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Kentucky’s Microbreweries, Small Farm Wineries and Craft distilleries Are Growing by Leaps and Bounds, but is the Law Catching Up?

The winds of change may be blowing in favor of small alcohol producers in Kentucky lately, but perhaps those winds could blow just a bit harder. In the midst of the phenomenal growth of the Kentucky Bourbon Trail and "alcohol tourism," the legislative bent of the Commonwealth of Kentucky lately seems poised to also encourage the proliferation of microbreweries, small farm wineries and craft distilleries. New laws and legislative considerations that permit certain retail privileges for small producers are a relatively new wrinkle in the state’s alcoholic beverage control (“ABC”) laws, and may reflect a growing shift in state alcohol policies that reflect and adapt to the growing economic benefit of both craft producers and alcohol-related tourism. At the same time, Kentucky is careful to uphold a strong three-tier system where larger producers are concerned, drawing a line separating economic benefit and tourism versus vertical integration and excessive top-heavy control by large distillers and breweries. Under these recent laws, small wineries and malt beverage producers may engage in modest retail activities that would ordinarily be restricted to them in the interest of furthering a thriving craft economy, but questions remain as to whether these laws go far enough in encouraging the growth of Kentucky’s craft producers, and even those of our iconic Bourbon distilleries, whose own retail privileges remain relatively limited.

Microbreweries, those that produce less than 25,000 barrels of beer in a year, may sell malt beverages produced on the premises by the drink or by the package without the need to physically transfer the products to a distributor. These provisions afford microbreweries limited privileges of entering the retail tier onsite, allowing these small producers to integrate vertically to retail their own products. The Louisville Courier-Journal and Lexington Herald-Leader note that while Kentucky only possessed two microbreweries in 2002, at least 14 have opened doors just since 2011.[1] This mirrors growth nationwide, as the Brewers Association, a trade group representing small and independent American craft brewers, cites 2014 statistics showing that craft brewers now control an 11 percent volume share of the marketplace, along with 22% growth in retail dollar value.[2]  Kentucky pales in comparison to Indiana, however, which has 126 active craft brewery licenses.  Kentucky currently has 26 active microbrewery licenses, and this disparity may be due in part to a difference in laws – Indiana allows for 30,000 barrels per year for microbrewers, a 20 percent increase above Kentucky.

Small farm wineries, however, are eclipsing microbreweries at a prodigious rate, with 88 small farm wineries in Kentucky. The state also provides certain retail package privileges for small farm wineries. For example, small farm wineries in Kentucky may make and bottle wines of their own, bottle wines from other small farm wineries, hold tastings and sell wine by the drink or by the package on the premises or at certain events.[3] They may also hold a restaurant liquor license. Still, small farm wineries would have received a significant boost from legislation that failed to pass the 2015 regular session. Senate Bill 81 would have brought a multitude of changes to Kentucky’s ABC laws, such as several “local option” provisions that would have allowed a local vote for package sales at distilleries and small farm wineries. Small farm wineries would also have been able to sell unmarketable wine products such as pomace to distillers to make brandy. HB 423, which also failed to pass this year, would have allowed small farm wineries to produce brandy directly for purposes of producing fortified wine.

Following the exploding growth in our state's signature Bourbon industry, dozens of small homegrown distilleries have begun cropping up in recent years. That prompted the legislature in 2014 to create a new class of distiller license that makes a distinction between large distillers and craft distillers, with the latter producing less than 50,000 gallons of distilled spirits a year. Craft distilleries are subject to a reduced licensing fee ($1,000 as compared to $3,090), but according to a report made for the Kentucky Distiller’s Association (KDA), this new system is not as generous to microdistilleries as other states laws are with similar distinctions.[4]

Kentucky also has limited provisions for distillers with respect to retail privileges in order to promote economic development and tourism along the Kentucky Bourbon Trail. In 2014 alone, more than 725,000 people visited the Kentucky Bourbon Trail, and most of those visitors came from out of state, according to the KDA.  Distilleries that both have a gift shop and are in wet territory have souvenir package privileges and may sell up to three liters of their distilled spirits per day, per person onsite.[5] The distillery, however, must still give and receive an invoice from a wholesaler for the delivery from the distiller to the distiller’s gift shop. This small step recognizes and preserves the three-tier system for the souvenir package sales, in addition to generating the appropriate tax revenues. Licensed distillers may also acquire a sampling license to allow visitors to sample the distilled products on premises.[6] SB 81, which failed to pass the General Assembly this year, would have expanded sampling privileges at these distilleries, allowing up to three ounces of samples per visitor per day, which would allow visitors to sample the wide variety and ages of distilled spirits being produced today. This legislation underscored the fact that distilleries have not yet been afforded the same privileges as breweries and small farm wineries.

Kentucky’s legislative climate certainly seems to be warming towards craft producers and growing thetourism and economic development through such venues as the Kentucky Bourbon Trail.  But, the failure this year of SB 81 and other craft producer-friendly legislation suggests that the General Assembly remains somewhat reluctant to fully embrace the concept of alcohol tourism, meaning that Kentucky still far lags behind other states in taking full advantage of the craft beverage industry while bolstering the three-tier system with regard to large and out-of-state producers.

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This article does not constitute legal advice.

[1] http://www.courier-journal.com/story/news/local/2014/12/30/kentucky-craft-beer-scene-exploding/21050267/

[2] http://www.craftbrewersconference.com/wp-content/uploads/2015/04/2014-BA-Growth-Release.pdf

[3] KRS 243.157

[4] Barry Kornstein with Jay Luckett, University of Louisville, The Economic and Fiscal Impacts of the Distilling Industry in Kentucky (October 2014)

[5]KRS 243.0305

[6] KRS 244.050

Lexington, KYLouisville, KYFrankfort, KY: MML&K Government SolutionsWashington, D.C.