The Legal Issues with Distillery Barrel Programs

Craft distilleries are often interested in introducing barrel programs. These can be a regulatory quagmire because distilleries generally can’t sell at retail to the public in the three-tier system. Distillery owners see others doing it but just don’t know how to do it the right way.  They hear from some people it is legal and others it is not and there just isn’t much reliable information on the internet on this topic.  There is a lot of misinformation and misunderstanding about barrel programs. One reason is that each state’s laws are different so you can’t just take what is legal in one state and adopt it in another state. Some are control states, some are 3 tier states. Not to mention the very different regulatory schemes across the states when it comes to alcohol. I find there are 4 main legal issues:

1. Title to the whiskey.

When does it transfer? When the purchase is made or at delivery of the bottled product? This can be an issue for a small financially distressed distillery when a lien is claimed by the TTB for unpaid taxes, a creditor or bankruptcy situation. The question is who gets the whiskey despite it being fully paid for? In most cases, title can’t transfer until the final product is bottled and delivered (excise tax paid by the distillery) to the customer. Customers of course want to claim title upon payment especially when full pre-paid.

2. Structuring the transaction.

Is the transaction a pre-purchase or sale of a “future” right and obligation to purchase the product when it is ready? The reason this is an issue is that securities laws may apply in the sale of “futures.” That complicates the transaction and adds more regulatory issues. It is best to structure it as a pre-sale or an order to avoid any unintentional transgressions of securities laws or alcoholic beverage control laws.

3. Compliance with sales and distribution laws:

Distillers are generally prohibited from direct retail sale to customers, especially in a 3-tier system. They must sell to distributors who must sell to retailers. Thus, the legal transaction is between the customer and the retailer (liquor store). The retailer must have a corresponding arrangement with the distributor and the distributor must have yet a third corresponding transaction with the distillery manufacturing the product. There is a lot of risk and coordination required to make it work. In some states, micro or farm distilleries can contract with retail customers or retailers directly.

4. Compliance with state product allocation laws or contractual allocation obligations.

If there is limited product, there are sometimes regulations or contractual obligations covering an equal distribution of product to each “buyer” in the system. For example, if a distillery makes only 100 cases, it may be required to allocate the same amount to each of its distributors so they are all on equal footing. Thus, if a distributor or retailer takes part of its allocation in a transaction just for one customer, its other customers can be affected by the shortfall.

Barrel programs are on area where professional guidance ca be helpful. A little bit of advice at the beginning can save a lot of expense later if you are cited for regulatory violations with your operations, putting your licenses and permits at risk.