Call to Order and Roll Call
The 4th meeting of the Interim Joint Committee on Licensing, Occupations, and Administrative Regulations was held on Friday, August 18, 2017, at 10:00 AM, in Room 129 of the Capitol Annex. Representative Adam Koenig, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator John Schickel, Co-Chair; Representative Adam Koenig, Co-Chair; Senators Joe Bowen, Tom Buford, Denise Harper Angel, Jimmy Higdon, Paul Hornback, Dan "Malano" Seum, and Damon Thayer; Representatives Al Gentry, Dennis Keene, Chad McCoy, Jerry T. Miller, C. Wesley Morgan, David Osborne, Ruth Ann Palumbo, Sal Santoro, Arnold Simpson, Walker Thomas, and Susan Westrom.
Guests: Wendell Strode, Executive Director, Christy Thomas, Finance and HR Director, National Corvette Museum; Representative James Kay, Professor Seth DeBolt, Ph.D., University of Kentucky, Peter Weiss, Alltech; Scott Ward, Orrick, Herrington and Sutcliffe.
LRC Staff: Tom Hewlett, Bryce Amburgey, Jasmine Williams, Melissa McQueen, and Susan Cunningham.
Minutes
The minutes of the July 14, 2017 meeting were approved without objection.
Proposed changes to charitable gaming statutes.
Wendell Strode, Executive Director of the National Corvette Museum said that over 200,000 visitors tour the museum annually, including people from all 50 states and 60 foreign countries. The museum holds 25 raffles per year to generate revenue. This has been a major factor in the museum’s success in the past 20 years. The museum has purchased over 230 acres to expand and build a motor sports park that will have a 3.15 mile road course. There are three Corvettes and two Camaros available to drive on the track. The museum teaches teenage driver safety to young drivers, and it allows law enforcement agencies and first responder teams to use the park for training. The museum has a positive tourism impact for Kentucky.
The museum has recently reduced the number of raffles to comply with exemption guidelines for a 501(c)(3), and has been advised by the Office of Charitable Gaming that it reduce the number further. Most raffles are limited raffles, at $100 to $500 per ticket and with a limited number of tickets. These are sold on the museum’s website and outside Kentucky. Some states allow 501(c)(7) organizations to conduct this type of raffle. The museum is asking for this in Kentucky. The 501(c)(7) is primarily a social or recreational organization. By allowing 501(c)(7) organizations to hold raffles and donating the majority of the net proceeds from these events back to the National Corvette Museum, the museum could reduce the number of raffles it conducts, but still meets its funding needs.
In response to a question from Representative Koenig, Mr. Strode said the raffles held as a 501(c)(3) benefit the museum. By allowing a 501(c)(7) organization to hold raffles and donate the proceeds to a 501 (c)(3), it could expand the museum’s ability to operate in the Commonwealth.
Christy Thomas, Finance and HR Director, said the museum is an exempt purpose revenue, but gaming is not an exempt purpose revenue. The museum balances its educational revenue by educating the public through tours and other things that the museum does. Current gaming statutes in Kentucky do not allow for a 501(c)(7).
In response to a question to from Representative Miller, Mr. Strode said a $10 raffle ticket is sold at admission to the museum.
Senator Buford offered suggestions for public protection such as limiting the cost of a single ticket and setting the amount of the prize awarded.
In response to a question from Senator Bowen, Mr. Strode said that the museum pays sales tax on items sold at the gift shop and the café as well as employment tax. Adding a 501(c)(7) will not expand any tax exemptions.
In response to a question from Representative Santoro, Ms. Thomas said there are no owners or stockholders. Mr. Strode added that non-profits are started with exempt status. Once that is established there are members who can join the non-profit. However, if the National Corvette Museum is dissolved, any net proceeds have to be given to other non-profit organizations.
Senator Higdon said the definition of a 501(c)(7) is broad and could allow other organizations to apply for that status. Ms. Thomas said the Department of Charitable Gaming is in charge of approval of applications for all organizations and retains the right to deny an organizations request.
Representative Westrom commented that hearing from the Department of Charitable Gaming is in order.
Universities serving alcoholic beverages in culinary arts programs.
Representative James Kay said Midway University has a culinary degree program that includes bourbon distilling, and is considering adding craft brewing and local vinting. Under current statutes this program is not allowed to serve alcohol. The university is asking for a special license that pertains to educational programs, at accredited institutions only. This would allow the program to have alcohol and serve it to students who are of legal drinking age. Kentucky has an opportunity to take an education step to create a pipeline for the workforce to fill these skilled jobs.
Professor Seth DeBolt, Ph.D., Director of the Distillation, Wine and Brewing Program at the University of Kentucky, said UK had supported development of the wine industry and grains development through extension for the last 20 years. Since 2012 there has been a concerted effort in work force development and training for the students to enhance their knowledge and to help them get better jobs locally. Classes have been developed such as Kentucky Bourbon Tourism and directed classes on distillation, brewing and on viniculture and wine making. There are approximately 300 students per year in these classes. Kentucky’s universities have formed a coalition to ensure that all industries are represented.
Pete Weiss, Alltech Brewing and Distilling, said Alltech has partnered with Western Kentucky University to further the education of craft brewers and distillers that are coming into the state. The brewery is actually located on the campus of WKU under the Alltech license. The students in the program use the brewery as a lab class. This allows for hands on experience involving the science of brewing and distilling. Students learn how to run a small business in the classroom. Two students have been hired as brewer assistants. A product called College Heights Ale that is made through the WKU program.
In response to a question from Representative Koenig, Dr. DeBolt said the universities work through the three-tier system to source alcohol for the wine appreciation class. Representative Kay added that having a license would make it clear that the educational programs are allowed to have alcohol on the premises for use in classes and that they not required to discard product after brewing or distilling.
In response to a question from Senator Seum, Representative Kay said this raises the responsibility profile of the industry. Midway has a culinary arts program that includes specific alcohol related degrees. These programs require students to taste products. However, none of the products produced in the classes are served to the public.
Representative Westrom said that this is more of a workforce development program.
Proposed changes to alcohol statutes; HB 136, HB 155, 2017 Regular Session.
Representative C. Wesley Morgan said he has been in the retail alcohol business for 36 years. During that time he developed software used by approximately 500 retail outlets across the eastern part of the United States. Until 2010 his retail business had the second highest volume store in Kentucky. He believes that his retail experience is beneficial to the state. HB 136 relates to a law requiring all wholesalers to suspend sales to any retailers who are 30 days late on paying an invoice to a wholesaler. The retailer can still purchase with cash. Wholesalers maintain a list of all retailers and know who is 30 days out paying their invoice. This law obstructs the free flow of commerce in that one wholesaler can restrict a retailer from purchasing from other wholesalers.
Adam Blau, Fort Thomas, KY, said that each distributor delivers one type of alcohol. If Southern Wine and Spirits sells Makers Mark, a person cannot buy Makers Mark from Republic National Distributing Company Kentucky. The mail is slow at times, so his payment may go over 30 days. Distributors visit the store the day before a shipment is scheduled. If he is told the day before his shipment is due that he is on the “no ship” list, he has to figure out how to make the payment by 1:00 PM in order to come off the list and have the order shipped the following day. The majority of his alcohol comes from Southern Wine and Spirits, which delivers on Friday. If he cannot pay by Thursday at 1:00 PM, he will not have alcohol to sell that weekend. As a small business, it is important to have inventory on Friday.
In response to a question from Senator Bowen, Representative Morgan said the retail stores were at one time cash only. Ken Lewis, owner of Party Source in Belleview, KY, challenged the Department of Alcoholic Beverage Control in court to be allowed to accept shipments on credit.
Senator Schickel commented that Representative Morgan’s legislation will get all due consideration in the Senate. He noted that Representative Morgan presents a unique perspective on the retail alcohol business.
In response to a question from Senator Higdon, Representative Morgan said he objected to one wholesaler having the right to stop a retailer from purchasing from another wholesaler.
Senator Buford commented that some states only have one or two wholesalers in an entire state dealing all the products. Also, regarding credit, fair trade is gone. The legislature needs to be mindful of the small retailer getting cut off from buying any products.
Dan Meyer, General Counsel, Southern Wine and Spirits Wholesalers, said the laws are not particular to Kentucky. Most states have credit or COD laws for wholesale sales to retailers of spirits and wine. Federal law prohibits extending credit beyond 30 days. This ensures that the large retailers do not have an advantage over the small retailers. Wholesalers would like to work with retailers to address the problems so that sufficient notice is given before putting retailers on COD list. In most states the ABC maintains this list. However, in Kentucky the Wholesalers Association maintains this list.
On a different topic, Representative Morgan said there is a section in statute that allows a retailer to legally take a shipment of alcohol from a wholesaler Louisville to Whitesburg. Additionally, a retailer that has a business on Jefferson/Bullet County line and another business on the Jefferson/Shelby County line can transport alcohol from one end of Jefferson County to another with no problem. However, if a retailer crosses a county line he is in violation of the law. This is an over reach by the state to control crossing county lines and the movement of alcohol. The Department of Alcohol Beverage Control is able to allow for transportation of alcohol across county lines. In December 2015, a court in Clay County ruled that this was unconstitutional. A court in Knox County recently agreed with the Clay County decision.
HB 155 2017 RS, would have created a requirement for a retailer with common ownership in multiple stores to purchase a new license giving the retailer authority to transport alcohol from one licensed store to another. Wholesalers have been against this; however, this is after the product has gone through the three tiers of the three tier system. Liquor Barn will send collector bottles to all their stores. If the store in Lexington sells out of the bottles but the store in Bowling Green has a supply, the company stands to lose money because it cannot transport the cases across county lines. Liquor Barn could apply for permission from the ABC but that is unfair because ABC could allow some to ship and deny that privilege to others. Passage of HB 155 would have required the purchase of a special license that must be displayed on the vehicle transporting the alcohol and retailers must keep an inventory list of all product being transferred. The license applies to two stores together.
Bryan Edwards, retail store owner, Murray, KY, said the time it takes to send a request to ABC for permission to transport across county lines and for ABC to respond is cumbersome.
In response to a question from Representative Osborne, Representative Morgan said the new license would have a size limit on the truck that would be making the delivery from one retail store to another.
Regulating daily fantasy sports.
Scott Ward, attorney for Orrick, Herrington and Stucliff, spoke representing FanDuel and DraftKings, two members of a growing fantasy sports industry. Approximately 700,000 Kentuckians play fantasy sports every year. Fantasy sports has evolved from being played with friends on pencil and paper to playing on the internet with not only friends and co-workers, but competitors from across the country. This product has out-grown laws that were originally written with fantasy sports in mind.
Players select a team and pay an entry fee that amounts to a prize for the winner. This allows the “armchair quarterback” a chance to imagine himself a general manager. Fantasy sports tests the players skill at putting together the best team in football, baseball, basketball and other sports based on statistics of players in real games. The outcome of the real world game is not counted in fantasy sports, rather the stats of the players are converted to points. The team with the most points, with the best individual performances by the most players, wins.
Fifteen states have passed laws defining and regulating fantasy sports, including four of Kentucky’s border states. Each state has the same basic three elements. First, a tight definition of fantasy sports. The definition does not allow for expansion beyond fantasy sports and is based on a federal law passed over 10 years ago that excludes it from internet gambling. Second, consumer protection is mandated. Contests are limited to 18 and over; and employee play and college sports are banned. Player funds must also be held differently from operating funds. Finally, each law clearly states that fantasy sports are legal and are not gambling. There is no systemic element of chance nor outcome determinative in fantasy sports. Fantasy sports are offered by Disney through ESPN, by CBSsportsline, NFL, MLB, DraftKings and FanDuel.
In response to a question from Representative Miller, Mr. Ward said each state regulates differently. Most states have a licensure or registration fee. Few states have an additional tax on the adjusted gross revenue of the companies that pay into the state.
Representative Simpson said regulation is a concern since collection of taxes and registration fees could cause a burden to the small fantasy leagues have existed for years.
Representative Koenig said that the bill states there is a threshold of 100 players to be regulated. Therefore the small teams that have been playing for years will not be included in the current legislation. Mr. Ward said that the bill is designed to define fantasy sports and is intended to regulate commercial operators.
Representative Koenig said that the next meeting will be at Buffalo Trace Distillery on September 8th and 10:00 AM.
There being no further business to come before the committee the meeting was adjourned at 11:26 AM.