Three Napa wineries test a law saying small operators can't donate to charities

By JACK HEEGER, Register Staff Writer

Three Napa Valley vintners face possible license suspensions or stiff fines Tuesday when they come before an administrative law judge in Napa.

Their crime? They poured wine for charity.

According to the California Alcohol Beverage Control Board, the licenses they hold don't allow them to pour wine at an event attended by consumers, nor can they donate wine to a nonprofit organization for use at fundraisers. The vintners are Eagle Eye Wine, Elkhorn Peak Cellars and StoneFly Vineyard.

They were invited to participate in the Tiburon Wine Festival in May. Shortly after the event they were cited by a representative of the ABC. They were offered an opportunity to pay a fine, have their license suspended or appear at a hearing. All three opted for the hearing at 10 a.m. Tuesday in the basement level Public Works conference room in the county building in Napa.

The problem for the trio of wineries is that state law bars wineries without physical plants -- or those that cannot otherwise obtain the right sort of license -- from pouring wine for consumers or providing it for wine auctions.

There are hundreds of such boutique wineries in California, donating to countless charitable causes. If the law being applied to the three Napa wineries were applied more broadly, the stakes would be very high for wine country charitable groups and wineries alike.

One Napa Valley producer of a charitable event, who declined to be named because he did not want to jeopardize his own auction and fundraiser, said if the law is broadly enforced "it would be disastrous. ... It would devastate nonprofits and affect untold thousands of people who depend on the money raised by these very charities. They've got to change that law."

Paul Frank, owner of the small Gemstone winery in Yountville, said he donates 4 to 5 percent of his total production to charitable events. A 3-liter bottle, worth $450 if available to consumers, was sold for $9,000 at a recent charity auction.

"If we can give a bottle of wine to a charity, and sign it and it can bring $9,000, that's a lot more than we would be able to afford to give on our own," Frank said. "If we can't do that, and if others can't, then it will leave a significant deficit in social services in our community."

Multitude of licenses

The ABC issues more than 80 different types of licenses covering producers and sellers of alcoholic beverages. Of those, three relate most to vintners -- type 02, for brick-and-mortar wineries; type 17, for beer and wine wholesalers; and type 20, for off-sale beer and wine.

A vintner who makes wine but does not operate a physical facility qualifies for a type 17 license. A special type 20 license allows those vintners to sell to the public via telephone, fax or online.

There are more than 400 type 17 licensees in Napa County, including a few large wineries that also have 02 licenses and some wine shipping operations. But the vast majority of 17s are small producers, and according to a strict interpretation of the California Business and Professions Code section, they cannot pour for consumers or donate.

The citation against the three Napa wineries says they "conducted a wine tasting to consumers, a right and privilege not authorized under the licenses," and refers to B&P code sections 23300 and 23355.

The topics of pouring and donating are not mentioned in type 17 licenses. But Scott Warnock, supervising inspector for the Santa Rosa ABC District, said the law tells you what you can do, not what you can't. In other words, if it's not in the license you can't do it.

The penalty ABC imposes for violating the law is a percentage of the previous year's revenues or a suspension of the license. In the case of Elkhorn Peak Cellars, the fine would be $7,000, or a 15-day suspension, a pretty stiff penalty for a producer of only 1,500 cases per year.

"I've been pouring and donating wine for the past 15 years, and I wasn't aware that you weren't allowed to pour," said Ken Nerlove, of Elkhorn Peak. "That regulation was never enforced by ABC."

It actually has been enforced, Warnock said. But he acknowledged that enforcement has been stepped up in recent years. He estimated that about 50 cases have arisen in the past year.

Bill Wolf, of Eagle Eye Wines, said he was told by an ABC representative the recent spate of citations was triggered by complaints from some large wineries in Sonoma County holding 02 licenses. Because ABC is complaint-driven, it was forced to respond, he said. Wolf said ABC officials told him the large wineries complained they had invested substantially in their facilities, while smaller operators had not. The small wineries, however, still enjoyed the same benefits -- the marketing opportunities and tax write-offs of donating wine.

Warnock declined to discuss the source of the complaints.

Elkhorn's Nerlove doesn't think much of those arguments.

"We're not big enough to compete (with the large wineries)," he said. "I don't have a brick-and-mortar winery, but I pay my taxes, the same as they do, and then to say I can't donate wine to my favorite charity is just plain wrong."

Wolf said in addition to being unfair to small producers, in his view the law might even be unconstitutional. "It's unfair to treat us differently," he said. "That's why we have to have the law changed so that all of us, regardless of the type of license we have, can be treated on equal footing."

Special permit needed

A nonprofit organization must obtain a one-time license to conduct an event where alcoholic beverages are sold or poured. ABC estimates up to 300 of those are issued each month by its Santa Rosa District office overseeing Napa, Sonoma, Mendocino, Lake and Marin counties. The only wineries that legally can pour at these events or donate to the silent and live auctions have type 02 licenses.

There are two ways around the problem, both severely limited. One involves the non-02 vintner selling the wine to the nonprofit conducting the event. A winery representative cannot pour the wine, but under certain circumstances can be present to talk about the wine, the winery and the vineyard.

Can boutique wineries merely sell the wine inexpensively to charities? No. ABC's Warnock said the sale must be for not less than the vintner's cost plus 6 percent. Otherwise, he said, it is treated the same as if it were a donation.

The other possibility is for producers to become what's known as a type 02-AP, or Alternating Proprietorship, described by the federal Trade and Tariff Bureau as an arrangement where two or more persons take turns using the physical premises of a winery. Type 02-APs have the same rights in this arena as 02s.

Perhaps the most high-profile such operation locally is the Napa Wine Company in Oakville, custom-crusher of wines for 25 alternating proprietors.

Alternating proprietorships, though, may not be not for everyone. From what Napa Wine Company managing partner Andrew Hoxsey said, it would not be worth pursuing such a license if the only reason is to pour at charitable events. Hoxsey estimated a startup cost of up to $5,000 for both parties, along with the extra paperwork to comply with licensing regulations.

Sacramento-bound?

Surprised by the legal limitation, some of those who hold type 17 or 20 licenses are talking to lawmakers. ABC's Warnock said he has suggested that affected wineries go to their assembly representatives and state senators for help. Wolf, of Eagle Eye, said he has talked with representatives for Rep. Mike Thompson, D- St. Helena, and Assemblywoman Noreen Evans, D-Santa Rosa.

Evans assistant Laurie Puzo said this week she hasn't had a chance to discuss it with Evans, who is on vacation, but she urged Wolf to get industry support. She also suggested organizations outside the wine industry, including the state Chamber of Commerce and the Napa Valley Coalition of Non-ProfitAgencies, should try to mobilize.

Thompson's aide said the congressman, who has no direct say in state law, supports a change in the regulation.

Some action has already started. The Napa County Farm Bureau board of directors voted Wednesday night to support any proposed change in the law. "The winegrape industry has a long tradition of supporting charitable organizations, and fixing the law will continue that support," said Sandy Elles, executive director.

Wolf has also been in contact with two of the most influential organizations in the California wine industry -- the Wine Institute and the Napa Valley Vintners, both active as legislative advocates for wine producers.

The Wine Institute's by-laws preclude anyone other than 02s as active members, so their members are not adversely affected by the law.

Napa Valley Vintners requires its nearly 300 member wineries either make donations to Auction Napa Valley or the trade-only Premiere Napa Valley auction, or that they host a hospitality event at Auction Napa Valley. No consumers attend Premiere Napa Valley, so type 17 or 20 licensees can participate. But at Auction Napa Valley -- attended by consumers -- the rules could pose a problem.

Rex Stults, industry relations director for NVV, said the organization has asked ABC for a ruling on whether type 17 and 20 licensees can contribute to Auction Napa Valley. Stults said NVV also is pursuing the ability of 17s and 20s to donate to charities with a temporary event license.

One organization that would appear to be in the middle of the problem is Family Winemakers of California, with its two events per year, a trade-only gathering in Southern California and a consumer tasting in San Francisco. Because the consumer event is held at San Francisco's Fort Mason -- federal property -- it is exempt from California law.

Zinfandel Advocates & Producers conducts several events yearly, including one at Fort Mason. In an e-mailed statement, executive director Becky Robinson wrote, "It's a shame that the very smallest wineries are disadvantaged in this way. But ZAP is different from other trade or community wine associations in that we are a 501(c)(3) educational-charitable organization, so we are blessed with privileges of our own when producing events. That makes us different from other trade organizations."

Eagle Eye's Wolf hopes to ignite a grass-roots campaign to call attention to what he sees as the inequities in the current law.

"It has to start with the hearing, so I'm trying to get as many people, especially those who have 17/20s, to come to the hearing and give us support," he said. "I'd like to get some nonprofits to come to tell what happens to them if they can't have the support of these wineries, and what will happen to the people they help."

It is an odd circumstance that even the agency charged with enforcing the law recommends taking a similar course.

Napa Valley Register Copyright © 2008