BEFORE THE Department of REVENUE

OF THE STATE OF MONTANA

 

In the matter of the adoption of New Rules I through III and the amendment of ARM 42.13.301 pertaining to distillery deliveries, alternating proprietor on a manufacturer's premises, contract manufacturing, and the storage of alcoholic beverages

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NOTICE OF ADOPTION AND AMENDMENT

 

TO: All Concerned Persons

 

1. On October 15, 2015, the Department of Revenue published MAR Notice No. 42-2-943 pertaining to the public hearing on the proposed adoption and amendment of the above-stated rules at page 1727 of the 2015 Montana Administrative Register, Issue Number 19.

 

2. On November 9, 2015, a public hearing was held to consider the proposed adoption and amendment. Sam Hoffmann, Red Lodge Ales Brewing Company; Kristi Blazer, Montana Beer and Wine Distributors Association; Matt Leow, Montana Brewers Association; Jennifer Hensley, Montana Distiller's Guild; John Iverson, Montana Tavern Association; and Neil Peterson, Gaming Industry Association of Montana, appeared and testified at the hearing. Other members of the public attended the hearing, but did not testify. The department received written comments from John Walker Ross, Ross Orchards; Jennifer Hensley, Montana Distiller's Guild; and Brad Simshaw, Blackfoot River Brewing Company.

 

3. The department adopts New Rule I (42.13.807) as proposed, effective January 1, 2016, when the legislative changes to 16-4-311, MCA, become effective.

 

4. The department amends ARM 42.13.301 as proposed.

 

5. Based upon the comments received, and after further review, the department adopts New Rule II (42.13.1002) and New Rule III (42.13.1003) as proposed, but with the following changes from the original proposal, new matter underlined, deleted matter interlined.  The amendments to New Rule III include the addition of language to provide express notice that the department may consider a contract manufacturing arrangement where the client is located outside of Montana, so long as the arrangement is not prohibited by federal or state law.

 

NEW RULE II (42.13.1002)  ALTERNATING PROPRIETOR ON A MANUFACTURER'S PREMISES  (1) through (10) remain as proposed.

(11) The host is prohibited from selling, or providing, or distributing the tenant's product, with or without charge, in the host's sample room, on its licensed premises, or otherwise elsewhere.

(12) through (15)(b) remain as proposed.

(c) a tenant distillery with an annual production of 25,000 gallons or less may provide, with or without charge, liquor in its sample room only if the liquor was produced at its premises. This restriction includes a prohibition against a tenant distillery providing liquor in its sample room that was produced at a host's premises, subject to the production exception in ARM 42.13.805(3). A tenant distillery that produces liquor at its premises and packages the liquor at a host's premises may sell that liquor in the tenant's sample room.

(16) remains as proposed.

 

NEW RULE III (42.13.1003)  CONTRACT MANUFACTURING (1) through (4) remain as proposed.

(5) The sale and distribution of alcoholic beverages manufactured by the contract manufacturer may only be conducted as follows:

(a) a contract manufacturer is prohibited from selling, or providing, or distributing the product, with or without charge, in the contract manufacturer's sample room, or on its licensed premises, or elsewhere;

(b) through (9)(b) remain as proposed.

(c) a client with an annual production of 25,000 gallons or less may provide, with or without charge, liquor in its sample room only if the liquor was produced at its premises. This restriction includes a prohibition against a client providing liquor in its sample room that was produced at a contract manufacturer's premises, subject to the production exception in ARM 42.13.805(3). A client that produces liquor at its premises and packages the liquor at a contract manufacturer's premises may sell that liquor in the client's sample room.

(10) remains as proposed.

(11) The department may approve a contract manufacturing arrangement that does not fit within the bounds of this rule only if the proposed arrangement meets all is not prohibited by federal and state alcoholic beverage regulations. This may include a contract manufacturing arrangement where the client is not located in Montana.

 

6. The department has thoroughly considered the comments received. A summary of the comments and the department's responses are as follows:

 

COMMENT 1: Sam Hoffmann, of Red Lodge Ales Brewing Company, testified in support of proposed New Rules II and III because the rules allow utilization of his existing brewery facilities for cider production. Mr. Hoffmann submitted that this would benefit his brewery, which could capitalize on excess capacity during slower months, and Montana apple growers, which could have a new in-state market for their products.

Matt Leow, of the Montana Brewers Association, also testified in support of proposed New Rules II and III, stating that the rules may encourage more product production and create jobs, which may help to keep more brewing in Montana. Mr. Leow also stated that it was proper for the department to attribute product production to the tenant and client rather than the host and contract manufacturer.

Kristi Blazer, of the Montana Beer and Wine Distributors Association, testified in support of proposed New Rules II and III, stating that she agrees with Mr. Leow that product production should be attributed to the tenant and client. Ms. Blazer's additional rule comments are addressed in responses five and six below.

John Walker Ross, of Ross Orchards, submitted written comments expressing support of the proposed amendments to ARM 42.13.301 and the opportunity for new cider production at existing facilities under proposed New Rule II.

 

RESPONSE 1: The department appreciates the industry's support.

 

COMMENT 2: Jennifer Hensley, of the Montana Distiller's Guild, testified in support of the rules. Ms. Hensley also pointed out a discrepancy between proposed New Rule I(1), stating that a distillery had two business days to report a delivery made to an agency liquor store, and the department's explanation of that rule, referencing that deadline as a 48-hour reporting requirement. Ms. Hensley commented that these two reporting requirements were quite different and requested that the department utilize the two-business day requirement set forth in the proposed rule.

 

RESPONSE 2: The discrepancy between the proposed rule language and the department's statement explaining the rule was an oversight. The department adopts the rule as proposed and will administer the rule based upon its two-business day reporting requirement.

 

COMMENT 3: Brad Simshaw, of the Blackfoot River Brewing Company, submitted written comments expressing appreciation for the department's work on proposed New Rules II and III. Mr. Simshaw also questioned why a winery may provide product at its premises that was produced at a host's premises under New Rule II(14)(b), while a small brewery and microdistillery are prohibited from doing the same under proposed New Rule II(13)(c) and (15)(c).

 

RESPONSE 3: The reason for the disparate provisions in the proposed rules stems from the statutory differences relating to those businesses. A winery is not statutorily required to produce the wine at its premises to allow its consumption there. Under 16-3-411(1)(d), MCA, a winery may "provide, without charge, wine it produces for consumption at the winery." In contrast, a small brewery and microdistillery are statutorily required to produce products on site to allow consumption of those products there. Under 16-3-213(2)(b), MCA, a small brewery may "provide samples of beer that were brewed and fermented on the premises in a sample room located on the licensed premises." Similarly, 16-4-312(3)(a), MCA, allows a microdistillery to "provide, with or without charge, not more than 2 ounces of liquor that it produces at the microdistillery to consumers for consumption on the premises between 10 a.m. and 8 p.m." Because a winery is not statutorily prohibited from allowing the consumption of wine produced at a host's premises, the department declines to insert this prohibition by administrative rule. Accordingly, the department adopts the rule as proposed.

 

COMMENT 4: Ms. Hensley submitted that the last sentences of proposed New Rule II(15)(c) and New Rule III (9)(c) may allow a microdistillery to do something that would be prohibited by federal law. These provisions allow a microdistillery to sell in its sample room liquor that was produced at the microdistillery but packaged elsewhere. Ms. Hensley contends that such packaged products cannot be transferred in bond to the premises of the tenant or client.

 

RESPONSE 4: Federal law specifies how a distilled spirits plant proprietor may transfer and receive spirits in bond. Title 27 of the Code of Federal Regulations, Section 19.402, authorizes bulk spirits to be "transferred in bond between the bonded premises of plants qualified under 26 U.S.C. 5171 or 26 U.S.C. 5181 in accordance with sections 19.403 and 19.733." Thus, bulk spirit may be transferred in bond between a host and tenant or a contract manufacturer and client. Federal law also limits the transfer of taxpaid or tax determined spirits under Title 27 CFR, part 19. 

Based upon Ms. Hensley's request, the department agrees to remove the provisions allowing a tenant or client to sell in its sample room liquor that was packaged at the premises of a host or contract manufacturer, and has amended the rule accordingly.

 

COMMENT 5: Ms. Blazer recommended amending proposed New Rules II and III to clarify the role of the host and contract manufacturer with regard to product distribution. Although Ms. Blazer believes the rules are clear that the tenant and client own the product, she requests clarification that the host and contract manufacturer cannot be involved with product distribution.

 

RESPONSE 5: The department has amended New Rule II(11) and New Rule III(5)(a) to clarify that a host and contract manufacturer cannot be involved with distributing products owned by a tenant or produced for a client.

 

COMMENT 6: John Iverson, of the Montana Tavern Association (MTA), stated that the MTA generally supports the rules as proposed, with the exception of proposed New Rule II(13)(d) and New Rule III(7)(d).  These provisions allow a brewery with an annual nationwide production between 10,000 and 60,000 barrels to provide, without charge, on its premises beer that was produced at the premises of a host or contract manufacturer. Mr. Iverson submits that a brewery should only be allowed to provide beer at its brewery if the beer was produced at that brewery. Mr. Iverson contends that allowing otherwise thwarts the intention of the law, which is to allow a brewery to provide samples of its own beer, and undermines a customer's expectation that the beer served at the brewery is produced at the brewery.

Neil Peterson, of the Gaming Industry Association of Montana, and Ms. Blazer stated their support of Mr. Iverson's comments.

 

RESPONSE 6: The reason the proposed rules allow larger breweries to provide beer samples that were not produced at that brewery while small breweries cannot is based upon the difference in the statutory language relating to the sample privileges granted to breweries of different sizes. Under 16-3-213(2)(b), MCA, a small brewery may "provide samples of beer that were brewed and fermented on the premises in a sample room located on the licensed premises." In contrast, 16-3-214(1)(b), MCA, states that a brewery producing between 10,000 and 60,000 barrels may "provide its own products for consumption on its licensed premises without charge." Because this statute does not require a large brewery to produce its products at its premises to provide samples of that product at its premises, the department declines to insert this requirement by administrative rule. Accordingly, the department adopts the rules as proposed.

 

 

 

/s/ Laurie Logan                                    /s/ Mike Kadas

Laurie Logan                                         Mike Kadas

Rule Reviewer                                       Director of Revenue

 

          Certified to the Secretary of State November 30, 2015