A Check-In with the Idaho Wine Industry
An update from our colleagues Allison Blackman and Nicole Hancock:
The State of Idaho is most infamously know for the potato but the recently reenergized Idaho Wine Commission, vintners, and wineries across the state hope to soon add Idaho Wines to the Gem State's reputation.
Idaho wines regularly net honors in regional and national competitions, and the media are increasingly taking notice. "They want something new to write about, and that's us," says Executive Director of the Idaho Wine Commission, Moya Shatz. The October issue of Sunset magazine sports a feature story headlined: "Discover new wine country: In Idaho's low-key Snake River Valley, the wine is getting seriously good."
Idaho is steadily earning a reputation for growing and producing vinifera wine grape varieties such as syrah and viognier, as well as classic varieties including merlot, cabernet sauvignon, chardonnay and riesling.
Continue Reading...Cowlitz County Superior Court Denies Motion For Preliminary Injunction Against I-1183
Defenders of I-1183 received a holiday gift last week from the Cowlitz County Superior Court. On Thursday, December 22, 2011, the Court issued two important rulings in the declaratory judgment action challenging the constitutionality of I-1183.
First, the Court granted the motion to intervene brought a group of supports of I-1183 led by Costco and the Washington Restaurant Association. In so ruling, the Court observed that those entities’ economic interests were implicated by challenge to I-1183 and that their interests were distinct from those of the State. Those entities now will be able to participate fully in the defense of I-1183.
Second, the Court denied the motion for preliminary injunction to block implementation of I-1183. The Court explained that I-1183 is the law of Washington and that Plaintiffs had not carried their heavy burden for altering that status quo.
Following that ruling and recognizing that the challenge to I-1183 turns largely, if not exclusively, on pure legal arguments, the Court set the following expedited schedule for summary judgment briefing and a trial date if necessary:
- January 20, 2012: Opening Summary Judgment Briefs Due
- February 10, 2012: Responsive Briefs Due
- February 17, 2012: Reply Briefs Due
- March 5, 2012: Summary Judgment Hearing
- April 16, 2012: Trial
In setting this schedule, the Court stated that it welcomed extensive briefing on the issues presented. Thus, there might be an opportunity for the filing of amicus briefs.
We will continue to monitor developments in the case. If you have any questions, please do not hesitate to contact us.
I-1183 Faces Legal Challenges
Despite Washington voters’ approval of I-1183 in the November 2011 election, the effort to privatize the wholesale distribution and retail sale of liquor in Washington faces another hurdle. Last week, two lawsuits were filed in Washington courts challenging the validity of I-1183. The plaintiffs in both cases contend that the newly enacted law violates the single-subject rule for legislative bills and ballot initiatives under the Washington Constitution. Article II, § 19 of the Washington Constitution, which applies to both legislative bills and ballot initiatives, provides that “[n]o bill shall embrace more than one subject, and that shall be expressed in the title.” The plaintiffs allege a violation of that constitutional provision because the terms of I-1183, in addition to paving the way for private retailers to sell liquor, affect fines for selling alcohol to minors, taxes, and the wine distribution and pricing scheme.
Some past single-subject challenges to ballot initiatives have been successful. For instance, in 2000 a group of plaintiffs succeeded in repealing an initiative that addressed both the fees for car license tabs and required voter approval for all future state and local tax increases. But I-1183 differs from that initiative because it did not join together two completely separate subjects but instead deals entirely with various aspects of state regulation of alcohol distribution and retail sales. Thus, the key issue in the litigation appears to be whether I-1183 conforms to the single-subject rule when the provisions deal with the same general subject.
One of the challenges to I-1183 was filed in King County Superior Court, and the other in Cowlitz County Superior Court. The King County case was brought by two labor unions and is named General Teamsters Local Union No. 174 v. State. The Cowlitz County case was brought by the Washington Association for Substance and Violence Prevention, a property owner who leases a liquor store to the state, and two grocery stores. It is named WASAVP v. State. Both groups of plaintiffs seek declaratory and injunctive relief blocking the implementation of I-1183. The plaintiffs in the WASAVP case have also filed a motion for preliminary injunction, which is scheduled to be heard in Cowlitz County Superior Court on Friday, December 16.
Even though both lawsuits are against the Washington state government, it is very likely that businesses or associations whose interests are affected by I-1183 will have the opportunity to intervene in the litigation. We will continue to monitor the proceedings. If you have any questions, please don’t hesitate to contact us.
TTB Publishes Notice of Rulemaking for Inwood Valley AVA
On December 5, 2011, the TTB published a Notice of Proposed Rulemaking (Notice No. 125) regarding the establishment of the Inwood Valley Viticultural Area in Shasta, California. If established, the new AVA would consist of a 28,000 acre area, the vast majority of which is currently not dedicated to, or known for, vineyards. The TTB invites comments on the proposed rulemaking, with any comments due on or before February 3, 2012. A full version of the Notice and the documents relating to the underlying Petition can be found here.
Utah to Consider Privatization Models
The recent move by Washington voters to end state control of liquor sales, combined with ongoing corruption scandals within the Utah Department of Alcoholic Beverage Control, is causing Utah lawmakers to renew privatization discussions. Support appears to be growing to limit the state’s involvement in liquor sales at least to some degree.
Utah is among the minority of states that control wholesale and retail liquor sales. Several Utah state legislators have expressed an interest in privatizing the retail business. Some have also expressed interest in privatizing wholesale sales. Governor Herbert has expressed interest in retail change but appears reluctant to remove control of the wholesale system. Wholesale privatization appears less likely than retail privatization, because of a perception that state control over distribution and pricing results in fewer alcohol-related problems.
Utah currently allows some private retail alcohol sales through “package agencies.” Package agencies are located in resorts and rural areas and offer a modest selection of products. Similar to liquor licenses, package agency contracts are granted based on population with one package agency allowed per 18,000 people. Expanding the package agency system, for instance to allow grocery stores to operate liquor outlets, could act as a bridge to full privatization.
Any privatization reforms will have to clear several hurdles, including compensating for the substantial profit the state realizes from liquor sales.
TTB Rules to Expand Sonoma AVAs
On Wednesday November 16, the TTB published a ruling (T.D. TTB-97, available here) amending the federal definition of the Russian River Valley viticultural area and the Northern Sonoma viticultural area, by expanding each. The action first began in August of 2008 when Gallo Family Vineyards submitted a petition for the amendment. After receiving numerous comments both for and against, the TTB ruled to expand the Russian River Valley viticultural area south and southeast by 14,044 acres to 169,029 acres, an increase of 9%. This expansion will include land just west of Rohnert Park and Cotati.
The decision will also expand the Northern Sonoma viticultural area to include the entirety of the Russian River Valley viticultural area. The expansion will add 44,244 acres to the Northern Sonoma area, bringing its total to 394,088 acres, also an increase of 9%.
The TTB specifically noted in the ruling that the expansion will not affect currently approved wine labels but will allow winemakers in the expanded area to utilize the two viticultural designations not previously available to them.
The ruling goes into effect on December 16, 2011.
Liquor Sales to be Privatized in Washington State
Initiative Measure No. 1183 is passing by a 20% margin according to Washington Secretary of State’s 2011 General Election Results website. The same source indicates that, as of this morning, a majority of voters in only four of Washington State’s counties in the state were not definitively in favor of the measure.
A Press Release by the Washington State Liquor Control Board indicates that the agency “will continue to maximize revenue in responsible ways through the holiday season” and, in January, will focus on divesting its self of the state’s current wholesale distribution and retail operations. “By June 1, 2012, all liquor business operations - including purchasing, distribution and retail -- will be transitioned to the private sector.”
There are many unknowns that we expect to be addressed by agency rulemaking in the coming months of transition and we will be working closely with our current and future clients to help them understand how the changes affect their current business interests and strategic plans.
State Law Restrictions on Direct Sales to Consumers Are Ripe for Challenge
In the 2005 case Granholm v. Held, the U.S. Supreme Court struck down Michigan and New York laws that effectively prevented out-of-state wineries from shipping directly to in-state consumers but that allowed in-state wineries to conclude in-state direct sales. The Court held that these laws violated the U.S. Constitution’s Commerce Clause. Since then, lower federal courts around the country have had the tools to strike down similar state laws that facially discriminate against out-of-state producers without a permissible justification. For example, federal courts have struck down or enjoined facially discriminatory statutes—or selected provisions of such laws—in states such as Indiana, Kentucky, Massachusetts, New Jersey, Pennsylvania, Tennessee, and Texas.
But these rulings do not apply consistently across the country. For example, although the Sixth Circuit held unconstitutional Kentucky’s law requiring direct sales to be made only pursuant to in-person purchases, Indiana’s law requiring similar in-person sales remains on the books. And a number of other states retain laws restricting direct sales that appear legally dubious in the wake of Granholm and its progeny. But Granholm also has spurred Congressional attempts to restrict its reach. In 2010 and 2011, legislators introduced the Community Alcohol Regulatory Effectiveness (“CARE”) Act in the U.S. House of Representatives. In its latest iteration the bill aims to eliminate the federal statutory requirement that imported alcohol be subject to state laws “to the same extent and in the same manner” as alcohol produced in-state. The original version of the CARE Act did not survive the life of the last Congress, and it is unclear if the current version will find any more support in the present one. But notwithstanding this threat to direct shipping by out-of-state producers, overly restrictive state laws favoring in-state direct sellers remain ripe targets for litigation seeking to enforce Granholm and its reading of the Commerce Clause.
UC Davis Holds Wine Law Conference
I recently attended the UC Davis Wine Law Conference, held at the UC Davis School of Law. The conference's main focus was intellectual property and European imports/exports, as well as the affects of recent changes in the European Union rules regarding wine IP, with a specific focus on Italy. Panelists also discussed the affects of international beverage counterfeiting and how multinational parties can and should reach consensus on trade rules. The discussions were frank, sometimes even contentious, but overall very productive. The conference drew numerous high-level attendees, including members of the legal community, industry stakeholders, and regulatory agencies from both the United States and abroad.
IRS Publishes New Audit Technique Guide for Wineries and Vineyards
The IRS recently issued a new Audit Technique Guide (“ATG”, available here) applicable to winery and vineyard operations. As with previous IRS guidance, the new ATG is meant to be used by IRS examiners; however the IRS anticipates the industry will rely upon the publication as a guide. It should be noted, the ATG should not be cited as the IRS's technical position.
Many of the issues in the new publication have been previously covered in prior IRS guidance. In this ATG, however, the IRS appears to streamline many of its positions. For example, the UNICAP rules, to which wineries are subject, have evolved since the 1995 guidance. While previously cited as only temporary, these rules have since been finalized, and additional UNICAP rules have been added.
While the streamlining in the new guidance is mainly procedural, the ATG does reflect some significant developments. One such change is the IRS's acknowledgement that vineyards may qualify for Section 179 deductions. Currently, Section 179 allows a $500,000 deduction to taxpayers who place over $2 million of property in service by the end of 2011. For 2012, Section 179 reduces those numbers to a $125,000 deduction for placing over $500,000 of property in service during that year. The deduction will be further reduced to $25,000 for tax years beyond 2012. The ATG states that, based on changes to the definition of property subject to the Section 179 deduction, "[c]ertain practitioners are taking the position that this new definition includes vineyards and are taking [the Section] 179 deduction."
In addition, the ATG addresses and essentially blesses an income deferral method rejected in a 1996 case. The ATG describes the case as involving an accounting structure in which a farmer, using cash method accounting and operating a vineyard as a division of a winery, would sell grapes to the winery without receiving payment until the wine was sold, up to two or three years later. As a result of using cash method accounting, the vineyard would defer income until such time as the wine was sold. The ATG states that in 1997, the IRS published treasury regulations allowing this accounting practice.
To learn more about the issues discussed above as well as other developments addressed in the ATG, please contact:
Carl Lewis at cslewis@stoel.com
Nikki Dobay at nedobay@stoel.com
Jake Storms at jwstorms@stoel.com
This post was created in conjunction with Nikki Dobay.
Court Upholds San Diego County's Winery Ordinance
On April 15th, a California Superior Court Judge denied a challenge to San Diego County’s new Winery Ordinance. The Ordinance, passed in 2010 and available here, eases restrictions on tasting rooms and sales for smaller producers and allows others to essentially “fast-track” registration as a “small winery” with such designation allowing for pre-approved events, such as weddings.
The challengers claimed that the Ordinance’s Environmental Impact Report (“EIR”) under the California Environmental Quality Act (“CEQA”) was inadequate. Judge Timothy Taylor disagreed, stating “[t]he Board of Supervisors was, by the EIR, adequately informed about the consequences of its decisions. The public (including petitioner) was provided with adequate information regarding the decisions of their elected leaders.”
The challengers have 30 days from the issuance of the ruling to appeal.
California State Water Board Moves on Frost Protection Program
The State Water Resources Control Board (“Board”) held a workshop last week on a proposed regulation designed to assess and mitigate water use from the Russian River by growers in Mendocino and Sonoma Counties during frost season. Though no formal action took place, the Board received numerous comments on the proposed regulation.
The regulation would add Section 862 to the California Code of Regulations establishing that any water diversion from the subject area from March 15 to May 15 not in accordance with a Board-approved Water Demand Management Program (“WDMP”) would be deemed unreasonable. This includes the pumping of hydraulically connected groundwater, but excludes diversions upstream of the Warm Springs and Coyote Dams.
In addition, the new regulation would require the WDMP to include:
· An inventory of the frost diversion systems within the area subject to the WDMP
· A stream stage monitoring program
· Annual assessment of potential risks to salmonids from frost diversions
· Identification and implementation of any corrective actions deemed necessary to protect salmonids
· Annual reporting of the WDMP
The workshop was heavily attended by stakeholders from both government and industry and included a presentation of the projected cost of the proposed regulation. The draft economic report, available here, states that the average cost for those diverters in Mendocino County not requiring corrective actions would be $105.86 per acre in initial capital outlay and $28.50 per acre in annual costs; for Sonoma County, those numbers would be $59.98 and $18.74, respectively. For a 40-acre vineyard in Mendocino, this puts the total cost at $4,234 for initial capital outlay and $1,140 in annual costs; for Sonoma County, these numbers would be $2,399 and $749, respectively.
A common theme from the Board and the audience was that several important terms in the proposed regulation had yet to be satisfactorily defined. Chairman Hoppin, himself a farmer, repeatedly stated his hope that both sides would strive for a balance between protecting species and the water needs of farmers.
Several commentators expressed a need for the Board to address the permitting of offstream storage (i.e., storage ponds) as a tool to help address Russian River overdraft. Chairman Hoppin assured the audience that steps needed to be taken in this arena and that it was on the Board’s radar.
Formal rulemaking and the program’s environmental report are expected in mid-May, with final regulations in place by March 2012.
Stoel Rives Attorneys Speak at Wine Conference
This past week, Stoel Rives partners Chris Hermann and John McKinsey and associate Jake Storms all participated as panel speakers at the Best Practices for Owning and Operating a Winery conference, held at the Hyatt Vineyard Creek in Santa Rosa, CA. John also acted as co-host of the conference, which covered a wide variety of topics affecting wineries and vineyards, from siting and permitting and valuation to how to build a brand and protect trademarks.
Chris, Chair of Stoel’s Winery and Vineyard Management group, spoke on custom crush agreements and the pitfalls that can affect those who do not adequately protect themselves. John, California Co-Chair of Stoel’s Winery and Vineyard Management group, educated attendees on energy use and utilizing renewable electricity sources. Jake, an associate in the group, spoke on industry trends and California-specific legislative and project actions, including AB 605 and the California High-speed Rail.
The event was well attended, with over 40 stakeholders present at the two-day event. This marks the fifth year of the event, which was sponsored by Stoel Rives and Kennedy/Jenks Consultants, along with industry mainstay, Wines & Vines.
Napa County Farm Bureau Holds Water Forum
On March 9th, the Napa County Farm Bureau held its first water forum in five or six years in St. Helena, California. Kicked off by Bureau President Jim Lincoln, the event was well attended, with over 100 concerned stakeholders listening to the most recent updates in California water issues.
Phillip Miller, the Deputy Director of Napa County Public Works, discussed a recent study by Napa County designed to compile countywide data, establish a framework for reporting, and provide recommendations related to any future groundwater permitting and monitoring program.
Of most interest was the presentation by Paula Whealen, a principal at the engineering firm of Wagner & Bonsignore. Ms. Whealen gave a general overview of new requirements for surface water users from the California State Water Resources Control Board (“SWRCB”), including:
· All reports of licensees and progress reports by permittees and pre-1914 water right diverters are now due annually by July 1;
· Reports must provide the monthly amount taken from the source;
· They must state the monthly amount beneficially used; and
· They must be filed electronically as of this year.
o Filings will require high-speed internet access
Because all new reports must be filed electronically, the prior “fudge factor” regarding timelines for reporting will no longer exist. The SWRCB will be able to tell on July 2 who hasn’t filed the necessary reports. Failure to file all necessary reports constitutes non-compliance with the underlying water license/permit and can lead to fines and/or other administrative actions. It was also stated that, given the increase in the number of enforcement officers (25) and the establishment of a water rights enforcement office in Santa Rosa, California, there will be a significant increase in site inspections in the North Coast region.
A bit of sage advice given at the Forum is for all vineyard and winery owners operating under a license/permit to take it out, read it, and understand it. If you don’t understand your water rights permit, find someone who does, and most importantly, make sure you are in compliance. In addition, even for those sources that are not required to be reported (i.e., reclaimed water), it behooves vineyards and wineries to keep records of all water that is used on the property.
Sonoma Sets Fees, Program Schedule for Frost Protection Program
The Sonoma County Board of Supervisors has adopted the final measures for moving ahead with the County’s Frost Protection Program (the “Program”). This final act was merely a carry-over from the February 8 meeting where the Board adopted the fee structure for the Program and extended the time frame for implementation of the Program until 2012.
Under the new Section 11B of the County Code, the Program will be used to gather information on vineyard and orchard water usage in the Russian River Watershed. As previously blogged, creation of the program started after complaints were made by the U.S. Fish and Wildlife Service that frost protection measures that use water from the Russian River Watershed were causing the death of certain protected salmonid species. The federal agency threatened to take action under the Endangered Species Act if the County did nothing. The County moved to create the Program ahead of State action, which is expected to occur in the next 12-18 months.
Implementation of the Program was originally planned for the 2011 frost season. However, County staff informed the Board at the February 8 meeting that two hurdles had sprung up that would delay actual implementation until the frost season of 2012. The first was a seemingly 11th-hour move by certain vineyard stakeholders to not back the program due to concerns of the public nature of the information gathered. The second was the negotiations over the issue of indemnification between the County and the non-profit organization created to assist in the implementation and that would oversee the gages in the long-term.
While a delay in implementation to the 2012 frost season was acceptable to the U.S. Fish and Wildlife Service, it was stated that any further delay would require action on the part of the agency. One Board member suggested that, due to the delay, the Board consider scrapping the Program and creating a fully voluntary concept. This idea was not acceptable to the U.S. Fish and Wildlife Service and was quickly discarded.
Vineyards and orchards within the Program’s umbrella must register with the County Agricultural Commission annually between January 1 and March 1. This year’s registration must occur by June 1. The fee set for the Program is $64.00 per site. This fee will be assessed annually with the required registration. The County estimates there are some 360 sites within the Program’s boundaries.
The Program will have to conform to any future State action regarding the Russian River Watershed. However, the Board was confident that the Program would meet with acceptance at the State level.
