BEFORE THE DEPARTMENT OF REVENUE
OF THE STATE OF MONTANA
In the matter of the adoption of New Rule I (ARM 42.11.106) and amendment of ARM 42.11.105 relating to the mark-up on liquor sold by the state
NOTICE OF ADOPTION AND AMENDMENT
TO: All Concerned Persons
1. On August 25, 2011, the department published MAR Notice No. 42-2-865 regarding the proposed adoption and amendment of the above-stated rules at page 1642 of the 2011 Montana Administrative Register, issue no. 16.
2. A public hearing was held on September 27, 2011, to consider the proposed adoption and amendment. Oral testimony was received at the hearing and is summarized as follows along with the response of the department:
COMMENT NO. 1: John McKee, representing Headframe Spirits questioned whether there was an agriculture component addressed in the rule. He stated that he doesn't believe that it is possible to have a 100 percent Montana-produced ingredients. He stated that there are a number of arguments that doesn't make that possible. He suggested that 51 percent, such that there is a presumption of the majority used, but there is actually a reality that can occur. The 100 percent just doesn't make physical sense. A product simply cannot be made that way. Robin Blazer, Courtney McKee, and Brian Schultz expressed similar comments.
Mr. McKee further stated the most important thing would be to remove any ambiguity.
RESPONSE NO. 1: The department appreciates the comments made by Mr. McKee, Ms. Blazer, Ms. McKee, and Mr. Schultz during the rule hearing and has modified the language in New Rule I (ARM 42.11.106). It is the intent of the department to offer a 100 percent reduction in mark-up, after department costs, to all distilleries that produce 25,000 proof gallons or less of liquor nationwide regardless of the percentage of Montana-produced ingredients used in the production of the liquor. The department believes the modified language removes the ambiguity referenced in the oral testimony.
COMMENT NO. 2: Bryan Schultz, representing Roughstock Distillery asked a question regarding the background of the interstate commerce clause. He questioned the main points of why the agriculture information was taken away from the bill and then not put into the rules.
RESPONSE NO. 2: As to the commerce clause analysis, see the response to Comment No. 3 below. The department determined that it had no ability to discern the location of the production of the ingredients and hence the assumption was warranted. See the response to Comment No. 5 below.
COMMENT NO. 3: Mr. McKee suggested the department review a Supreme Court case called New Energy v. Ohio. He stated that the case deals specifically with this type of interstate commerce clause. The interstate commerce clause action underneath Bacchus Imports v. Hawaii (sic) Dias dealt strictly with the excise tax. This isn't tax, this is a department warehouse overhead mark-up rate, not tax. And so in New Energy vs. Ohio, they speak very specifically in the Supreme Court then to an excise tax versus a state's cash, or contribution if you will, to the state's ongoing business interests. And the Supreme Court weighed in on the side of that ruling underneath the dormant commerce clause.
Mr. McKee further stated that the Bacchus v. Dias ruling was strictly about the excise tax, and this is not a tax. He stated that the warehouse overhead is not a tax and therefore Bacchus v. Dias doesn't apply, however, New Energy v. Ohio does.
RESPONSE NO. 3: The department understands the comments and suggestions made by Mr. McKee. Mr. McKee stated that the Bacchus Imports, Ltd. v. Dias, 468 U. S. 263 (1984) case was not on point because it concerned an excise tax rather than a price mark-up. Instead, New Energy Co. v. Limbach, 486 U. S. 269 (1988) was said to permit discrimination in favor of in-state agricultural products.
The department disagrees with this analysis. The commerce clause analysis does not turn on the form of the state imposition as between a mark-up and an excise tax. See Oregon Waste Systems, Inc. v. Oregon, 511 US 33 (1994). In the Oregon case, the Supreme Court struck Oregon's surcharge on waste from out-of-state. In New Energy the Supreme Court struck Ohio's tax credit for ethanol producers using Ohio ingredients. Accordingly, Bacchus is directly on point and prohibits favoring Montana ingredients. New Energy reinforces the same legal conclusion.
Other comments were received to the effect that other states have statutes that purport to only license distillers that obtain a majority of their ingredients from within the licensing state. It was not proven that these states actually enforce this restriction and even so, because the restriction operates solely to disqualify potential in-state licensees, the commerce clause analysis of such a statute would be completely different.
COMMENT NO. 4: Robin Blazer, representing Willies Distillery stated that she believes there should be an enforcement of Montana raw materials. She said that she wasn't saying that she would run to North Dakota and grab her supplies, but she suggested that as an extra incentive for the agriculture producers in Montana, or rather the distilleries to take that extra step, she doesn't think a presumption is good enough.
On this same subject, Mr. Shultz commented that the portion of the rule that states 25,000 proof gallons with reductions that are not going to be based on a Montana agricultural portion doesn't reflect the law. He further stated that he understands there may be some challenges that the department's legal office may have but that there are two other states that require small distilleries in those states to be 51 percent compliant with in-state grown agricultural products to even be lawfully considered a distillery. Additionally, Mr. Schultz stated that if he wanted to import 25,000 gallons of scotch whiskey into Montana and re-brand it as his own, it could be done. He stated that he believes the 25,000 proof gallon limit just as a producer nationwide is a very wide and open avenue for anybody to get a reduction in mark-up without using any kind of agricultural products. He stated that this has no face value to what the original bill was passed on.
RESPONSE NO. 4: The department appreciates the comments made by Ms. Blazer and Mr. Schultz. The department believes the act of giving incentives to distilleries that use Montana-produced ingredients violates the interstate commerce clause. Such an incentive would likely make the state liable for refunds of approximately $9.0 million of annual general fund revenue. See Comment No. 3 above. The department will allow all companies that produce less than 25,000 proof gallons annually to receive the reduced mark-up rate regardless of the percentage of Montana-produced ingredients. See Comment No. 2 above.
COMMENT NO. 5: Senator Steve Gallus, representing Senate District 37, sponsor of Senate Bill 215 provided written comments regarding the proposed rule action stating: "As primary sponsor of Senate Bill 215 during the 2011 session, I wanted to respond to the proposed department rule regarding the legislation. Just to be clear, I am very much opposed to the proposed rule and plan to exhaust every legal recourse possible to block its adoption. The proposed rule flies in the face of legislative intent, and the authority of the legislative branch and separation of powers.
The proposed new rule does not follow the language set out in Senate Bill No. 215 since all distillers who produce 25,000 proof gallons or less are assumed to qualify for the reduced mark-up, regardless of whether Montana-produced ingredients were used. Additionally, the proposed new rule implies that a distiller cannot receive the reduced mark-up until November 1, 2011, despite the immediate effective date of Senate Bill No. 215.
The department does not have the legal authority to use ARM to take the preventative measure of protecting the state from a potential violation of the interstate commerce clause in the U.S. Constitution, especially when rule combines to violate and ignore MCA.
The department relied heavily on the Governor's signing statement which does not carry any weight of law where MCA does."
RESPONSE NO. 5: The department does not have a mechanism to determine where the ingredients used by any particular distillery are produced. In particular, as noted by a member of the Revenue and Transportation Committee, a number of Montana farmers also produce grain in Canada and North Dakota, and those farmers would be hard pressed to identify the origin of their grain. Lacking the mechanism to determine the actual source of production (as opposed to determining from whom the ingredients were purchased) justifies the rule and steers clear of the separation of powers argument posited by the sponsor.
The department's implementation of the law is prompt and timely given that it was necessary for the department to: (i) respect the contractual rights of agency liquor store owners and permit existing inventories in the retail system to be exhausted and (ii) determine which portion of the mark-up was attributable to costs and promulgate a rule explaining the department's conclusion. No earlier implementation was feasible, despite the immediate effective date. The Revenue and Transportation Interim Committee has reviewed the department's rule and determined to take no action on the rule.
3. As a result of the comments received the department adopts New Rule I (42.11.106) with the following changes:
NEW RULE I (42.11.106) REDUCTION IN STATE MARK-UP FOR DISTILLERIES AT OR BELOW 25,000 PROOF GALLONS (1) For purposes of applying 16-2-211, MCA,
the department will assume that for distilleries a reduced mark-up rate of 20 percent will be applied to all liquor products acquired from a distillery that manufactures, distills, rectify rectifies, bottles, or processes 25,000 proof gallons or less of liquor nationwide annually , all ingredients contained in the liquor from such distilleries is comprised of 100 percent Montana-produced ingredients. A reduced mark-up rate of 20 percent will be applied to liquor products from such distilleries.
(2) through (7) remain as proposed.
AUTH: 16-1-103, 16-1-303, 16-2-211, MCA
IMP: 16-2-211, MCA
4. Therefore, the department adopts New Rule I (42.11.106) with the amendments listed above and amends ARM 42.11.105 as proposed.
5. An electronic copy of this notice is available on the department's web site at www.revenue.mt.gov. Locate "Legal Resources" in the left hand column, select the "Rules" link and view the options under the "Notice of Proposed Rulemaking" heading. The department strives to make the electronic copy of this notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered. In addition, although the department strives to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.
/s/ Cleo Anderson /s/ Dan R. Bucks
CLEO ANDERSON DAN R. BUCKS
Rule Reviewer Director of Revenue
Certified to Secretary of State October 17, 2011