Call to Order and Roll Call
The 5th meeting of the Interim Joint Committee on Licensing, Occupations, and Administrative Regulations was held on Friday, October 13, 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, Julian M. Carroll, Denise Harper Angel, Jimmy Higdon, Paul Hornback, Ray S. Jones II, Christian McDaniel, Dan "Malano" Seum, and Damon Thayer; Representatives Al Gentry, Dennis Keene, Chad McCoy, Jerry T. Miller, C. Wesley Morgan, Kimberly Poore Moser, David Osborne, Ruth Ann Palumbo, Phillip Pratt, Arnold Simpson, Diane St. Onge, Walker Thomas, and Susan Westrom.
Guests: Representative Jason Nemes; Adam Watson, President, Daniel “DH” Harrison, Vice President, Kentucky Guild of Brewers; Jennifer Doering, General Manager, Chas Seligman Distributing; Donald Cole, Director, Kentucky League on Alcohol and Gambling Problems; Karen Lentz, Kentucky Association of Beverage Retailers; Jason Baird, Kentucky Malt Beverage Council; Dan Meyer, Wine and Spirits Wholesalers of Kentucky; Drew Chambers, CPA, Mountjoy Chilton Medley (MCM); Christy Trout, Commissioner, Trina Summers, Distilled Spirits Administrator, Carol Beth Martin, Malt Beverage Administrator, Department of Alcoholic Beverage Control.
LRC Staff: Tom Hewlett, Bryce Amburgey, Jasmine Williams, Melissa McQueen, and Susan Cunningham.
Minutes
The minutes from the September 8, 2017 meeting were approved without objection.
Senator Schickel asked for a moment of silence to commemorate Senator Dick Roeding who recently passed away. Several other Senator also commented on Senator Roeding and his exemplary service to the Commonwealth.
Kentucky Guild of Brewers 2018 Legislative Agenda
Adam Watson, President, Kentucky Guild of Brewers, Co-Founder of Against the Grain in Louisville, said that Kentucky Craft Brewers are growing faster than ever. However, Kentucky is still behind neighboring states. The brewers association’s definition of “small” is six million barrels, or the federal tax and trade bureau line of two million. The Kentucky definition is 50,000 barrels. Two new breweries have opened recently. One of them, Third Turn in Oldham County, is already expanding to accommodate larger than expected traffic. Mile Wide, in Louisville, won a medal at this year’s Great American Beer Festival and has invested in a new canning line that allows them to add new products. This year the guild is partnering with the Kentucky Department of Agriculture, uniting craft brewers with Kentucky Proud farmers to create three unique flavors.
The Kentucky Guild of Brewers supports open competition and market access. They believe in responsible consumption and using their success to support their local communities and growing number of Kentucky employees. Neighboring states have higher production limits, modernized tax codes, growth incentive programs, greater contractual freedom, and fewer restrictions to market access. It is the guild’s belief that there is discrimination between small farm wineries and the craft brewers. The brewers do not self-distribute. Craft beer goes through the three-tier system. They are allowed to self-sell directly to customers who visit their facilities. They would like to remove the limit of 288 ounces per day that a taproom can sell. This creates an unnecessary barrier to commerce. If a customer walks into the Country Boy taproom to purchase a case of Cougar Bait, they are not allowed to buy a glass of the newest IPA while there. At Against The Grain’s taproom, because the cans are 16 ounces, cans have to be removed from a case before they can be sold.
Kentucky breweries pay federal and state excise tax, state wholesale tax, and state and local taxes. The guild is asking the legislature to make a change so that the breweries can send their wholesale tax payments directly to the Department of Revenue (DOR). Wholesale taxes are paid to distributors, who keep one percent and then forward the forms and payments to DOR. New brewers are required to sign a contract with a distributor, even though they are not distributing, so that they can pay their taxes. Essentially, distributors are acting as tax collectors while the state is giving up one percent of its beer wholesale tax revenue. All other taxes are submitted by the brewers directly to DOR.
Senator Schickel commented that the way the industry has transformed the urban core is amazing.
Senator Harper-Angel commented that she would like to see craft beer in Kentucky State Parks.
In response to a question from Representative Morgan, Mr. Watson said the brewers fill out tax forms and write checks to their distributor for the wholesale tax. The distributor keeps one percent of that money and forwards the rest on to the DOR.
Senator Higdon asked for clarification regarding a distributor collecting one percent, which seems high to collect a tax.
Direct Shipment of Alcohol – A Response to the Previous Proposal
Jennifer Doering, owner of Chas Seligman Distributing, told members that she and her family employ 100 people, and operate in 14 counties with 1200 accounts and 1400 different Stock Keeping Units (SKUs). While the system for the distribution and sale of alcoholic beverages is complex it provides a system of checks and balances. It fosters the growth of Kentucky’s robust alcoholic beverage industry, including the craft beer and wine business. Distributors help all brands into the market place, facilitating visibility and marketing. Distributors also collect almost $150 million in taxes from alcohol sales each year. Their combined operations provide million in economic benefits to communities throughout the state purchasing and maintaining facilities, trucks, and other equipment.
Distributors ensure products on the shelves are safe and fresh. Should there be a product recall they can remove any product quickly. Distributors understand that the market place is evolving and are adapting to meet consumer demand. They support the desire of consumers to receive products in the manner of their choosing, whether that is through a licensed retailer or a verified delivery method, as long as it complies with the existing system of checks and balances.
Distributors feel that direct shipment is not a responsible approach. Changing to direct shipment will turn the entire state wet, make alcoholic beverages more easily accessible to minors, and cede Kentucky’s authority to control the sale and distribution of alcoholic beverages within the state. Common carriers will be put in charge of distributing alcohol at any time of any day of the week.
Allowing direct shipment of alcohol, most of which will occur from out-of-state businesses, creates a loophole in the current tax scheme as it relates to alcoholic beverages. Currently, Kentucky has the fifth highest tax on alcohol products, and most of the taxes collected and paid are through a distributor. Direct shipment by-passes the distributor level, making it difficult for the DOR to collect taxes. Distributors feel that the costs of the proposal to the industry outweigh its unproven benefits. They want the system of checks and balances preserved. This ensures that consumers have access to products they want, and producers compete on a level playing field. Additionally, it ensures the timely collection of taxes and protects our communities.
Drew Chambers, CPA Partner with Mountjoy Chilton Medley, said the Kentucky Beer Wholesalers Association had hired the firm to assist in describing the current tax structure for alcohol sales in Kentucky. The current system provides critical checks and balances that protect the industry and the safety of the consumers. They extend to the tax collection process, allowing for an efficient and reliable system to collect a significant amount of annual tax revenue for the state.
Currently, wholesalers and distributors remit both a wholesale sales tax based on sales dollars, and a wholesale excise tax based on product volume sold. The wholesale sales tax ranges from 10.25 percent for beer and wine to 11 percent for distilled spirits. This tax does not include the retail level sales tax collected by retailers, or local taxes imposed in some areas. The excise tax is based on volume, generally measured in gallons, and the rate varies based on the type of beverage. Administratively, the wholesale sales tax and excise tax are reported on a single tax form that is filed monthly. Separate forms do exist for the wholesalers or distributors of beer, wine and distilled spirits. The forms provide information related to the product received during the month, as well as the beginning and ending inventory levels. This data is used to compute the volume subject to the excise tax and the gross receipts from sales in order to compute the wholesale level sales tax. A separate form is used for wholesalers to report the individual product shipments received from breweries or distilleries. In addition to the forms completed by the wholesalers, producers and transporters also report sales in Kentucky. Brewers provide a monthly report of sales by specified distributor and date. This is a form of corroboration of the information filed by the wholesalers. This enhances the state’s ability to monitor and audit the forms and collections. Kentucky’s collection from beer wholesalers consistently exceeds $60 million. The industry as a whole exceeded $147 million in tax collection in 2017.
Information from the Federal Bureau of Labor Statistics confirms that Kentucky wholesalers employ thousands of people. In the first quarter of 2017, the census data reported malt beverage wholesalers employed 1,302 people as of March. Annualizing this data suggests payroll in excess of $70 million. This data relates to direct employment only. As pointed out, these small businesses contribute millions to Kentucky’s economy through employment opportunities and the operation of facilities within the state. It is clear that the current system provides assurances that tax amounts are properly reported and collected, it is administratively efficient and beneficial to the DOR, and provides thousands of jobs in Kentucky.
Karen Lentz, Executive Director and Legislative Agent for the Kentucky Association of Beverage Retailers, representing both large and small package stores across the state said feedback from members has been broad. The biggest issues are the level playing field and tax collection. As more communities go wet there is an implementation of license fees, or a gross receipts tax. Some communities collect a tax in addition to the wholesale and sales tax. Courts have already ruled that doing business in a state does not create nexus so if a Kentucky resident purchased alcohol online from another state and had it shipped, there would be no sales tax collected. The state allows distributors to withhold a portion of the sales tax collected. There is a maximum of $50 allowed to be collected per reporting period. However, out-of-state companies who voluntarily elect to submit taxes are classified as model sellers and are allowed to keep as much as 8 percent of what they ship into the state. Another concern is what other states are doing. According to FedEx only 14 states allow direct shipping into the state. Many states require a license specific to that states. There is also a concern regarding Kentucky shipping out and similar businesses shipping into the state. An NCSL study was very limited showing which states allow direct shipment.
Jason Baird, Executive Director, Kentucky Malt Beverage Council, said all members of the council also have liquor and wine wholesalers license. These small business owners have seen brands, brewers, and retailers come and go; however, many small family businesses like Seligman have been in the distribution business since the end of prohibition. Members are concerned about public safety and take that responsibility seriously. A mandate to collect wholesale, excise and retail taxes does not provide a nexus of the sale for out-of-state shipments and Kentucky is at a competitive disadvantage because of current high alcohol taxes. Members are also concerned about loss of jobs.
Donald Cole, Executive Director, Kentucky League on Alcohol and Gambling Problems said Kentucky still has many dry areas. There are places where package sales are not allowed even though there are sales by the drink in restaurants. There are wet counties that have dry precincts. How will a carrier know they are delivering to a wet area? Will the carrier be required to have a license? Is the driver required to be insured? Will the company making a delivery be required to confirm that the person receiving the delivery is over twenty-one? Will the delivery be to a retailer or to a residence? FedEx or other carriers leave a package with no signature that the package was received. This could allow a minor to order wine, watch for the delivery at a neighbor’s house who is not home, and go pick it up. Cheap products encourage more drinkers. Cities are looking for more revenue, and direct shipment of alcohol will siphon more money out of Kentucky’s economy. Kentucky wineries are required to follow certain laws to regulate the wine industry. Opening up sales will pit breweries against wineries. All alcohol entities should operate by the same laws to level the playing field.
Dan Meyer, Executive Director and General Counsel, Wine and Spirits Wholesalers of Kentucky, said the current system provides safeguards for consumers. There have been problems with counterfeit products in other countries. Tainted products poisoned vacationers in a resort in Mexico. Tainted products are common in Europe as well. The United States does not have that problem. Alcohol is highly regulated for a good reason. The current market provides the consumer with broad choices. Responsibility, accountability, and public safety concerns should outweigh consumer convenience.
Representative Morgan opined that the real argument is competition. However, he stated he does not support direct shipments into Kentucky. The real solution is to allow competitive distributors so that any licensed wholesaler can sell any brand they would like to sell. Another problem is that 65 percent of sales are by credit cards, which charge a percentage for card use.
Representative Keene told the committee that in considering this change care should be taken so as to avoid unintended consequences. The number one responsibility the legislature has is public protection.
In response to a question from Senator McDaniel, Mr. Meyer stated that there is no cap on collection of the wholesale tax. The DOR agreed that the wholesales could keep 1 percent of the total amount of the wholesale tax collected. Karen Lentz added that she was referring to KRS 139.570 relating to retailers. There is a structure that is capped at $50, for sales tax, per month. Senator McDaniel warned that during the upcoming session, groups who come with misleading or inaccurate information will be cut out of any tax reform meetings.
In response to a question from Representative St. Onge, Ms. Doering said regarding wholesaler loss of revenue, there is not a study because there is no range or limit on direct shipment in the proposed bill. There is a major difference between getting a case of wine shipped to a home verses a brewer directly shipping to a large box store that demands direct shipping. She further stated that if there is a product that someone wants, a distributor can get that product. Adam Watson responded that the Guild is in support of direct ship.
Representative McCoy said that every day there are tourist visiting his county, in fact one group from Australia comes every year for the Bourbon Festival, and there is an obstacle for them to ship bourbon back home.
In response to a question from Representative Moffett, Karen Lentz said the national association said that they are having a hard time keeping track of direct shipping laws because every state is different, some requiring in person, some requiring limits on the amount that can be direct shipped. Some states only allow direct ship from a winery and some states allow direct ship from a retailer. Representative Moffett said an NCSL report states that in the last couple of years direct shipment has expanded.
Representative Moffett also stated that he did not believe that there was tainted alcohol being direct shipped from state to state by licensed vineyards or brewers. Mr. Meyer said the direct shipment is unregulated. Ms. Doering added that MSNBC had recently reported a 13 year old had recently answered the door on five different occasions. On three of the occasions she was not given the alcohol. However, on two occasions she was allowed to receive the alcohol, no ID required. Representative Moffett said that most verification procedures he is aware of work. He added the subject is complex and he is looking forward to working with all parties to work out a solution.
In response to a question from Representative Miller, Ms. Doering said that the down side of direct ship to a Sam’s Club is that independent players in the market will suffer due to the buying power of a large retailer.
Senator Thayer cautioned the industry for talking against each other. There is a relationship between tourism and the alcohol business. A reasonable way to move forward on direct shipping is to allow an individual visiting tourist sites such as a brewery, small farm winery, or a distillery to purchase, under the limits established by the General Assembly, alcohol that they can ship to their home. This will show immediate results for our tourism business.
In response to a question from Representative Koenig, Ms. Doering said that of her 14,000 SKUs 12,000 are alcohol.
Administrative Regulation Process Revision
Representative Nemes said that his bill is known in other states as the “Right to Earn a Living” bill. It takes a close look at occupational licensing regulations. Occupational licensing requirements raise the price of goods and services, restrict employment opportunities, and make it more difficult for workers to take their skills across state lines. Often policy makers do not carefully weigh the cost and benefits when making decisions to regulate a profession through licensing. Licensing, when overdone, impacts lower wage workers, minorities and veterans in a significant way in our state. In a survey, veterans said it was hard for them to translate their military service into sufficient requirements to become licensed in Kentucky. This is a problem the General Assembly needs to address. Kentucky licenses more of its workforce that any surrounding states, with more onerous obligations. SB 120 took steps to reduce licensing requirements.
This bill seeks to preserve the protection for consumers to make sure that legitimate professions are licensed and providing quality workers. There will be periodic review to recognize unnecessary licensing regulations. There will be a requirement for licensing boards to report to the Legislative Research Commission every five years. This report will explain the licensing process for that profession and document reason for change or repeal. Also, during those five years, citizens will have access to challenge particular licensing provisions. The gives the professional the opportunity to go directly to the board rather than to court. This eliminates legal fees for the state.
Representative Westrom stated that she had just received a call from a constituent who had been an EMT in the military. However, his license from the military is not recognized in the state of Kentucky.
Representative Nemes said that military spouses are also included in his bill.
Senator Bowen said that he had been in a profession where there was licensing as well as certification. He stated that in some cases certification can take the place of burdensome licensing process. For instance, ASC has certification for mechanics that is just as stringent as a licensing test or program.
In response to a question from Senator Seum, Representative Nemes said SB 120 removed the automatic removal requirement for convicted felons. However, the presumption is that yes, you will lose your professional license if convicted of a felony.
Representative Koenig said that Kentucky has been selected to be one of 11 states to participate in a study with NCSL to streamline licensing and certification regulations.
Alcoholic Beverage Control update on implementation of HB 183 from 2017 Regular Session
Trina Summers, Distilled Spirits Administrator, said HB 183 looked at the statutory requirements for all licenses. The bill removed language that was not statutorily necessary. Applications were shortened. Instructions for applying for a licenses were standardized and have been put online. Other revisions were for making language consistent on forms for private party requests, minors on premises, payment forms, and dormancy forms. These are required for licensees in their business. Also, in the interest of “red tape reduction” they eliminated unnecessary forms.
Carol Beth Martin, Malt Beverage Administrator, said administrative regulations were submitted to reflect changes from HB 183. The state ABC was granted the same discretion as local governments in terms of setting Sunday sales hours for extended hours supplemental licenses. License renewal administrative regulations were updated to reflect the change in the reduced fee for the class B rectifiers license and, applications were updated and incorporated by reference.
The signs on vehicles regulation dictates what information should be displayed on trucks. The new regulation allows for larger numbers in the license number displayed on the side of their transport vehicles. The appointment notification of local administrators was changed because it is no longer required for administrators to take out a bond. Finally, the equipment and supplies regulation has just been filed. This was necessary because HB 183 took out the language allowing producers and distributors to give away refrigerated coolers.
Christy Trout, Commissioner, Department of Alcohol Beverage Control, said ABC has held workshops across the state. They have worked with KACo in talking about alcohol related issues. The ABC also participated in the Kentucky League of Cities bi-annual summit. They are working on incorporating the ABC website into the local administrator’s websites.
The change in HB 183 to allow retail drink licenses in a city of any size has changed the quota number for sale in each community. The department is working on a data base to provide information on the quota and prohibitions by community. They have assisted communities who do not want to have sales by the drink with ordinances.
Steve Humphress and his team are working on a Frequently Asked Questions database. These will be available on the ABC website.
In response to a question from Representative Miller, Ms. Trout said she was not aware of the origin of the education fund for malt beverages. She said will find the information and provide it to him at a later date.
In response to a question from Representative Morgan, Ms. Trout said that due to pending action of the board she could not comment regarding the sale or transfer of a license that must be held for three years.
Senator Thayer said there was an important announcement at the Country Boy taproom at 1:30 PM, regarding the collaboration of the Department of Agriculture and the Kentucky Guild of Brewers.
Representative Koenig reminded the members that the next meeting was November 17, which is not the usual meeting day.
There being no further business to come before the committee, the meeting was adjourned at 11:45 AM.