Wednesday, January 3, 2018

The Bourbon Secondary Market Is Now Legal in Kentucky, Sort of

On January 1, Kentucky’s new ‘Vintage Spirits Law’ took effect. The new law (actually, revisions to the commonwealth’s existing alcoholic beverage statute) says, “A person holding a license to sell distilled spirits by the drink or by the package at retail may sell vintage distilled spirits purchased from a nonlicensed person upon written notice to the department in accordance with administrative regulations promulgated by the department.”

It further defines ‘vintage distilled spirit’ as “a package or packages of distilled spirits that are in their original manufacturer's unopened container; are not owned by a distillery; and are not otherwise available for purchase from a licensed wholesaler within the Commonwealth.”

As of the January 1 start date, ‘the department’ (i.e., the Kentucky Alcoholic Beverage Control Department [KABC]) had issued no administrative regulations or guidelines. As of now, what you see above is all the guidance there is. Retail license holders who want to take advantage of it will have to interpret the new law for themselves, with advice of counsel, of course.

“We won’t be buying 2016 George T. Stagg and adding it to our vintage list,” says Larry Rice, owner of Louisville’s Silver Dollar. “[We’ll] probably keep it early ‘90s and older, early 90s just cause there was some good glut whiskey still being bottled.”

There almost surely are rules coming. The KABC has held some meetings and is accepting suggestions. If you want to contribute, address your thoughts to Christine Trout, Commissioner, Department of Alcoholic Beverage Control, 1003 Twilight Trail, Frankfort, KY 40601. You can also include your suggestions in the comments below, if you wish, but I’m pretty sure nobody at the KABC reads this blog.

The Presidents' Forum (TPF) is a trade association for distilled spirits producers that focuses on regulatory issues. It has submitted its thoughts in a letter to the KABC. TPF worries “that any product sold outside of the three-tier system carries a risk of being counterfeit/contaminated.” They are also concerned about harmony between the new state law and relevant federal regulations.

Under TPF’s suggested rules, all transactions would have to be in person. Checks only, no cash. Sellers would have to provide ‘a sworn affidavit’ to the retailer-reseller, including their name, address, phone number, and email, as well as a statement of when, where, how and from whom the vintage spirits were acquired. The retailer-reseller would be required to keep a record of the seller's vehicle: make, model and license plate number; as well as legible photographs of the bottles being acquired showing front and back labels, intact capsule closures, etc.

Retailer-resellers would, of course, then provide all this to the KABC along with the date and time of the transaction, a description of the vintage spirit acquired, its quantity and the price paid. Retailer-resellers would have to label all bottles obtained in this way so the consumer knows they came from the secondary market.

TPF suggests ‘vintage’ should be defined as pre-metric bottlings only, which means nothing after 1981. This has the advantage of being very easy to determine, but would exclude those ‘early 90s bottlings’ Rice wants. Long term that is a crazy standard, since it will keep receding further and further into the past.

Since the assumption is that the vintage spirits on offer will have been originally obtained legally at retail, and the vintage spirit transaction is between a non-licensed post-retail owner and a licensed retailer-reseller, who will then transact a retail sale with a consumer, it is hard to see where the producers even have a dog in this fight. But anybody can make suggestions, so they did.

TPF, in conjunction with the Wine and Spirits Wholesalers of America, also asked the feds to opine on whether or not retailers taking advantage of the new state law would be breaking any federal rules. Again, this doesn't affect producers or wholesalers directly, they're just looking out for the little guys.

The feds expressed concern that people might use the Kentucky law to become unlicensed vintage spirits wholesalers. Federal law says it is illegal for a retail license holder to acquire alcohol from a non-licensed person who is “engaged in the business of purchasing beverage alcohol for resale to wholesalers or retailers.” If the seller is not as described, then the law doesn't apply. That standard is just vague enough to cause problems.

Kentucky’s current governor, Matt Bevin, is a proud conservative Republican, which should mean he favors minimal regulation. Does that apply to alcohol in a state where 20 counties still permit no alcohol sales and many others severely limit it? I hope it does. Kentucky's new law is revolutionary in terms of bringing at least the ‘vintage’ part of the whiskey secondary market out of shadows. It could be a significant boon to tourism. Why not wait to see what problems arise, if any, rather than write rules in a vacuum?

That puts a lot of responsibility on retailers who choose to become vintage spirits buyers and resellers. No one wants to risk their license, so diving into this pool is not for the faint of heart. Meanwhile, it should be interesting for the rest of us to watch and perchance to taste.


Anonymous said...

It might also generate some sales tax and income tax woes. Kentucky has a long standing reputation for attacking casual sellers like at flea markets. The Revenue folks will also expect you to claim the sales as income. And unless you kept your 50 year old sales receipt, they're going to claim what you got was all profit. The greedy and money hungry in the Commonwealth will want their pound of flesh.

Anonymous said...

So just to add some additional thoughts to my above post, what we're seeing is a typical example of bureaucrats who don't like the legislature intruding on their private kingdom, they're over burdening the people by requiring burdensome regulations that will be nearly impossible to comply with and easy for them to find fault with. Its bad enough for a buyer and seller to find each other and come to an agreement, but now they want to add on a bunch of regulations to make life difficult. Maybe just enough to scare off everyone and leave the marketplace them.