Regulatory issues come to a head for craft brewers

Colorado brewers also lobbying state over environmental issues
The Colorado Statesman

Craft brewers are searching for a legislative or regulatory fix to a conflict between state and federal law that resulted in at least one group of breweries in the state facing seizure of its prized elixirs.

Brewers are also lobbying the state to ensure that environmental standards are in place to protect against potential damage from the oil and gas industry that could affect air and water quality, which they say is critical to the preservation of the craft beer industry.

From a business regulatory standpoint, brewers have recently targeted the state Department of Revenue’s Liquor and Tobacco Enforcement Division, which they refer to as the LED.

The push has come from Stash Enterprises, the corporation that owns Mountain Sun Pub and Brewery and Southern Sun Pub and Brewery in Boulder and Vine Street Pub in Denver. Founding partners were shocked on Oct. 5 when city and state liquor compliance agents arrived at Mountain Sun for what was described to them as a routine compliance audit.

The timing couldn’t have been worse, according to owners. The agents arrived during a busy dinner, as the brewpub was also preparing for the Super Bowl of beer events, the Great American Beer Festival. Agents later expanded their investigation from Mountain Sun to the other two establishments that fall under Stash Enterprises.

The partners weren’t overly concerned. They believed that they had been in full compliance with all rules, regulations and taxes, and even had a compliance attorney in their corner. So when the agents pulled most of the beer Stash Enterprises had been pouring — including entries in the Great American Beer Festival — partners were shocked.

“Brewers, beer writers and avid fans of the industry who visit us every GABF were nearly as disappointed as us that during this particular week, we were unable to showcase our contributions to the Front Range microbrew industry,” explained Kevin Daly, a founding partner with Stash Enterprises. “Instead of the 21 house beers we would normally pour, each of our locations was limited to six house beers.”

The issue is complicated and falls under what many in the industry believe to be gray areas of state law. Much of the controversy revolves around beer ownership and transfers. Federal law allows craft breweries to maintain beer “in bond,” meaning brewers can store and transfer beer between commonly owned locations without paying taxes on the transfer. Once that beer is tapped, then taxes must be paid.

But when LED learned that Stash was transferring beer between locations, the state agency considered it a violation of state law, which they said warranted seizure of the beer. LED believes that Stash must technically sell its beer and write invoices for every barrel that is transferred between locations, thereby properly accounting for all products and taxes. Daly said the concept is ridiculous.

“This makes no sense,” he said. “We already own our own beers.”

Part of the problem for Stash is that it simply doesn’t have enough room at its brewpubs to store all the beer it makes. They have a storage warehouse in Boulder, but it’s now unclear whether they can continue to transfer their products from the warehouse to each of the three brewpubs or between the locations themselves. What’s particularly confusing is that the warehouse and all three brewpubs are licensed as part of the brewery premises.

Don Burmania, director of LED, said state law clearly prohibits beer from being freely transferred between commonly owned locations. But he said there is nothing stopping Stash Enterprises from storing the beer at its warehouse, as long as the individual products are labeled and separated by the individual breweries.

“Since it’s three separate licensed entities, if they wanted to have an off premise warehouse, they would have to just basically obtain three separate permits, and they could have one location with just tape on the floor distinguishing between which part belongs to which license,” explained Burmania.

But Daly says that would prevent the three breweries from offering their combined products at each of its locations. By allowing transfer between commonly owned entities, Daly said, that would allow all of his breweries to “mingle.”

“We need to get some regulations changed. They should match the federal regulations. There’s no reasoning for this.

“We’ll bring this in front of every legislator because it really changes the way we operate,” Daly continued. “It’s just not feasible.”

He added that selling the beer to each location and writing invoices would be an “accounting nightmare.”

Burmania said he understands the frustration. But he doesn’t believe that the current requirement is too difficult to comply with.

“We think it’s an easy solution right now,” said Burmania. “When they are transferring products back and forth under federal law they are doing it with a transfer form, and we just are requiring them to also do it with an invoice.

“Under state law, each license is separate and distinct, and so if they were to sell it to another brewpub they would have to issue an invoice, if they were to buy it from another brewpub that wasn’t commonly owned they would have to receive an invoice,” he continued. “It’s that simple. If they are to have three separate licenses they are going to have to treat them each as three distinct businesses.”

Daly said he attempted to work with compliance agents, but that they refused to discuss the issue.

“We feel that the LED has been overly aggressive in this matter and the more professional and rational way of handling this would have been to call us in for a meeting where this could have been discussed and our position advanced, rather than to disrupt our businesses, seize our beers and curtail any discussion whatsoever,” said Daly.

He has since worked out an agreement with LED that released his products from seizure. But he is only allowed to sell those products at the respective brewpubs; no to-go service is allowed while the issue is pending.

Burmania said his division went out of its way to work with Stash in order to come up with a solution.

“We will work with anyone to deal with any type of compliance issues,” he said.

Alex Heckathorn, an Oregon-based compliance attorney who handles issues for Stash Enterprises, as well as many other brewers, said one simple solution the legislature could propose is to allow brewpubs to maintain warehouses under common ownership. That would at least solve the storage issue.

Another fix would be to allow brewers to transfer beer within their corporation.

“The legislature would look at allowing commonly owned brewpubs and breweries to follow federal practice on keeping beer in bond and being able to move beer in bond,” he said.

John Carlson, executive director of the Colorado Brewers Guild, is not quite sure whether a legislative fix is necessary. He said much of the change could come from within the Department of Revenue itself.

Carlson said he believes the current state law was written at a time before the craft beer boom, which has seen double-digit growth year after year.

“Perhaps it requires a fix, perhaps LED could handle it as is with just a different view on the existing statute,” opined Carlson. “You would hope that those regulators would like to be forward-leaning or accommodating for the industry… as opposed to very draconian and static.”

Paul Gatza, director of the national Brewers Association, said burdensome regulations get in the way of businesses supporting the community, as well as consumers supporting local businesses.

“Local is very important nowadays,” said Gatza. “People, they know that the money bounces around the community if they support their local breweries and support local jobs.”

He added that Congress is becoming more aware of the craft beer industry and its contributions. Gatza hopes that state governments also understand that.

“They like us because we’re adding jobs… we’re very popular in D.C.,” said Gatza. “Even through the recession we were the part of the world that was growing as an industry.”

Daly said he is simply trying to operate his business, while also contributing to the community.

“For the past 20 years, we have built and operated upstanding businesses that contribute to the communities around them,” said Daly. “At all times during these 20 years, we have done our best to always be in compliance with local, state and federal regulations on our industry.”

Environmental regulation

Brewers are also looking at regulations beyond the industry itself, becoming involved with issues pertaining to the environment. The idea is that if they can protect the environment, then they can protect their ingredients, such as water, which is critical to the brewing process.

There’s also the issue of continuing to attract tourists, who are big consumers of Colorado’s local products, especially its craft beer.

A group of brewers in June sent a letter to Gov. John Hickenlooper, a former brewer, expressing their fears over impacts of oil and gas development to air, water, land and communities.

Many of the brewers’ concerns revolve around hydraulic fracturing, or fracking. Because fracking employs the pressure of a fluid to increase extraction rates — often including chemicals, sand and water — fears have grown that groundwater can become contaminated.

The governor’s office has not yet set up a meeting with the brewers, though he is aware of their concerns. The group, known as Brewers for Colorado, has grown from 26 to 38 members.

“When we sell our beer, we also are marketing the healthy, outdoors Colorado lifestyle,” explained Tony Simmons, owner and head brewer at the Pagosa Brewing Company. “The continued success of our craft beer industry depends on balancing priorities to protecting the clean air, water and land that is our most crucial marketing asset.”

While Hickenlooper hasn’t provided a formal response to the brewers’ letter, he did stop by Pagosa Brewing recently during a tour of the state. Simmons said the governor appeared to be sympathetic. He is hopeful that as a former brewer, Hickenlooper will take the group seriously. Hickenlooper co-founded Denver’s Wynkoop Brewery.

“He said, ‘When brewers talk, I listen,’” said Simmons.

The governor has run into trouble on the fracking issue. As a former geologist with close ties to the oil and gas industry, Hickenlooper fully supports fracking.

His office in July told The Colorado Statesman that it values its relationship with brewers across the state and is reviewing their concerns.

In the meantime, Brewers for Colorado has set its focus on upcoming rulemaking by the Air Quality Control Commission. The commission in November will release a set of proposals looking to curb emissions by the oil and gas industry. The process is expected to last at least through February.

Much of the rulemaking will align the state with recent federal rules and regulations that call for tougher methane emission standards on condensate tanks.

But many of the rules will be Colorado-specific, including rules around monitoring and inspecting leaks, especially from smaller pieces of equipment, according to Mike Silverstein, administrator for the Air Quality Control Commission.

“It’s a public health issue,” explained Silverstein. “We have an issue with the federal ozone standard, and we don’t currently attain that ozone standard here in the Front Range, and we kind of flirt with that ozone standard in other parts of the state, and oil and gas is probably, if
not the biggest source of emissions related to ozone, one of the largest sources.”

Chip Holland, owner of Glenwood Canyon Brewing Company, which is located in tourist-heavy Glenwood Springs, believes brewers can offer vocal stakeholder input as the commission meets to develop the new rules.

“We live in a beautiful somewhat pristine state that is well known for its beauty, mountains, clean air, water supplies and all. It brings a lot of tourists and people to town, which is a large portion of our economy here,” said Holland. “We sell a lot of [beer] to the tourists.”

Peter@coloradostatesman.com