Lobbying Affiliate: MML&K Government Solutions

The Micro-Distillery License Trend: Should Kentucky Get Onboard?

October 2013

McBrayer Newsletter, October 2013

Authored by Stephen G. Amato

In 2012, Dr. Paul Coomes, Professor of Economics at the University of Louisville, released a report for the Kentucky Distillers Association entitled, The Economic and Fiscal Impacts of the Distilling Industry in Kentucky. The report solidified the fact that Kentucky is still the dominant force behind bourbon production, accounting for 95% of the U.S. total. In recent years, bourbon has experienced a renaissance; take, for instance, the increasingly popular Kentucky Bourbon Trail or The Bourbon Review publication created in 2008 - it seems that people everywhere are thirsty for Kentucky's native spirit. With the recent boom of micro-distilleries (also known as craft distilleries), it is apparent a new crop of distillers, many outside of Kentucky, are eager to quench this thirst.

Micro-distilleries, in contrast to the bourbon-producing behemoths that are so well-known in our state, create only small batches of spirits. The distillers produce whiskey, vodka and other liquors with an emphasis on the ingredients and the process with which the small quantities are made. Micro-distillers appeal to an audience dedicated to locally-made products and fans of small businesses. According to the American Distilling Institute, there were approximately 50 micro-distilleries in 2005; today, there are around 250 in 45 states. The micro-distillery trend is very much like the craft-brewery boom that America experienced in the 1990's.

States across the country are giving this burgeoning industry a boost with legislation that makes it easier for micro-distillers to open up shop. Small-scale producers sometimes struggle to become profitable because of the costs of licensing fees they must obtain before operation. In Kentucky, a distiller is required to pay $3,090 for a license, along with other fees that may be required by local ordinance. While this fee is not as expensive as those in some other states, it still may create a road block for first-time producers looking to make their big break in the industry.

California, Colorado, New York, and Oregon have all become major proponents of the micro-distillery movement. In August, New Jersey became the newest state to legalize micro-distilling. New Jersey's distillery license comes at a price of $12,500 per year; the new micro license, which allows for up to 20,000 gallons of hard liquor to be produced annually, is a much more wallet-friendly $938.

Our state has reduced licensing fees for smaller operations before. For example, a brewer's license costs $2,580 annually; a micro-brewery license (for breweries that do not exceed production of 25,000 barrels of malt beverage per year) can be obtained for $520. In addition, a small farm winery license (for wineries that produce 50,000 or less gallons of wine in one calendar year) is only $110.00, compared to $1,030 for a winery license. These reduced licensing fees have, at least in part, helped lower overhead costs for local landmarks like Talon and Equus Run Winery, West Sixth Brewing and Alltech's Lexington Brewing Company.

If the Kentucky legislature does decide to adopt a micro-distillery license in a future session, they may want to also consider making allowance for tasting and sampling rooms and the sale of souvenirs at micro-distilleries. Again, Kentucky's legislature has already made similar concessions for micro-breweries and small farm wineries. Just in 2013, Governor Beshear signed House Bill 315, which permits the sampling of malt beverages on premises at a brewery, provided that the brewery is located in a wet locality and the sample does not exceed 16 ounces per patron. With the passage, Kentucky brewers like Alltech's Lexington Brewing Company in downtown Lexington can offer tasting tours that includes samples of its popular Kentucky Bourbon Barrel Ale, and its other brews. Provisions like this allow producers to get their products to customers and increase brand awareness.

According to Dr. Coomes' 2012 report, distilling contributes nearly $2 billion in gross state product each year, and has more than doubled its importance to the state's overall economic activity in the last 13 years. In the last decade, distilling created 4 percent new job growth while the rest of Kentucky's broader manufacturing base was shrinking. Kentucky is known as the home of bourbon giants like Jim Beam and Woodford Reserve; it may be time to consider what role the little guys should play.

Kentucky and bourbon production are synonymous with one another, but as the industry changes to make way for micro-distillers, we should discuss how we want our state to move forward. The competition is increasing and demand is growing. Other states are gaining recognition for churning out fine spirits at micro-distilleries, but everyone knows no one can do it like Kentucky. How we enable our local distillers to do it in the future is a question worth considering.

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