By: Edward J. Castellani, J.D., C.P.A. and Ryan Kauffman, J.D.

The Michigan Office of Regulatory Reinvention (ORR) recently issued its recommendations of proposed changes to Michigan’s liquor control laws and regulations. The recommendations were released after an in-depth review of current laws, rules and regulations with a view toward improving the regulatory environment. The mission of the ORR is to ensure that Michigan’s regulatory environment is simple, fair, efficient and conducive to business growth and job creation. The ORR report included 72 recommendations.

The recommendations must be promulgated as regulations by the Michigan Liquor Control Commission (“MLCC”) or enacted into law through the legislative process before they will have legal effect. However, many of the recommendations, if they come to fruition, will have a significant impact on Michigan’s current regulatory system. We have summarized below some of the recommendations we believe are most important to liquor license applicants and licensees.

Procedural and Organizational Changes

The ORR recommends a number of procedural and organizational changes, including the need to increase the use of electronic communications. Currently, the MLCC uses the mail system almost exclusively. The report recommends increasing the use of email with applicants, investigators, local law enforcement, and local governing bodies. This seemingly small change, which is perhaps long overdue, may help expedite the licensing process and other matters.

The ORR also makes recommendations in regard to changes in the MLCC’s Enforcement Division. The ORR notes that specialized investigators would improve the licensing investigations and ensure more equalized enforcement. Accordingly, it is recommended that the Enforcement Division be separated into two sections: Licensing Investigation and Violation Enforcement.

There is also a recommendation to upgrade the MLCC system to allow suppliers password-protected access to pertinent information, such as daily sales information by account, and to levy a $20 surcharge on all licenses (manufacturer, wholesale and retail) to support an education and enforcement competitive grant program to be administered by the MLCC. The ORR also suggests shifting the collection of the excise tax on beer and wine produced outside of Michigan from the supplier to the distributors to increase efficiency.

Local Manufacturers, Brewers, Small Distillers

Currently, brewpub, microbrewery, and brewery license applicants are required to submit an application to the federal Alcohol and Tobacco Tax and Trade Bureau (TTB) and receive federal approval before submitting the same information on a completely different set of forms to the MLCC. To streamline the licensing process, the ORR recommends allowing license applicants to submit the same Brewers Notice and supporting documents required by the TTB to the MLCC concurrent with their submission to the TTB.

Recommendations are also made with regard to changes of the license issued for small-scale brewers. Importantly, the ORR recommends that the current microbrewer and brewpub licenses be replaced with a single small brewer’s license which combines the rights of the two current licenses. This new combined license would allow a small brewer to do the following:

• Brew not more than 30,000 barrels across all locations (based on the current maximum production for a microbrewer);
• Hold a liquor license for on-premise sales;
• Hold a small wine-makers and/or small distiller’s license; and
• Hold a specially designated merchant license.

The ORR further recognizes a need to make it easier for small brewers and small winemakers to distribute their products through the three tier system. The ORR recommends achieving this goal by exempting contracts between a wholesaler and a microbrewer or small winemaker from the Michigan beer and wine distribution laws if the volume through the wholesaler comprises less than 3% of that wholesaler’s book of business measured using case-equivalents. Such a change could make it easier for small brewers and small wine makers to get their products to retailers’ shelves.

Expanding Sales Privileges for Small Distillers

The report also addresses several problems currently facing small distillers and brandy manufacturers in Michigan. Michigan currently authorizes wineries to hold a license to produce brandy from fruit and also permits small distillers to produce spirits from grain not exceeding 60,000 gallons annually. However, Michigan spirits production has been low (less than one half of one percent share of Michigan’s spirits market), and Michigan distillers are struggling to gain market share.

Michigan distillers are mandated by statute to remain small and many of their products are specialty items that will never sell in large quantities. However, the ORR concludes that the primary reason that Michigan’s small distillers are struggling is that they are generally producing unknown brands in a marketplace dominated by large distillers with long established brand franchises. In addition, established distillers are able to quickly launch brand extensions and new products in the Michigan market. This has resulted in over 5,500 products listed in the state distribution system, but only about 30 of those products are from Michigan distillers.

The ORR suggests that Michigan’s small distillers need to develop initial sales directly to consumers and has recommended the expansion of sales privileges to give distillers improved market access and, more importantly, an opportunity to become profitable small business entities creating jobs and investment within Michigan. The recommended changes to expand sales privileges include allowing small distillers to do the following:

• Sell spirits made in a restaurant for consumption on or off the premises if the restaurant is owned by the spirits producer or operated by another person under an agreement approved by the MLCC, even where the restaurant is on property contiguous to the distillery;
• Sell alcoholic beverages not normally sold by the spirits producer if purchased through an authorized distribution agent of the state;
• Sell its spirits for on and off premise consumption to special events licenses subject to regulation as applied to similar events held elsewhere in the state; and
• Donate its spirits to non-profit charitable and government-sponsored fundraising events at a price established by the MLCC.

In addition, the ORR report also recommends that the statutory definition of “Small Distiller” be broadened to clarify the rights granted to the licensee. As proposed, the broadened definition would expressly state that the MLCC “may approve a small distiller to sell its spirits for export from the state, for distribution through the ADA system, to another Michigan distillery, and at retail for on and off premise consumption, at its licensed premises or at other premises authorized in this act.”

Licensing Procedure

The ORR has made a recommendation to allow the MLCC to issue a conditionally approved license in some circumstances. The recommendation is to change Michigan law to allow an applicant to request issuance of a conditionally approved license within fourteen days of the request, subject to certain terms and conditions for a period of time. The suggestion is that the conditional license be good for 180 days. There is also a recommendation to allow for immediate issuance of certain types of permits.

The report also makes recommendations that may make it easier for an existing licensee to obtain an additional license by proposing the elimination of the investigation on individuals already licensed with the MLCC. LEIN, NCIC or ICHAT checks may still be used on existing licensees where it is deemed necessary.

Other proposed changes to the licensing process include the recommendation to eliminate the requirement of the MLCC to “verify” the source of the applicant’s funding and the recommendation to allow the local legislative bodies to delegate approval of a license to a clerk or an administrative officer.

In regard to the licensing quota system, the report recommends, among other things, that escrowed on-premise licenses be transferable between adjacent counties subject to a five-year limitation on subsequent inter-county transfers.

There is also a significant recommendation in regard to Resort Licenses. The recommendation is to amend the Liquor Control Code to annually allow up to 40 non-transferable on-premise licenses where the licensee has invested at least $500,000. The fee for this license is suggested to be set at $25,000 ($5,000 of which will be earmarked for local law enforcement).

Change in Liquor Liability for On-Premise Licensees

Currently, there are regulations that require the licensee to be aware of all actions of their customers and presume that the licensee is allowing the act to happen. The ORR recommends that the regulations be amended to protect licensees and servers from liability unless they “knowingly” allow certain events or behavior on the premises except in cases where, considering the totality of the circumstances, it is clear they knew of or should have been aware of the conduct constituting the violation. This lower standard of proof, however, should remain applicable to licensees and servers where the violation involves service of minors.

Operating Changes for On-Premise Licensees

The ORR has also made recommendations regarding changes for on-premise licensees, including a change related to sales on credit. The current law regarding credit sales discriminates against some retailers who are not allowed to extend credit. The ORR recommends amending the statute to allow the retailer the choice as whether credit is extended to customers.

In regard to contests and advertising articles, the ORR notes that the majority of other states allow items like logoed glassware, napkins, coasters and wearing apparel in a licensed establishment. Current recommendations already allow this practice in Michigan with the approval of the MLCC. The ORR recommends that the MLCC remove all prohibitions on this type of “Secondary Use” items that are provided by suppliers.

The ORR also recommends that the amount of liquor an on-premise licensee may purchase from an off-premise licensee be increased from the current 9-liter limit per month. The report did not include an amount for the new limit.

Operating Changes for Authorized Distribution Agents (ADAs)

There is also a recommendation to have the State Administrative Board utilize its authority to increase the current maximum of $7.50 for the per-case ADA delivery fee. Although the law envisioned regular increases to cover increased warehousing and delivery costs, the per-case fee has not been increased in almost six years, bringing the system’s sustainability into question. The ORR recommends that a statutory process be developed with an appropriate index to establish the fee cap and a service-linked metric to set the actual fee. The ORR further recommends that the MLCC consider limiting the number of products available to be distributed by ADAs.

Motor Vehicle Fuel Pump Licenses

The Liquor Control Code currently requires retailers who also sell gasoline to maintain a minimum on-premise inventory of merchandise – excluding alcoholic liquor and gasoline of at least $250,000 to be eligible to obtain an SDM license. This requirement and others make it difficult for convenience store/gas station operations to become licensed, thus limiting their business options. The ORR has recommended reducing the inventory threshold to $50,000.

 

Edward J. Castellani and Ryan Kauffman practice alcoholic beverage law at Fraser Trebilcock in Lansing, Michigan and represent suppliers, manufacturers, wholesalers, retailers, brew pubs, wineries, alcohol importers and others involved in the manufacture and distribution of alcoholic beverages. They may be contacted at 517-482-5800 or at ecast@fraserlawfirm.com and rkauf@fraserlawfirm.com.