I read a wine-related memo issued May 9, 2011, by the Department of the Treasury, Alcohol & Tobacco Tax & Trade Bureau (TTB), as follows: “TTB reminds beverage alcohol industry members that promotional support items and services listed under the exceptions in Subpart D of 27 CFR part 6 may not qualify as exceptions if the industry member supplies the items or services conditioned upon an activity that would violate other provisions of the Federal Alcohol Administration Act.” Say what?
Clearly, it’s time to explore the over-regulation of wineries and vineyards. Based on my interviews, the business of managing a vineyard and/or running a winery is subject to endless regulations that threaten to drive people out of their minds—if not out of business.
Does it matter? Yes. Sonoma, Napa, Mendocino, Lake, Marin and Solano counties have more than 800 wineries and 130,000 acres of vineyards between them. These wineries and vineyards create a lot of jobs, pay a lot of taxes, generate a lot of sales tax revenue, bring in countless tourist dollars and support a long list of ancillary businesses.
Is this big business? Yes. The TTB Statistical Report for January 2011 states that 44,862,181 gallons of still (non-sparkling) wine were bottled in the United States that month, of which 39 million gallons were bottled in California. That’s the equivalent of about 200 million 750 mL bottles.
How about owning a vineyard? Let’s say you’ve already survived the process of acquiring or developing one. You’ve complied with rules about zoning, proximity to waterways, trees, hillsides, grading, endangered species and so on. Your vineyard is up and running and you’ve hired workers to help. By federal and state law, there are at least 27 notices you need to post wherever one of your workers might get out of a car.
The notices must be in both English and Spanish and cover: federal minimum wage, equal employment opportunity, injuries caused by work, discrimination and harassment, polygraph protection, California unemployment/disability, safety and health protection on the job, pay day, time off to vote, safety rules for pesticide handlers, whistleblowers protection, operating rules for industrial trucks, pregnancy disability leave, employee housing, family and medical leave act, respirator use, hours and working conditions in agricultural occupations, California minimum wage, migrant and seasonal agricultural worker protection, agricultural/industrial tractors, field sanitation and minor children in the workforce.
These are just the notices. It’s up to you to comply with all the corresponding rules and many more. For instance, let’s say you sprayed an anti-mildew chemical on your vineyard today. You must immediately add notations to an employee notice showing what you sprayed (brand name and chemical name) and the REI (re-entry interval, meaning how long an employee should wait before going back in the vineyard).
But before you can even purchase the chemicals for spraying, you need either a California Pesticide Private Applicator License, a California Qualified Applicator License or an Agricultural Pest Control Adviser License (none of which is easy to obtain).
This is just the tip of the iceberg. One vineyard owner showed me a three-inch thick binder of guidelines for a vineyard to be designated as “sustainable.” Several had big worries about proposals of the State Water Quality Control Board that would prohibit use of water from the Russian River, its tributaries and “connected groundwater” (wells) for frost protection. The results could be financially devastating.
How about owning a winery? Sounds romantic, right? I spoke with a winery owner who purchased a property in Sonoma County in 1999. The property had a former machine shop that he wanted to convert to a winery. It took four years and boatloads of money to get the proper permits, dealing with multiple county, state and federal entities. He spent $2,500 on a required archeological property survey and $10,000 to provide a set of updated plans for the building, to comply with the 1997 Building Code. The only change from the original plans was a notation requiring five bolts on each truss connection instead of three.
He spent tens of thousands of dollars upgrading the entrance to the property and installing a fire hydrant, as demanded by the county and fire officials. [The alternative was to install two unattractive 10,000-gallon water tanks. A local fire official discouraged this, saying, “We never use those tanks, especially after we accidentally hooked up to one filled with diesel fuel.”] Then came adventures with the Americans with Disabilities Act and proving he had sufficient rebar in the building’s concrete slab—a $1,200 report. Then the county said he must have a State Water Quality Control Board sign-off on his septic system, and the state, citing understaffing, said there’d be a two-year delay.
In another column, I’ll explore how wineries deal with wine shipping rules that are different in every state, the cumbersome federal label approval process, the inspection, certification and numbering of portable compressors, unending monthly, quarterly and yearly reporting requirements, and calculation of the federal tax that’s different on wines below or above 14 percent alcohol.
But here’s a classic example of extreme regulation. Long-time friends, husband and wife, own a small winery. They receive more than 400 requests each year to donate wine to charities. They also drink some of their wine and, each year, some bottles are broken.
They received a notice from the state that they were being audited for use taxes. In the course of the two-day audit, they discovered they were not entitled to a deduction for wines donated to charity and they owed use taxes on the donated, drunk or broken bottles. The audit was costly, including the owners’ CPA on standby for two days, and a bookkeeper at hand to present endless details—not to mention the taxes themselves.
The owners were flabbergasted when the auditor declared she’d be back for a third day and demanded a credit card number so the taxes could be charged automatically. Their answer: “No.”
Our government at work.
[Note: The winery owners demanded a meeting with the auditor’s supervisor. At the (short) meeting, all parties agreed that the audit did not need to continue, and that the owners’ bookkeeper and CPA would cooperate to file regular use tax forms and pay the taxes in the normal way, by check.]
A native of Santa Rosa, Bob Andrews is a former pension trust officer at Exchange Bank and was a long-time co-owner of a retirement plan administration firm. He’s married with two chrildren, three grandchildren and loves everything to do with wine. Contact him with your "Open Trench" experience at bandrews@northbaybiz.com.
