With the growth of Santa Barbara County’s wine industry, tasting rooms are the perfect vehicle for wineries to reach potential consumers. The popularity of wine can be seen in the plethora of tasting rooms in Santa Barbara’s Funk Zone. What was once an industrial section of Santa Barbara is now arguably one of the city’s most popular attractions.
So what exactly goes into opening a winery and tasting room? More than you may think.
At the state level, a winery must comply with the requirements of the California Department of Alcoholic Beverage Control (ABC), the state Department of Food and Agriculture (CDFA) and the state Board of Equalization (BOE).
At the federal level, compliance with the Alcohol and Tobacco Tax and Trade Bureau (TTB) and Food and Drug Administration (FDA) is required.
And let’s not forget that a winery must also comply with local county ordinances.
This article will provide you with an overview of the various permitting and licensing hoops you will have to jump through to get a traditional bricks-and-mortar winery and tasting room off the ground.
Any person who desires to produce or sell wine must apply for a Type 02 winegrower’s license from the state Department of Alcoholic Beverage Control. The ABC requires a license at each location where the winery accepts orders. So if a winery plans to have a separate or additional office location for accepting and processing orders, or if it has an off-site retail room, a separate application for a duplicate winegrower license is required for each location.
There is no limit to the number of duplicate winegrower’s licenses that a winery may obtain for additional office locations. However, wineries can only have one duplicate winegrower premise where wine tastings occur and/or where wine is sold to consumers for consumption off premises.
In addition to the ABC licensing requirements, wineries that purchase and crush wine grapes, even if they are from related entities, for the purpose of making wine must register as a processor with the CDFA and annually renew their processor’s license.
Because processor license fees are based on the volume of grapes purchased, a winery that crushes grapes must provide a report to the CDFA by Jan. 10 of each year describing the total tons of grapes purchased during the preceding harvest, broken down by reporting district, tons harvested, variety and price paid per ton. Failure to comply with the reporting requirement can lead to investigation and audit by the CDFA and, potentially, fines, suspension or revocation of the processor’s license.
This information is also used annually to produce the CDFA Final Grape Crush Report.
A winery, like any other California business that sells tangible personal property, must register for a seller’s permit and pay sales tax to the BOE on a quarterly basis. Wineries also must pay an excise tax, which varies depending on the wine’s percentage of alcohol.
As a result of a surtax that was imposed in California, however, the state excise tax rate for all still wines is 20 cents per gallon. The BOE may require a winery to post some collateral — such as cash or a bond — to secure its excise tax payments, although this is not always required.
The TTB is charged with regulating the production and sale of alcoholic beverages under the Internal Revenue Code, the Webb-Kenyon Act, the Federal Alcohol Administration Act and the Alcoholic Beverage Labeling Act. The TTB’s stated mission is to qualify and issue operating permits, known as basic permits, to wineries, importers and wholesalers of wine; secure and collect revenue from winery operations; protect consumers by ensuring that alcohol products are labeled, advertised and marketed in accordance with applicable laws; and ensure fair trade practices in the wine industry.
A bricks-and-mortar winery that plans to produce or blend wine is required to apply for and hold a federal basic permit under the FAA Act to produce and blend wine, and also to register as a Bonded Wine Cellar (BWC) under the IRC to operate the winery premises.
To obtain the BWC approval, a vintner must have a secure winery premise to protect the wine (and thereby preserve the government’s revenue source) and obtain a wine bond from either an insurance company or some other surety, which acts as collateral to secure payment of the winery’s estimated tax liability. This is how the term “bonded wine premise” was derived. The winery’s excise tax liability is calculated based on the estimated number of gallons of wine produced and the particular types of wine produced.
After a winery begins operating, it must pay federal excise taxes on wine in accordance with, and at the times prescribed by, federal regulations. A winery’s federal excise tax is calculated based on wine type and alcohol content. A domestic winery that produces fewer than 250,000 gallons of wine may qualify for the Small Producer’s Wine Tax Credit, which can reduce the excise taxes owed by as much as 90 cents per gallon.
A new winery must register with the FDA as a “food facility” pursuant to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 (Bioterrorism Act) before commencing wine production activities. Following 9/11, Congress passed the Bioterrorism Act to enhance the security of the nation’s food supply. The law imposes an ongoing recordkeeping obligation on food producers, which includes wineries. Wineries must establish and maintain, for two years, records that allow the FDA to identify the sources and recipients of their products to allow it to address credible threats to public health.
Santa Barbara County Wine Ordinance
Finally, wineries must comply with local county ordinances. In Santa Barbara County, wineries are governed by the county’s Land Use and Development Code. Section 35.42.280 of the code sets a three-tier permit track for the development and operation of wineries. For example, one permit tier allows for the development and operation of wineries that comply with all of the following criteria (subject to a development plan approved by the zoning administrator):
» For every 1,000 cases of wine produced there shall be a minimum one acre of vineyard planted on the winery premises.
» The production capacity of the winery shall not exceed 50,000 cases per year.
» The winery may include a tasting room. However, the floor area of the tasting room shall not exceed 400 square feet, or 10 percent of the winery structural development area, located on the winery premises, whichever is greater.
» Winery structural development located within the winery premises shall not exceed 20,000 square feet.
» Winery special events occurring on the winery premises shall not exceed eight per year and the attendance at each event shall not exceed 150 attendees.
Existing and future wineries should be aware that Santa Barbara County’s Planning and Development Department is currently engaged in a special project to update the county’s winery ordinance. This will include a review and potential amendments to permit requirements and development standards for wineries and associated activities.
The says the purpose of the project is to “more clearly define standards for (1) allowed tasting room and event activities, (2) food service, including the permitting of kitchen facilities in wineries, and (3) sale of wine-related items.”
There is also a possibility that ordinance revisions could establish standards for reporting and monitoring, minimum premise size and planted vineyard acreage for wine tasting rooms and/or events, and parameters for assessing cumulative effects of proposed wineries. The changes to the wine ordinance will undoubtedly have an impact on existing and future wineries.
Starting a winery can be a complex, confusing and time-consuming process. Complying with the requirements of the various public agencies listed in this article is only one piece of the puzzle. Issues related to business entity formation, financing, tax, grape contracts, insurance and land use should also be evaluated.
If you plan to start a winery, speak with a qualified attorney to ensure you are taking all the right steps.
— John Haan is a senior associate at Rogers, Sheffield & Campbell LLP of Santa Barbara and chairman of the firm’s Wine Law Group. His practice is concentrated in the areas of business, real estate and wine law. A version of this article was published previously in Santa Barbara Lawyer. Click here to read previous columns. The opinions expressed are his own. This article is not intended to provide legal advice. For legal advice on any of the information in this post, click here for the form or phone number on the Rogers, Sheffield & Campbell Contact Us page. The opinions expressed are his own.