FRANKFORT, Ky. — In recent years, vineyards and wineries have become more common in Kentucky due to a changing agricultural climate and a natural climate that is advantageous to the growing of grapes.

But a storm is brewing between small operators and the General Assembly as legislation has been introduced to regulate the sale of wine by in-state producers to the retail market.

Currently, Kentucky wineries are exempt from a law that requires out-of-state wine producers or any distilleries or breweries to ship by any means other than through wholesalers or a system known as the three-tier system.

After Prohibition was abolished in 1933, states were given broad authority to regulate the liquor industry. A system was created as a way of regulation that required the industry to be clearly separated into manufacturers, wholesalers and retailers. In addition, state laws placed restrictions on the involvement of manufacturers in the wholesaling and retailing tiers of the industry.

The purpose of the three-tier system was to prevent the encouragement of alcohol consumption that occurred prior to Prohibition - when manufacturers could be involved in wholesale or retail operations. Today, except for guidelines established in the Federal Alcohol Administration Act, control of alcoholic beverages is considered a state matter.

Last year, the U.S. Supreme Court struck down direct shipping laws in Michigan and New York, ruling that the laws in both states discriminated against interstate commerce. The judgment in Granholm v. Heald, meant that in-state and out-of-state wineries must be treated the same when it comes to the direct shipment of wine. States that permit in-state vintners to sell directly to consumers may not deny that right to out-of-state producers.

Kentucky, along with other states, would have to amend present laws to abide by the high court’s ruling.

State Sen. Gary Tapp, (R-Waddy) and Dick Roeding, (R-Lakeside Park) have introduced bills into the Kentucky General Assembly that would delete the state provision allowing a small winery to sell and transport wine directly to a retail drink or retail package license holder.

“We didn’t ask for this problem, but rather it was handed to us by the Supreme Court,” Tapp said. “If a large company sues and wins to get the same exemption, it could put these small wineries out of business. They could be gobbled up by the larger producers. That could cause the loss of lots of jobs in the wholesale industry, as well.”

Tapp’s Senate Bill 82 would give the state wine industry $1 million dollars in tax revenue for marketing efforts and enhancement of winery products through wine-making experts while providing a stipend for distributors to handle state wines for smaller producers; those with less than 10,000 gallons a year.

Some small producers see this proposal as detrimental to their young industry.

Chuck Smith, owner of Smith Berry Winery in New Castle, Ky., said the legislation would hurt the small wineries more than help.

“We’re a diversified tobacco farm here; an eighth-generation Henry County farm, and we’ve gone into growing grapes and making wine,” he said. “If this legislation passes, it will hurt our business.” Smith’s business generates about 4,000 gallons of wine per year and celebrated its third anniversary last August. His business has restaurant and retail customers in Louis-ville, Lexington and Midway.

“We’re a small business and this is really an issue about the wholesale distributors” Smith added. “The three-tier system has been around for more than 70 years and the wholesalers want it to stay.

“We’ve had the exemption from that system for about 10 years as a way to help get our businesses started. We’re not opposed to the distributors. We don’t want them to go out of business. We just want a compromise and to get on with business.”

Many small producers say that by going through a distributor to get their product on retailer shelves, they would have to sell at a major discount - something many can’t afford.

“Three representatives from the state wineries - including myself - met with representatives of the wholesale industry (last week) in Frankfort to talk about this issue and try to reach an agreement,” Smith said. “But, in the middle of the meeting, one of them got mad and left. The other two were working with us. They can’t even agree with each other.”

Wholesalers have dismissed the small winery arguments by saying there would be a minimal markup applied to Kentucky wines. State Rep. Rick Rand, (D-Bedford) has offered House Bill 507, which would allow out-of-state producers to ship to the state but leaving the in-state exemption.

“The wineries here support the three-tier system. All we want is our little exemption we’ve had,” Smith said. “We’re willing to compromise and to limit our production up to 8,000 cases per year. The law, as it is written right now says we have to first offer our wine to wholesalers. If they don’t want it then we have the right to self-distribute. We’ve offered it in the past, and they thought we were too small.”

While compromise may be the only way to reach an agreement between both parties, at this point in the state’s legislative session, passing a state budget will take precedence over anything else possibly leaving no solution at all.

“We have to keep all these things in mind. There could be some changes in the bill that would appease the wineries,” Tapp said. “We want the small wineries to continue to grow. We’re doing the best we can to comply with the Supreme Court ruling, help the wineries and keep the three-tier system intact. I was raised on a farm, so I understand the ag industry, and I support it from one end to the other. There well could be a compromise yet to take care of everyone concerned.”

Smith concluded, “We’ve had a 25 percent increase in business from last year and we’re growing. Our wineries are bringing tourism dollars to the local economies. We’ve got people coming here from all over the country. This helps out our little towns. This is more than just agriculture, now.

This farm news was published in the March 8, 2006 issue of Farm World.