News: CJ Exclusives

‘Game-changer’ alcohol bill on Cooper’s desk; governor expected to sign

Lee Katrincic, co-owner of Durham Distillery. (Photo courtesy of Durham Distillery)
Lee Katrincic, co-owner of Durham Distillery. (Photo courtesy of Durham Distillery)

Parity. 

It’s what North Carolina’s craft distillers wanted most, really. To, in a regulatory and statutory sense, take their place in line with the state’s brewers and vintners. If not in front of them, then just behind, in a place where they can extend an arm and gently tap them on the shoulder. If only to say, “Whew, it took us awhile, but we’re here.”

Lawmakers, after so many fits and starts, finally persuaded enough of their nervous colleagues to vote to begin fixing North Carolina’s archaic and broken system of governing alcohol, a move some 80 years in the making. To, at long last, open the turnstiles and let N.C. craft distillers into the game, which the breweries and wineries have been playing for years.

Gov. Roy Cooper is soon — possibly Friday — expected to sign into law Senate Bill 290, which aligns rules for N.C. craft distilleries more closely with those governing wine and craft beer. Significantly, the bill enacts reforms enabling the ABC to become more flexible for consumers and more customer-friendly. 

“It’s pretty exciting,” says Rim Vilgalys of The Brothers Vilgalys Spirits Co. in Durham. “We’ve been open for six years, and this is the single-biggest thing that’s happened.”

N.C. craft distillers and the N.C. Restaurant and Lodging Association — along with free-market and consumer groups — lobbied hard for the legislation. The bill, NCRLA president and CEO Lynn Minges said, creates greater convenience and choice for businesses and consumers. 

“While we believe there is still much work left to be done, we celebrate this impactful milestone and look forward to continuing the discussion on modernizing the state’s ABC system,” Minges said.

N.C. craft distillers are already making plans to capitalize on the new rules. They’re scheduling tastings throughout the state, advertising for mixologists, and planning classes to teach people about cocktails. In fact, rum distillers Gentry and Rebecca Lassiter of Lassiter Distilling Co. have already built a tiki bar. Durham Distillery is opening Corpse Reviver, a cocktail bar.

“(The new law) will usher in a new era of opportunity for North Carolina distilleries to flourish, taking a similar path as the craft beer industry,” said Kathleen Smith of Key City Spirits, a sales and marketing company that acts as a brand ambassador for distillers throughout North Carolina.

“Growing the local economy, tourism, and supporting North Carolina farmers,” Smith told Carolina Journal. “Every distillery Key City Spirits works with has plans to connect with their community through the service of cocktails featuring local spirits, beer, and wine. We are excited to be able return the support of the many N.C. ABC boards, who have championed North Carolina products by providing educational tastings to consumers. This an exciting time of renewed pride in North Carolina’s history of a world-class legal distilling industry snuffed out by prohibition, we are proud to play a role in bringing our rich heritage into the 21st century.”

But like a straight shot of 120-proof rotgut whiskey, it all didn’t go down so easy. Or all at once.

The measure underwent numerous revisions, as other bills were incorporated in, including H.B. 536, sponsored by Rep. Chuck McGrady, R-Henderson. 

“A cocktail of ABC bills (S.B. 290, House Bill 91, and H.B. 536) combined into one great drink,” McGrady tweeted. 

Though, at one point in the legislative process, McGrady told his colleagues it was easier to explain the bill by listing things no longer in it, such as direct online sales, Sunday sales, and the sale of alcohol on trains and ferries.

The bill, lawmakers ultimately realized, isn’t about alcohol, necessarily. Rather, it’s more about invention and innovation. Freedom and entrepreneurship.

Sen. Rick Gunn, R-Alamance, was a primary sponsor of S.B. 290, which will allow brewers to offer tastings at farmers markets and removes a limitation on sales at the state’s craft distilleries. The bill allows restaurants and other venues to sell up to two drinks per customer at any one time, and would allow liquor tastings at state ABC stores, from 1 to 7 p.m., for three hours, with no more than three tastings per week.

The measure will allow N.C. distilleries, with the proper permits, to sell malt beverages and unfortified and fortified wine, as well mixed beverages. The bill will allow distillers to, much like ABC stores, sell to consumers without facing the current five-bottle-per-person annual restriction.

But, as McGrady pointed out in a recent tweet, the bill includes myriad provisions toward reforming the outdated, monolithic system.

Although legislation moving the state toward privatization of liquor sales has proved unsuccessful, the new law would not restrict the formation of new ABC boards, of which the state has about 170. 

A sticking point in the process came with a provision allowing distillers to distribute their own state-approved spirits to customers such as bars and restaurants, via local ABC stores. The issue, in fact, led to a proposed committee substitute for the bill. Opponents of the measure, namely the N.C. ABC and the local boards, were worried about losing control of state alcohol sales and about collecting the appropriate taxes. Now, all liquor that is made in and comes into North Carolina goes through the N.C. ABC and is stored in a warehouse in Raleigh, to be distributed to boards throughout the state. Problem is, the local boards weren’t compelled to carry any particular product. So, a restaurant that may want to sell, say, an N.C-made whiskey, may have been unable to procure it, as inventory choices were left to the whims of the politically entrenched boards.

Now, when Cooper signs, a permit holder (restaurant or bar) can order a single bottle, which would be delivered to their local ABC store. If the local store is unable to deliver the product, for whatever reason, the store will notify the commission within 48 hours, and the commission will allow the distiller to deliver an approved product to the ABC store for pickup, Gunn said.

The intent, Gunn said, has always been to give distillers an opportunity to get their product to the permittees, or restaurants. 

“Quite honestly,” he said, “they didn’t have an avenue to do that. Not necessarily the ABC’s fault, but it’s hard to carry the products. So what was happening is they would order the product, the permittee, ABC could not get it to them. 

“This is a compromise between ABC boards … and the distillers, and this is a good way to make sure we’re getting that product into the market so that we can now compete.”

Gunn points out that while liquor sales in North Carolina amount to about $1.3 billion annually, sales of N.C. products account for about half of one percent of that.

A failed experiment

While many states tossed most of the remnants and clutter leftover from the failed experiment known as prohibition, North Carolina couldn’t bring itself to throw it all away. Lawmakers with an affinity for prohibition, cognizant of the state’s history with illegal liquor and heavily swayed by religious interests, couldn’t let go of the antiquated, rusty rules.

Realizing the economic — and even social — potential of state-based breweries and wineries, lawmakers began easing restrictions on what brewers and vintners could make and how they could market and distribute it. North Carolina, the Brewers Association says, produces more than 1.2 million barrels of beer each year from its nearly 300 breweries, resulting in an economic impact of more than $2 billion. 

North Carolina, the state agricultural department says, has about 400 vineyards and 200 wineries. Before prohibition, by some accounts, North Carolina had some 500 distilleries. Today the state has about 80, even despite the regulatory morass surrounding liquor.

In 1938, the National Alcohol Beverage Control Association was founded to represent the state control systems, under which state governments took over the wholesale trade and conducted retail sales of heavier alcoholic beverages through its own stores. North Carolina is one of 17 states that employ this system.

Lawmakers didn’t make distilling in North Carolina legal until 1979, and the state didn’t get its first distillery until 2005. Arguably the biggest boost for North Carolina liquor since prohibition came in the form of House Bill 909, which Gov. Pat McCrory signed into law in June 2015. When the “One-Bottle Law” became effective in October of that year, it was then legal for distillers to sell their products on-site. A couple of years later lawmakers increased that sales limit to five. S.B. 290 removes those arbitrary numbers, so customers can buy as much liquor from a N.C. distillery as they wish.

S.B. 290 also clarifies rules for the consumption of alcohol in common areas, such as the Morgan Street Food Hall in downtown Raleigh, and allows customers to buy a single bottle from approved special orders to ABC stores.

It includes a mandate for N.C. ABC, which, starting Oct.  15, and quarterly thereafter, will be required to submit a written report to the chairs of the Joint Legislative  Oversight Committee on Justice and Public Safety “detailing the progress made in bidding and selecting an independent contractor for the receipt, storage, and distribution of spirituous liquor at and from the state  warehouse” in accordance with the general statutes.

In August of last year, the Office of State Auditor Beth Wood released a report saying the N.C. Alcoholic Beverage Control commission — the agency in charge of controlling state alcohol production, storage, sales and distribution — has over past years cost the state about $13.5 million.

The audit released Aug. 9, in short, found that poor contract administration cost North Carolina taxpayers at least $11.3 million over 13 years. Unused warehouse space potentially cost the state $2.1 million over seven years, and a lack of monitoring left the state underpaid by at least $297,537 over two years.

The ABC erred in its responsibility to follow state policies and state practices, said in a news release. The ABC, the audit concludes, failed to administer the warehouse contract in the best interest of the state.

“My staff said, ‘When we looked at the ABC commission, there’s something not right there,” Wood told CJ. “They’ve got a contract that’s not been put out for bid since 2004, they can’t answer questions about how the contract’s being administered, this is not tied to a financial statement audit, but it’s info they’ve gleaned about that division of DPS.”

Maryland-based LB&B, which, its website says, specializes in facilities management, logistics, and training operations, since 2004 has contracted with the state to provide warehouse and distribution services.

“In state fiscal year 2017, the contract cost for warehousing and distributing spirituous liquor was $8.3 million. The total contract cost from July 2004 through June 2017 was $77.7 million.” Auditors found the commission failed to “procure, administer, and monitor the LB&B contract for the warehousing and distribution of spirituous liquor in accordance with state policies and best practices.”

N.C. ABC chairman A.D. Zander Guy, in his response to the audit, said plans are under way to place the warehouse contract up for bid in 2020 and become effective when the current contract expires in 2021.

Winning the battle

On a recent oven-hot Saturday in Durham, just feet from the train tracks that traverse Ramseur Street, Vilgalys welcomes customers to a tasting bar in a room adjacent to his small “fake distillery.”

Brothers Vilgalys doesn’t make its base liquor, a fact Rim readily shares. 

“We buy the alcohol from a big supplier,” Vilgalys says. “We do the rest of the processing and flavoring and bottling. It’s just a much more economical way to do it, but we could definitely get a still and start fooling around with it on a small scale, and then see what we can make for people at our own place.”

Vilgalys makes a unique line of Baltic-style spirits he infuses with all manner of herbs and spices, including his flagship Krupnikas, containing wildflower honey and spices such as cinnamon, cloves, nutmeg, caraway, allspice, and star anise. 

Vilgalys is looking forward for a chance to experiment. To prosper and to profit.

“We can start selling our own stuff by the drink … and that’s definitely where my mind has been for a long time. That’s always been a part of our strategy.

“When we began this thing, it’s something that I’ve always seen as like breweries, that have been able to sell their own beer. Not only is that where they make their money … but the other upside of that is that they can try (making) new stuff all the time. 

“We have the Krupnikas, which is kind of our core product, and then we have all these other things … things we made up. But it would really help to have a way to test those out, you know, on a small scale. So, if we can make something new and then throw it on the bar and get feedback from people right away, that’s going to be … a great way to try out a new product.”

McGrady remembers a time not so long ago when it was all he could do to move a local bill to help a brewery in his district. Times have changed, he said.

“In my first year,” McGrady told CJ, “I ran a little bill just to help my local brewery, and I had no idea what I was getting into. It took me three times in committee to get it out … and then it would barely pass the House, even though it didn’t affect anybody but one (business).”

McGrady has served five terms in the House but announced this year he won’t run again. He credits younger lawmakers, people such as Rep. John Bell, R-Wayne, with helping carry some of the heavy load that is alcohol reform.

“He’s got an eastern, more rural district, and yet he’s been willing to be on the front as a leader in these things. 

“You’re having constant turnover as younger legislators come in. And, as craft breweries and craft distilleries put a different face on what a distillery is, or what a brewery is, we’re seeing significant change. 

“Really, in four or five years we’ve gotten a lot of movement. There’ll be a few more retirements (from the General Assembly) over the years and, more importantly, more exposure. As these small businesses — distilleries, breweries, cideries, wineries  — become part of the community, those legislators are going to recognize that. They’ve got a lot at stake, and these things bring people into the area.

“I’m just stunned at how much progress we’re making,” McGrady said. 

Slow and unsteady, but progress nonetheless.

“I mean, it took us about 100 years to get here.”