owners, the proceeds of the excise tax should be split between the thoroughbred purse supplement fund and the Standardbred purse supplement fund.
In response to a question from Senator Seum, Ms. Speckert said the Supreme Court has ruled that the KHRC has the authority to promulgate regulations and approve the request to offer the historical horse race wagering machines and the commission is confident that they are legal.
Alcoholic Beverage Competitions
Andrew Faulkner, Vice President, American Distilling Institute, said in April of this year the institute held its annual conference in Louisville. There were approximately 1,000 members representing 600 distilleries in the 50 states. In addition to the conference, the institute also holds competitions, workshops, and publishes a magazine. There have been 12 conferences to date, six of which have been in the Louisville area. The mission of the institute is to educate distillers and start up distilleries.
The institute has two events, an annual judging of craft spirits, which currently cannot be held in Kentucky, and an annual conference and vendor expo. The institute receives spirits from distilleries throughout the country. Because most are not listed in the state of Kentucky, they cannot be poured for the judges to sample. The judging, referred to as a spirits competition, is a professional evaluation of a product distilleries are producing. Typically there are 450 distilled spirits entered. The distillers pay to enter these competitions. In return they receive tasting notes. Awards are also handed down. The institute operates a budget of $80,000, some of which is paid to the host city.
ADI has staff who check in bottles in advance of a competition. There are six panels with four judges each. The judges are made up from buyers, retailers, bartenders, bloggers and journalists who are influential in the distilling industry.
Because Kentucky law does not allow for tasting of spirits that are not registered in the state, the next competition will be hosted in San Diego this next spring. In the past Ted Huber of Huber Orchards acquired a waiver of Indiana laws so that the ADI could hold a competition at that property.
In response to a question from Senator Carroll, Mr. Faulkner said if a spirit is not listed in the state of Kentucky it cannot be poured at a competition.
Stacy Kula, Stoll Keenon Ogden, an alcohol industry attorney, said it was her understanding that for alcohol to be sold in the state of Kentucky it has to be registered in the state of Kentucky. In conversations in the past with the ABC there have been discussions of “work arounds.” However, experience with clients shows that the work arounds do not really work. The law in Kentucky does not specifically permit alcohol competitions therefore they are prohibited.
In response to a question from Representative Meeks, Mr. Faulkner said in Kentucky alcohol cannot be served without cost, and out-of-state liquor not registered in Kentucky cannot be served in Kentucky. Also, the three-tier system is costly to the event. Ms. Kula added that if there was an exception for just the bottles entered in the competition to be exempt from the three-tier system it would save significantly on the costs of holding the judging. She added that ABC was only allowed to promulgate regulations, therefore a change in statute for a special license would be necessary.
In response to a question from Representative Osborne, Ms. Kula said the correct terminology is “register” with the ABC. Each manufacturer would have to register with the state of Kentucky by filing an application and paying a fee.
Representative Montell commented that he is interested in hearing from the Kentucky Distillers Association before proceeding with this issue.
There being no further business to come before the committee, the meeting was adjourned at 10:53 AM.