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Texas brewers’ legal victory significant for more than obvious reasons

Texas State Capitol
| Paul

mask-of-silenus-avatarThis week, Texas craft brewers claimed something rare for their industry in this state. They won a legal victory.

The drama began three years ago with what was then known as Senate Bill 639. Introduced into the 2013 state legislative session by Dallas state senator John Carona (who subsequently lost the next election), the bill stated its intent of “protecting the independence of distributors” by eliminating compensation for craft breweries for territorial distribution rights of their products. Essentially, it stripped small breweries of the right to make money by selling their brand—something the distributors still had the privilege of doing once a distribution agreement was signed.

Craft brewing has the same rights of identity as any other industry operating in this state.

In an unprecedented action, three Texas craft breweries took the state legal code to task in December 2014. Two North Texas breweries, Peticolas Brewing of Dallas and Revolver Brewing of Granbury, jointly filed suit with Austin’s Live Oak Brewing and the Institute for Justice against the Texas Alcoholic Beverage Commission (TABC) to have the new law overturned as a violation of the state constitution. For small businesses like today’s craft breweries, the ability to make money selling their distribution rights can be a big revenue source at start-up, not to mention that they would receive no benefit or compensation should a contracted distributor strike a later deal. It was a blatant and vulgar power-grab by the wholesalers lobby, and challenging it was the right thing to do.

District Court Judge Karin Crump agreed this week, finding no compelling state interest in such a law. Although consumers may not see any tangible benefit from such an esoteric lawsuit, it will only contribute to the improving health and strength of craft brewing in Texas (which ultimately benefits consumers). However, more has been achieved with this decision than simply rolling back biased regulations or defending the pockets of small brewers. This decision may be a truly significant turning point for the brewing industry in Texas.

First significant legal challenge in Texas craft brewing

The craft brewing industry has made monumental advances in Texas brewing laws in recent years, probably the largest favorable gains since legalization of brewpubs back in 1993. They have struggled tirelessly to change laws both state and municipal; they have fought zoning, distributors, retailers, even conservative anti-alcohol groups who have no interest in craft beer. They face down the TABC and lobbyist groups every two years when the legislature meets in Austin.

What makes this result any different? This was a legal challenge to an existing law enacted in 2013, not a state-wide popular movement for incremental change. This was not grass-roots anything: these were some of the most knowledgeable, seasoned professional brewers this state has to offer taking on an unjust law forced upon their industry by a much more powerful special-interest group.

And the judge agreed with them. This giant is not as invincible as we once thought.

Intellectual property matters, even for breweries

What also sets this struggle apart are the stakes over which it is being fought. Of course, every legal matter regarding business and regulation can usually be boiled down to money and, truthfully, this decision is no different. Laws are enacted to win economic power and either project it or protect it. The parties behind laws are always fighting to control bigger pieces of their respective pies.

However, this lawsuit was not explicitly about commerce or access or territory or financial advantage over a competitor. The lawsuit just won was brought over control of a brewery’s intellectual property, the ownership of their fundamental rights as a business at the point of distribution and thereafter in future transactions. Too long has craft brewing been singled out as an industry, operating under a legal double-standard not even shared with wine and other alcohol manufacturers. Craft brewing has the same rights of identity as any other industry operating in this state.

Craft brewers can collaborate on more than just beer

Collaborations are nothing new for the craft beer game. If not simply a business partnership for a combined venture, genuine friendships develop and result in new and inventive beers. Brewery X will meet Brewery Y at a common event like the Great American Beer Festival and decide to collaborate on a flashy, co-branded product. The industry is embarrassingly amicable to direct competitors, even those in the same market, and these ventures usually result in a win-win-win for both parties and consumers.

But this collaboration is a brand-new animal. Texas craft breweries have now demonstrated that they can band together not only for a united front for change before lawmakers; they can also work together to fight for a focused, tactical purpose on behalf of their entire industry. Craft brewing is no longer a domain of hobbyist businessmen selling in a boutique marketplace. This was a grown-up lawsuit, and we walked away with the W. SD

What happened to the price of my beer?

Dallas
| Paul

Dallas Craft Beer Examiner

Anno Domini 2014, that’s what happened. The new year brought with it some new tax laws, so bear with us as we attempt an explanation. I promise to make this as painless as possible, which means a minimum of math for you.

To begin, some basics of the industry. First, bars, pubs and restaurants operate under two different types of licenses in Texas with two different tax rates. There are places that serve only beer and wine (no liquor) with one license, and others that serve a full bar with beer, wine and mixed drinks under another license.

Second, these two different licenses have two different tax rates for on-premise sales. Beer-and- wine-only licensed sales are subject to state/local sales tax (currently 8.25%) but mixed beverage permits were not. Full-bar licenses had a separate excise tax of 14% on all alcoholic beverages — beer, wine and liquor — reported simply as a combined “gross receipts” of sales in their accounting. (This is an important detail.)

Third, taxes required by the state are usually built into the pricing of the beverage. (Ever wonder why drink prices are often whole dollar amounts?) This is the retailer adding in the tax to their own costs and rounding off pricing for ease of the transaction. You, the consumer, never saw this amount itemized on a tab but it has always been there.

Now for the 2014 changes: In an effort to increase transparency and equity in taxation, mixed beverage licenses are now subject to state/local sales tax as well with the excise tax being reduced from 14% to 6.7%. This new calculation yields about the same level of taxation as before (6.7 + 8.25 = 14.95%) and now you will see that sales tax appear itemized on your final bill going forward.

All this accounting really is the concern of the retailer but this is where the changes start appearing for you, the consumer. The retailer is required to pay the new taxes as described here but has the option of how to adjust their own pricing in response. Some places will continue to subsume the taxes in the final customer prices to maintain sales. Most are simply passing along the new sales tax directly to the consumer on the final bill, using last year’s final beverage prices. This is why your $5, 2013 pint of beer is now a $5.41 pint in 2014.

Note this change is only to the mixed beverage license, and includes all sales. Even beer or wine purchased at a full bar will be subject to the new rate (remember, “gross receipts”), which is a little inequitable for beer consumers but just part of doing business with the tax man. Beer/wine-only establishments should not see pricing changes — however, a few have now added explicit sales tax on the bill for reasons yet unclear.

Barely a week into the new year and new tax model, pricing is still in flux everywhere as retailers work to grasp the complicated details of the changes and adjust their prices verses costs accordingly. I would expect craft beer prices to float and shift for a month or two as owners and managers sort things out.

(Of course, I’m neither a tax officer nor an accountant, so anyone with authority or clarifications please step in and correct me where necessary.)

Cheers!

Originally published January 10, 2014, at Examiner.com

Dallas as a Craft Beer Town

| Paul

Something strange has occurred in Dallas during the past year, something not known since the mid-1990s when dot-com money flowed freely and commercial ventures were embraced recklessly and without long-term thought. Dallas is rediscovering craft beer—and making up for lost time in a big way. With no production breweries in Dallas at the beginning of last year, by the end of 2012 at least five are projected to be in full operation.

The last commercial brewery to operate in Dallas proper was the Great Grains Brewery, a terrible operation that mercifully shut down for financial reasons in 2006 over a rather trivial TABC regulation that left it unable to recover. Since that time, Rahr & Sons Brewing (opened 2004) has thrived in Fort Worth and Franconia Brewing (opened 2008) in McKinney but nothing in the Dallas area per se. The only non-chain brewing that has persisted within the city limits has been the Humperdinks brewpub on Greenville Avenue, an orphaned spin-off of the Pacific Northwest-based Big Horn Brewing franchise that went independent a few years ago.

To begin the charge, in October of last year the Deep Ellum Brewing Company became the first craft brewery to open in Dallas in more than five years, setting up in the south end of the Deep Ellum arts district. Owners Scott Frieling and John Reardon hired young brewer Drew Huerter away from the St Louis area, with names such as Schlafly and Mattingly Brewing on his resume. Their first beers have been style-twisting crowd pleasers, a crowd that has regularly mobbed the brewery ever since they opened Saturday tours to the public.

Almost immediately on the heels of Deep Ellum Brewing came Peticolas Brewing, setting up in a small place in an industrial park west of downtown near the Meddlesome Moth. With a legal family legacy in Dallas going back almost as long as there has been a city, Michael Peticolas left a career as a lawyer to pursue his dream of independent brewing. His is a much smaller and more personal operation than Deep Ellum, taking all financial, marketing and brewing responsibilities upon himself and his young family. Peticolas’s first beer was released in January of this year to almost immediate success.

The third in this initial triad to develop throughout the prior year is Lakewood Brewing, who only recently acquired a lease on a site in the White Rock Lake area. Although owner and brewer Wim Bens may have grown up in the Lakewood area of east Dallas, he did so with a Belgian birth certificate and a young enthusiasm for homebrewing. His previews of beers at various promotional events have been excellent, and Lakewood Brewing is expected to be in full production by late spring.

Two newcomers to the Dallas beer scene are also expected to be open later this year. From the common amateur brewing interest of three local friends (Jack Sparks, Brent Thompson and Kat Stevens), Reunion Brewing is born from the coincidence of these three reuniting once again in Dallas for business. Their production brewery is currently under development in west Dallas not too far from Peticolas’ current location.

The second new craft brewery will be Four Corners Brewing of the Oak Cliff area, also the venture of three partners with a shared passion. George Esquivel, Steve Porcari and Greg Leftwich have already hired award-winning veteran brewer John Sims for their operations, and have only recently located a commercial site. With hopes to be open by Labor Day and plans for as many as ten employees their first year, Four Corners may outpace all the rest despite a late start.

To see five production craft breweries sprout within the space of twelve months is simply unprecedented for a city like Dallas, more characteristic of the brewing culture of Austin. Is there room for all these businesses (plus those not yet named) to survive together in our North Texas market? Is the craft beer nature of Dallas truly shifting after all these years, embracing the movement as so many other cities have already? Only time can answer.

Originally published January 29, 2012, at craftbeerusa.blogspot.com.