1. March 11, 2014 NABCA 21 st Annual Legal Symposium on Alcoholic Beverage Law & Regulation Confusion with Infusion Thomas A. Lisk, Esq. Counsel, Virginia Hospitality & Travel Association Presented by:

2. Confusion with Infusion TTB Opinion on Alcohol Infusions  TTB is aware of the increasing trend of bars and restaurants infusing distilled spirits with fruits, herbs, and other nonalcoholic ingredients in order to make "infusions," which are served on premises in cocktails.  NABCA asked for a statement of TTB's position on the issue in order to assist NABCA's state government members when developing their own policies regarding infusions.  TTB provided a response which reflects its analysis of the application of certain federal laws to the making of infusions using taxpaid spirits.

3. Confusion with Infusion TTB Opinion on Alcohol Infusions (continued)  TTB also provided NABCA with its current enforcement policy regarding these activities, so that States could take that into consideration when applying their respective alcohol beverage laws and regulations.  However, TTB cautioned that it is not precluded from taking enforcement action for any conduct that may jeopardize the revenue.

4. Confusion with Infusion "Under the Federal Alcohol Administration Act (FAA Act), rectifying or blending distilled spirits may only be lawfully done by a person with a TTB permit. (See 27 U.S.C. 203(b)). Additionally, under the Internal Revenue Code of 1986 (IRC), processing distilled spirits (including mixing) may be conducted only on the bonded premises of a distilled spirits plant by a person who maintains a registration as a distilled spirits plant proprietor. The mixing of taxpaid spirits for immediate consumption is not considered processing. (See 26 U.S.C. 5002(a)(5) and 5002(a)(6)(B)).”

5. Confusion with Infusion “We understand that infusions are generally not for immediate consumption at the time the ingredients are mixed and would, accordingly, be subject to the IRC requirements. However, since taxpaid spirits are used in the process, TTB believes there is little risk to the Federal excise tax revenue. Additionally, because infusions are served on premises as or in cocktails, we do not foresee FAA Act packaging and labeling concerns. Under these circumstances, TTB exercises its enforcement discretion not to take enforcement action solely on the basis of violations with regard to a retail liquor dealer that mixes taxpaid spirits to produce infusions for on-premise consumption.”

6. Confusion with Infusion “This position does not apply to and TTB will continue to enforce prohibitions on processing with non-taxpaid spirits, bottling spirits, aging spirits in barrels, heating spirits, refilling of liquor bottles by retail liquor dealers, and with respect to any other conduct that may jeopardize the revenue." TTB Newsletter, May 18, 2012 http://www.ttb.gov/newsletters/archives/2012/ttb- newsletter051812.html

7. Confusion with Infusion What is happening in the States?  Is infusion rectifying? Rhode Island says yes and prohibits the practice. In contrast California says no and permits the practice.  Many States prohibit infusion due to State requirements that distilled spirits only be poured from the original container (e.g., AZ, CT, GA, KY, UT).

8. Confusion with Infusion  Some States prohibit infusion but take no enforcement action (names withheld to protect the guilty?).  Some States consider infusion to be equivalent of a pre-mixed drink and therefore allow the practice but with limitations on how long the spirits may be stored in the separate container (e.g., one day, 72 hours, “temporarily”).

9. Confusion with Infusion  Texas ABC Marketing Practices Bulletin: “We conclude the process of infusion in and of itself is not by itself in violation of 16 TAC Sect 45.5 and is not too dissimilar from the process of a mixed or frozen drink prepared on a retailer’s premise.”  Conclusion can change if the infusion results in a higher alcohol content or renders the product unfit for consumption.

10. Confusion with Infusion  Tennessee ABC initially banned all infusions.  TABC subsequently suspended enforcement activity until rules could be promulgated.  Draft rules published in June 2013 to permit infusion with limitations, including: - Containers not larger than 3 gallons; - Disposed of within 72 (96?) hours; - Labelling and Record-Keeping.

11. Confusion with Infusion  Senate Bill 628 (2010): The Virginia ABC Board shall promulgate regulations that “[p]rescribe the terms and conditions under which mixed beverage licensees may infuse, store, and sell flavored distilled spirits.” (Chapter 481, 2010 Acts of Assembly amending Va.Code Section 4.1-111.B.11).  Passed State Senate 40-0 and passed House of Delegates 100-0.

12. Confusion with Infusion  VA ABC issues Notice of Intended Regulatory Action (“NOIRA”) on September 27, 2011 which is published in Virginia Register of Regulations on December 5, 2011.  VA ABC publishes draft language with policy statement on June 27, 2012.  Governor’s Office approves draft on April 30, 2013 and proposed language is published in Virginia Register of Regulations on May 20, 2013.

13. Confusion with Infusion  VA ABC finds that: “[t]he primary advantage of this action is to allow mixed beverage restaurants the flexibility to produce their own flavor-infused distilled spirits for the production of cocktails. It poses no disadvantages to the public or the Commonwealth.” VA ABC Agency Background Statement 10/31/2013

14. Confusion with Infusion  VA ABC further finds that: “[i]n order to determine compliance with statutes requiring purchases of all distilled beverages from state stores, prevent fraud by substitution of product, ensure compliance with the required ratio of food sales to mixed beverage” record- keeping requirements were necessary for licensees that would be infusing spirits.

15. Confusion with Infusion  Governor’s Office approves final text of regulation on January 2, 2014.  Final text published in Virginia Register of Regulations on January 27, 2014.  Regulation became effective on February 26, 2014.

16. Confusion with Infusion  3 VAC 5-50-60.F. of the VA ABC Regulations provides that:  A mixed beverage restaurant licensee may infuse, store, and sell flavored distilled spirits under the following circumstances:  If infused in the original spirits container, the mixed beverage stamp must remain affixed to the bottle.

17. Confusion with Infusion  If infused in a container other than the original spirits container, the substitute container, which shall not exceed two liters in volume, will be labeled with the following information: a. Date of infusion; b. Brand of spirits; and c. Amount of spirits used.

18. Confusion with Infusion  Accurate records must be kept by the mixed beverage licensee as to the spirits used in any spirits infusion process.  Licensees infusing distilled spirits shall comply with all applicable state and federal food safety regulations.

19. Confusion with Infusion  Washington State has no regulation that specifically addresses infusion of spirits; however, state statutes have been unofficially construed to allow infusion;  BUT, now that Washington has legalized recreational marijuana, guidance is being offered that it will not be legal to sell any type of alcohol infused with marijuana or THC derivatives.

20. Questions? Thomas A. Lisk, Esq. (804) 788-7750 | tlisk@eckertseamans.com