By: Donald Snyder, President, Donald@TimeAndTasks.com
June/July 2017 Issue – Beverage Master Magazine
With the passing of the 21st amendment, the prohibition of alcohol in the United States was officially repealed. Each state was given the power to regulate and control the distribution of alcohol within their borders. Today, every state handles the sales of alcohol a little differently, including setting limitations on what craft distilleries can do in their gift shops and tasting rooms. Some states are more “craft friendly” than others by allowing sampling, cocktail and bottle sales, direct distribution, paid tours, and other profitable options. However, every state imposes some restrictions. When the state imposes restrictions, how can distillers work within the laws to increase their bottom line?
Florida
Recently the state of Florida passed a bill to increase the number of bottles craft distilleries can sell out of their tasting rooms; from two bottles per person, per brand, per year to six. Other restrictions in Florida include no drinks or cocktail sales by the glass, no direct sales to bars or retailers, and all products must be distilled on site. How does a new craft distillery in Florida get consumers to experience their brand? St. Augustine Distillery has developed a unique business model to work within the state laws.
Philip McDaniel, CEO of St. Augustine Distillery has focused on foot traffic.
“We’ve located in a high-traffic destination which allows us to get a high volume of visitors,” he said.
Because the law limits sales per brand, Florida craft distilleries are also focusing on new product innovation. If a Florida distillery has 10 different brands, they can now sell up to 60 bottles per person per year.
New York
In contrast, New York offers far fewer restrictions on craft distilleries with their Farm Distillery license. As long as 75% of the spirits come from New York produce and grains, craft distilleries can do on-site tastings, serve cocktails, and sell bottles of their spirits in their tasting room.
Jason Barrett, President and Head Distiller of Black Button Distillery in Rochester, New York enjoys the flexibility the state offers.
“We can only make cocktails with New York labeled spirits but overall, we are very lucky,” Barrett said.
Black Button Distillery has built a bar in their tasting room to take full advantage of cocktail sales and is one of the most popular happy-hour spots in Rochester.
Texas
Texas has some very interesting restrictions that limit bottle sales from the distillery gift shop to two bottles per person every 30 days. The time limit doesn’t reset every calendar month so every consumer has a different 30-day rolling window. Craft distilleries are responsible for maintaining a database of every consumers’ purchase to stay in full compliance with the law.
Texas recently passed a law allowing cocktail sales in the distillery, which has been a big benefit for distillers like Robert Likarish, founder of Ironroot Republic Distillery in Denison, Texas.
“The cocktail lounge was integral to our survival the first couple of years. We relied on it heavily while we built our distribution network and waited for our whiskey to age. It is still an important way for us to connect with our community and visitors to the distillery,” said Likarish.
Ironroot Republic Distillery was recently awarded “Best Corn Whiskey in the World” at the San Francisco International Spirits Competition, which has helped draw new customers into the tasting room.
South Carolina
South Carolina allows for sampling and bottle sales from a craft distillery with very specific restrictions. Distilleries can provide undiluted, unmixed samples in the amount of 1.5 ounces per person, per day in their tasting rooms. Samples can be free or the distillery may charge for them, which can be a decent revenue generator in an area with heavy foot traffic. Customers can purchase up to three 750 ml bottles per day at distilleries but the products must have a higher price point than the surrounding market. Distilleries cannot serve food or make cocktails, and their business hours must mirror those of retail liquor stores by closing at 7 pm.
David Raad, owner and distiller at Six & Twenty Distillery in Piedmont, South Carolina is generally positive about the state laws.
“South Carolina is a fairly forward-leaning state when it comes to distillery tastings, sales, and customer engagement,” said Raad.
As an additional source of revenue, Six & Twenty offers classes for aspiring distillers to learn the art, science, and challenges of running a distillery before they start their own.
California
Until recently, California was one of the most restrictive states in the country – forbidding all bottle sales out of craft distillery gift shops. Recent legislation has softened the restrictions considerably making it much easier for distillers to get their product into consumers’ hands. Distilleries can now sell up to 2.25 liters (three 750ml bottles) per person, per day and charge for tours. Self-distribution is prohibited, but craft distillers can open an offsite tasting room as long as it is also a restaurant. There is a cap of 100,000 gallons a year (brandy excluded) and 65% of their spirits must come off of their own still.
Jim Harrelson, Owner of Do Good Distillery in Modesto, California, and President of the California Distiller’s Guild, has helped shape recent legislation regarding bottle sales and off-site tasting locations.
“The old method would require the distiller to sell their product to a wholesaler and buy it back. I know several people who were required to do this and their product travels hundreds of miles on a truck to make a five foot journey,” said Harrelson.
West Virginia
West Virginia allows bottle sales to customers from a craft distillery’s gift shop with an interesting catch. Distillers must pay a percentage of their gift shop sales directly to a local liquor store called a Market Zone Tax.
John Little, CEO of Smooth Ambler in Maxwelton, West Virginia explained how recent changes to the Market Zone Tax have improved his bottom line.
“We used to pay a 28% markup to the state and 10% of all retail sales went to the local retailers via a tax called a market zone tax. Now, we only pay 5% markup to the state for items sold in the gift shop and only 2% for the market zone tax. It’s changed our retail business.”
Distilleries in West Virginia cannot charge for samples or sell cocktails. But, distilleries can rent the facility and serve samples as long as they abide by the three ounces per person rule. This allows distilleries to have private parties which can be a nice source of revenue. Micro-distilleries have a discounted state license fee but have lots of regulations related to the percentage of grain from West Virginia and have a limit on production.
Little is happy with his choice to pay for the full distillery permit.
“While we’d meet the percentage of grain out of West Virginia, currently about 90% of our grain is from West Virginia, we didn’t want to have a cap on production. So, we have a full distillery permit. The West Virginia ABC treats us very well and is eager to help however they can, legally,” Little said.
Tennessee
One of the states with the loosest restrictions on liquor sales in distillery tasting rooms is Tennessee. The current limit per person per visit is 25 – 750ml bottles. This limit is hardly ever reached by most individuals, but, if a consumer does their daily limit and want more, they can always come back the next day. The catch for the distiller, however, is that the bottles must first be sold by the distillery to a distributor and then bought back. This takes a small bite out of the distiller’s margin, but it is a relatively small price to pay for almost unlimited bottle sales at full retail price.
Sampling is also permitted in Tennessee, and many distilleries take advantage. Consumers who visit the Ole Smoky Moonshine Distillery in Gatlinburg, Tennessee can sample 0.25 oz of up to thirteen different spirits.
Tennessee recently passed legislation to permit cocktail sales, a law which took effect in July 2016. Andy Nelson, owner of Nelson’s Greenbrier Distillery in Nashville, Tennessee is happy with the change.
“The State of Tennessee just passed a law allowing distilleries to sell cocktails out of their tasting rooms and that is very exciting for us. Any alcohol contained in the cocktails must be produced on the distillery premises so it can be a bit limiting but great progress nonetheless. We are right in the middle of trying to figure out a cocktail program for the distillery. We know that we may only get one chance at a first impression so we want to be sure we do it right from the beginning,” said Nelson.
Ohio
One of the most notoriously restrictive states for distilleries is Ohio. Bottles can be sold from a distiller’s gift shop but there is a significant catch.
James Bagford, Distiller at Flat Rock Spirits Distillery in Dayton, Ohio, described the process.
“When a state agency store sells a bottle, they receive six percent of the retail price. When distilleries sell a bottle, the state gets to keep that six percent. So, we actually lose money when selling a bottle from the tasting room after we pay for credit card processing fees, bags, etc. The main advantage of having the tasting room is being able to connect with customers, tell them about making our product, and provide a sample before they commit to purchasing a whole bottle.”
In November of 2016, Ohio passed legislation to allow distilleries to obtain an A1A permit, previously only available to breweries and wineries. The permit allows distilleries that produce under 100,000 gallons per year to sell their spirits, spirits produced by others, beer, and wine for on-premise consumption, as long as they have a kitchen and the ability to serve food during normal business hours.
Montana
Montana is a growing craft spirits market spurred by craft-friendly laws. Distilleries can sell and serve two ounces of distilled spirit samples per person per day, which can be in the form of cocktails. They can sell up to 1.75 liters per person per day for offsite consumption, and self-distribute to state liquor stores. In addition, Montana distilleries can provide free or paid tours.
Distilleries are not responsible for paying the state mandated 20% markup on products moved through the tasting room. The only real restrictions placed on distillers are that of the spirits sold in the tasting room, 90% must have been produced in-state and can only be served between the hours of 10:00 am and 8:00 pm.
Courtney McKee, Founder and Owner of Headframe Spirits in Butte, Montana is very happy she’s located her distillery in the state.
“All in, being a distillery in Montana is fantastic. We’ve had a lot of influence over expanding the privilege of having a tasting room and we don’t think there’s a better state to do business in than Montana.”
Colorado
Hands down, the state with the fewest restrictions on craft distillery tasting rooms is Colorado. Distilleries in dsColorado have every benefit they could ask for including unlimited bottle sales, no limits on sample or cocktail sales, permission to sell directly to retailers and liquor stores (direct distribution), can offer paid or unpaid tours, can have two separate offsite tasting rooms, and now get a “distillery pub” license.
In exchange for these benefits, the state imposes a $2.85 per proof gallon excise tax (roughly $0.48/bottle) which is relatively insignificant when selling bottles and cocktails at full retail price.
Kristian Naslund, owner of Dancing Pines Distillery in Loveland, Colorado enjoys all the benefits of being in Colorado.
“We can sell anything that contains alcohol that we make, in any form – samples, cocktails, etc. We can sell to anyone and self-distribute. Overall, Colorado is a great state to run a distillery.”
When it comes to operating a craft distillery tasting room, every state has their unique advantages and restrictions. No state is perfect, although some states are more craft-friendly then others. Whatever the restrictions are in a state, there are always opportunities to tweak the business model to drive a profit. Whether it is building a visitor-friendly distillery to maximize bottle sales from foot traffic, developing and innovating new brands to work within sales restrictions, building a bar to maximize profit from cocktail sales, designing an inviting tasting room to serve samples, or just focusing on efficiency and cost reductions for a pure distribution model, there is an opportunity to make money in every state. If the state gives lemons, make lemonade flavored vodka and sell as much of it as possible.
