Supplemental Notice to WSR 12-07-040.

     Preproposal statement of inquiry was filed as WSR 11-24-098.

     Title of Rule and Other Identifying Information: New sections in chapter 314-02 WAC, Requirements for retail liquor licensees; create new chapter 314-23 WAC, Spirits distributors and spirits certificate of approval licenses; and revising chapter 314-28 WAC, Distilleries.

     Hearing Location(s): Washington State Liquor Control Board, Board Room, 3000 Pacific Avenue S.E., Lacey, WA 98504, on May 23, 2012, at 10:00 a.m.

     Date of Intended Adoption: May 30, 2012.

     Submit Written Comments to: Karen McCall, P.O. Box 43080, Olympia, WA 98504-3080, e-mail rules@liq.wa.gov, fax (360) 664-9689, by May 23, 2012.

     Assistance for Persons with Disabilities: Contact Karen McCall by May 23, 2012, (360) 664-1631.

     Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: New permanent rules are needed to implement Initiative 1183 that passed on November 8, 2011. Parts of the initiative became effective on December 8, 2011. New license types were created and the state of Washington changed from a controlled liquor system to a privatized liquor system. Emergency rules were adopted on December 7, 2011, and on April 4, 2012, to clarify the language in the new laws created in Initiative 1183. Permanent rules are needed to replace the emergency rules and further clarify the new laws.

     Statutory Authority for Adoption: RCW 66.08.030, 66.24.055, 66.24.160, 66.24.630, 66.24.640.

     Statute Being Implemented: RCW 66.24.055, 66.24.160, 66.24.630, 66.24.640.

     Rule is not necessitated by federal law, federal or state court decision.

     Name of Proponent: Washington state liquor control board, governmental.

     Name of Agency Personnel Responsible for Drafting: Karen McCall, Rules Coordinator, 3000 Pacific Avenue S.E., Olympia, WA 98504, (360) 664-1631; Implementation: Alan Rathbun, Licensing Director, 3000 Pacific Avenue S.E., Olympia, WA 98504, (360) 664-1615; and Enforcement: Justin Nordhorn, Enforcement Chief, 3000 Pacific Avenue S.E., Olympia, WA 98504, (360) 664-1726.

     No small business economic impact statement has been prepared under chapter 19.85 RCW. This proposal has a positive impact on businesses or individuals who wish to sell spirits in the state of Washington.

     A cost-benefit analysis is not required under RCW 34.05.328.

April 18, 2012

Sharon Foster

Chairman

OTS-4509.10

NEW SECTION
WAC 314-02-103   What is a wine retailer reseller endorsement?   (1) A wine retailer reseller endorsement is issued to the holder of a grocery store liquor license to allow the sale of wine at retail to on-premises liquor licensees.

     (2) No single sale to an on-premises liquor licensee may exceed twenty-four liters. Single sales to an on-premises licensee are limited to one per day.

     (3) A grocery store licensee with a wine retailer reseller endorsement may accept delivery at its licensed premises or at one or more warehouse facilities registered with the board.

     (4) The holder of a wine retailer reseller endorsement may also deliver wine to its own licensed premises from the registered warehouse; may deliver wine to on-premises licensees, or to other warehouse facilities registered with the board. A grocery store licensee wishing to obtain a wine retailer reseller endorsement that permits sales to another retailer must possess and submit a copy of their federal basic permit to purchase wine at wholesale for resale under the Federal Alcohol Administration Act. A federal basic permit is required for each location from which the grocery store licensee holding a wine retailer reseller endorsement plans to sell wine to another retailer.

     (5) The annual fee for the wine retailer reseller endorsement is one hundred sixty-six dollars.

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     (a) Documentation that shows the licensee has a right to the warehouse property;

     (b) If a warehouse facility is to be shared by more than one licensee, each licensee must demonstrate to the board that a recordkeeping system is utilized that will account for all wine and/or spirits entering and leaving the warehouse for each license holder. The system must also account for product loss;

     (c) Licensees in a shared warehouse may consolidate their commitment for the amount of product they plan to order, but their orders must be placed separately and paid for by each licensee; and

     (d) Alternatively, if the warehouse does not have a recordkeeping system that provides the required information, wine and/or spirits for each licensee in a shared warehouse must be separated by a physical barrier. Where physical separation is utilized, a sketch of the interior of the warehouse facility must be submitted indicating the designated area the licensee will be storing product. (Example: If ABC Grocery and My Grocery, each licensed to a different ownership entity, both lease space in a warehouse facility, the wine and/or spirits must be in separate areas separated by a physical barrier.)

     (2) Upon the request of the board, the licensee must provide any of the required records for review. Retail liquor licensees must keep the following records for three years:

     (a) Purchase invoices and supporting documents for wine and/or spirits purchased;

     (b) Invoices showing incoming and outgoing wine and/or spirits (product transfers);

     (c) Documentation of the recordkeeping system in a shared warehouse as referenced in subsection (1)(b) of this section; and

     (d) A copy of records for liquor stored in the shared warehouse.

     (3) Each licensee must allow the board access to the warehouse for audit and review of records.

     (4) If the wine and/or spirits for each licensee in a shared warehouse is not kept separate, and a violation is found, each licensee that has registered the warehouse with the board may be held accountable for the violation.

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     (a) Sell spirits in original containers to consumers for off-premises consumption;

     (b) Sell spirits in original containers to permit holders (see chapter 66.20 RCW);

     (c) Sell spirits in original containers to on-premises liquor retailers, for resale at their licensed premises, although no single sale may exceed twenty-four liters, and single sales to an on-premises licensee are limited to one per day; and

     (d) Export spirits in original containers.

     (2) A spirits retailer licensee that intends to sell to another retailer must possess a basic permit under the Federal Alcohol Administration Act. This permit must provide for purchasing distilled spirits for resale at wholesale. A copy of the federal basic permit must be submitted to the board. A federal basic permit is required for each location from which the spirits retailer licensee plans to sell to another retailer.

     (3) A sale by a spirits retailer licensee is a retail sale only if not for resale to an on-premises spirits retailer. On-premises retail licensees that purchase spirits from a spirits retail licensee must abide by RCW 66.24.630.

     (4) A spirits retail licensee must pay to the board seventeen percent of all spirits sales. The first payment is due to the board October 1, 2012, for sales from June 1, 2012, to June 30, 2012 (see WAC 314-02-109 for quarterly reporting requirements).

     Reporting of spirits sales and payment of fees must be submitted on forms provided by the board.

     (5) The annual fee for a spirits retail license is one hundred sixty-six dollars.

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     (a) Submit a signed acknowledgment form indicating the square footage of the premises. The premises must be at least ten thousand square feet of fully enclosed retail space within a single structure, including store rooms and other interior areas. This does not include any area encumbered by a lease or rental agreement (floor plans one-eighth inch to one foot scale may be required by the board); and

     (b) Submit a signed acknowledgment form indicating the licensee has a security plan which addresses:

     (i) Inventory management;

     (ii) Employee training and supervision; and

     (iii) Physical security of spirits product with respect to preventing sales to underage or apparently intoxicated persons and theft of product.

     (2) A grocery store licensee or a specialty shop licensee may add a spirits retail liquor license to their current license if they meet the requirements for the spirits retail license.

     (3) The board may not deny a spirits retail license to qualified applicants where the premises is less than ten thousand square feet if:

     (a) The application is for a former contract liquor store location;

     (b) The application is for the holder of a former state liquor store operating rights sold at auction; or

     (c) There is no spirits retail license holder in the trade area that the applicant proposes to serve; and

     (i) The applicant meets the operational requirements in WAC 314-02-107 (1)(b); and

     (ii) If a current liquor licensee, has not committed more than one public safety violation within the last three years.

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     The required reports must be:

     (a) On a form furnished by the board;

     (b) Filed every quarter, including quarters with no activity or payment due;

     (c) Submitted, with payment due, to the board on or before the twenty-fifth day following the tax quarter (e.g., Quarter 1 (Jan., Feb., Mar.) report is due April 20th). When the twentieth day of the month falls on a Saturday, Sunday, or a legal holiday, the filing must be postmarked by the U.S. postal service no later than the next postal business day; and

     (d) Filed separately for each liquor license held.

     (2) What if a spirits retailer licensee fails to report or pay, or reports or pays late? If a spirits retailer licensee does not submit its quarterly reports and payment to the board as required in subsection (1) of this section, the licensee is subject to penalties.

     A penalty of two percent per month will be assessed on any payments postmarked after the twentieth day quarterly report is due. When the twentieth day of the month falls on a Saturday, Sunday, or a legal holiday, the filing must be postmarked by the U.S. postal service no later than the next postal business day.

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OTS-4510.8

     (a) Sell spirits purchased from manufacturers, distillers, importers, or spirits certificate of approval holders;

     (b) Sell spirits to any liquor licensee allowed to sell spirits;

     (c) Sell spirits to other spirits distributors; and

     (d) Export spirits from the state of Washington.

     (2) The price of spirits sold to retailers may not be below acquisition cost.

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     (a) Ten percent of the total revenue from all sales of spirits to retail licensees made during the month for which the fee is due for the first two years of licensure; and

     (b) Five percent of the total revenue from all sales of spirits to retail licensees made during the month for which the fee is due for the third year of licensure and every year thereafter.

     (c) The license fee is only calculated on sales of items which the licensee was the first spirits distributor in the state to have received:

     (i) In the case of spirits manufactured in the state, from the distiller; or

     (ii) In the case of spirits manufactured outside the state, from a spirits certificate of approval holder.

     (d) Reporting of sales and payment must be submitted on forms provided by the board.

     (2) The annual fee for a spirits distributor license is one thousand three hundred twenty dollars.

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     (a) A copy of all permits required by the federal government;

     (b) Documentation showing the applicant has the right to the property;

     (c) An acknowledgment form certifying the applicant has a security plan which addresses:

     (i) Inventory management; and

     (ii) Physical security of spirits product with respect to preventing theft.

     (2) Spirits distributors must sell and deliver product from their licensed premises.

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     (2) The required monthly reports must be:

     (a) On a form furnished by the board;

     (b) Filed every month, including months with no activity or payment due;

     (c) Submitted, with payment due, to the board on or before the twentieth day of each month, for the previous month. (For example, a report listing transactions for the month of January is due by February 20th.) When the twentieth day of the month falls on a Saturday, Sunday, or a legal holiday, the filing must be postmarked by the U.S. Postal Service no later than the next postal business day; and

     (d) Filed separately for each liquor license held.

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     (2) A penalty of two percent per month will be assessed on any payments postmarked after the twentieth day of the month following the month of sale. When the twentieth day of the month falls on a Saturday, Sunday, or a legal holiday, the filing must be postmarked by the U.S. Postal Service no later than the next postal business day.

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     (2) A holder of a spirits certificate of approval may act as a distributor of spirits they are entitled to import into the state by selling directly to distributors or importers licensed in Washington state. The fee for a certificate of approval is two hundred dollars per year.

     (3) A certificate of approval holder must obtain an endorsement to the certificate of approval that allows the shipment of spirits the holder is entitled to import into the state directly to licensed liquor retailers. The fee for this endorsement is one hundred dollars per year and is in addition to the fee for the certificate of approval license. The holder of a certificate of approval license that sells directly to licensed liquor retailers must:

     (a) Report to the board monthly, on forms provided by the board, the amount of all sales of spirits to licensed retailers.

     (b) Pay to the board a fee of ten percent of the total revenue from all sales of spirits to retail licensees made during the month for which the fee is due for the first two years of licensure.

     (c) Pay to the board five percent of the total revenue from all sales of spirits to retail licensees made during the month for which the fee is due for the third year of licensure and every year thereafter.

     (4) An authorized representative out-of-state spirits importer or brand owner for spirits produced in the United States but outside of Washington state may obtain an authorized representative certificate of approval license which allows the holder to ship spirits to spirits distributors, or spirits importers located in Washington state. The fee for an authorized representative certificate of approval for spirits is two hundred dollars per year.

     (5) An authorized representative out-of-state spirits importer or brand owner for spirits produced outside of the United States may ship spirits to licensed spirits distributors, or spirits importers located in Washington state. The fee for an authorized representative certificate of approval for foreign spirits is two hundred dollars per year.

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     (1) Copies of all permits required by the federal government;

     (2) Copies of all state licenses and permits required by the state in which your operation is located; and

     (3) Licensing documents as determined by the board.

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     (2) The required monthly reports must be:

     (a) On a form furnished by the board;

     (b) Filed every month, including months with no activity or payment due;

     (c) Submitted, with payment due, to the board on or before the twentieth day of each month, for the previous month. (For example, a report listing transactions for the month of January is due by February 20th.) When the twentieth day of the month falls on a Saturday, Sunday, or a legal holiday, the filing must be postmarked by the U.S. Postal Service no later than the next postal business day; and

     (d) Filed separately for each liquor license held.

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     (2) A penalty of two percent per month will be assessed on any payments postmarked after the twentieth day of the month following the month of sale. When the twentieth day of the month falls on a Saturday, Sunday, or a legal holiday, the filing must be postmarked by the U.S. Postal Service no later than the next postal business day.

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     (a) Import spirits into the state of Washington;

     (b) Store spirits in the state of Washington;

     (c) Sell spirits to spirits distributors; and

     (d) Export spirits in original containers.

     (2) An out-of-state spirits importer is required to obtain an authorized representative certificate of approval license as referenced in WAC 314-23-030.

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OTS-4517.5

AMENDATORY SECTION(Amending WSR 10-19-066, filed 9/15/10, effective 10/16/10)

WAC 314-28-010   Records.   (1) All distilleries licensed under RCW 66.24.140 and 66.24.145, including craft, fruit, and laboratory distillers must:

     (a) ((Must)) Keep records ((concerning)) regarding any spirits, whether produced or purchased, for three years after each sale. A distiller ((may be)) is required to report on forms approved by the board;

     (b) ((Must,)) In the case of spirits exported or sold, preserve all bills of lading and other evidence of shipment; ((and))

     (c) ((Must)) Submit duplicate copies of transcripts, notices, or other data that ((are)) is required by the federal government to the board if requested, within thirty days of the notice of such request. A distiller shall also furnish copies of the bills of lading, covering all shipments of the products of the licensee, to the board within thirty days of notice of such request;

     (d) Preserve all sales records to spirits retail licensees, sales to spirits distributors, and exports from the state; and

     (e) Submit copies of its monthly records to the board upon request.

     (2) In addition to the above, a craft distiller must:

     (a) Preserve all sales records((, in the case)) of retail sales to consumers; and

     (b) Submit ((duplicate copies of)) its monthly ((returns)) records to the board upon request.

[Statutory Authority: RCW 66.24.145 and 66.08.030. 10-19-066, § 314-28-010, filed 9/15/10, effective 10/16/10; 09-02-011, § 314-28-010, filed 12/29/08, effective 1/29/09. Statutory Authority: RCW 66.08.030. 86-07-022 (Order 172, Resolution No. 181), § 314-28-010, filed 3/13/86; Order 14, § 314-28-010, filed 12/1/70, effective 1/1/71; Rule 84, filed 6/13/63.]

     (2) Beginning June 1, 2012, a distiller may sell spirits of its own production to a customer for off-premises consumption, provided that the sale occurs when the customer is physically present at the licensed premises.

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     (a) Produce sixty thousand proof gallons or less of spirits per calendar year. A "proof gallon" is one liquid gallon of spirits that is fifty percent alcohol at sixty degrees Fahrenheit;

     (b) Sell spirits of its own production directly to a customer for off-premises consumption, provided that the sale occurs when the customer is physically present on the licensed premises. A licensee may sell no more than two liters per customer per day. A craft distiller may not sell liquor products of someone else's production;

     (c) ((Sell spirits of its own production to the board provided that the product is "listed" by the board, or is special-ordered by an individual Washington state liquor store)) For sales on or after March 1, 2012, sell spirits of its own production to a licensed spirits distributor;

     (d) For sales on or after March 1, 2012, sell spirits of its own production to a licensed spirits retailer in the state of Washington;

     (((d))) (e) Sell to out-of-state entities;

     (((e))) (f) Provide, free of charge, samples of spirits of its own production to persons on the distillery premises. Each sample must be one-half ounce or less, with no more than two ounces of samples provided per person per day. Samples must be unaltered, and anyone involved in the serving of such samples must have a valid Class 12 alcohol server permit. Samples must be in compliance with RCW 66.28.040;

     (((f))) (g) Provide, free of charge, samples of spirits of its own production to retailers. Samples must be unaltered, and in compliance with RCW 66.28.040, 66.24.310 and WAC 314-64-08001. Samples are considered sales and are subject to taxes;

     (((g))) (h) Contract ((produced)) produce spirits for holders of a distiller or manufacturer license.

     (2) A craft distillery licensee may not sell directly to in-state retailers or in-state distributors until March 1, 2012.

[Statutory Authority: RCW 66.24.145 and 66.08.030. 10-19-066, § 314-28-050, filed 9/15/10, effective 10/16/10; 09-02-011, § 314-28-050, filed 12/29/08, effective 1/29/09.]

     (1) Submit copies of all permits required by the federal government;

     (2) Submit other licensing documents as determined by the board;

     (3) Ensure a minimum of fifty percent of all raw materials (including any neutral grain spirits and the raw materials that go into making mash, wort or wash) used in the production of the spirits product are grown in the state of Washington. Water is not considered a raw material grown in the state of Washington((;

     (4) Purchase any spirits sold at the distillery premises for off-premises consumption from the board, at the price set by the board;

     (5) Purchase any spirits used for sampling at the distillery premises from the board; and

     (6) Purchase any spirits used for samples provided to retailers from the board)).

[Statutory Authority: RCW 66.24.145 and 66.08.030. 10-19-066, § 314-28-060, filed 9/15/10, effective 10/16/10; 09-02-011, § 314-28-060, filed 12/29/08, effective 1/29/09.]

     The required monthly reports must be:

     (a) On a form furnished by the board ((or in a format approved by the board));

     (b) Filed every month, including months with no activity or payment due;

     (c) Submitted, with payment due, to the board on or before the twentieth day of each month, for the previous month. (For example, a report listing transactions for the month of January is due by February 20th.) When the twentieth day of the month falls on a Saturday, Sunday, or a legal holiday, the filing must be postmarked by the U.S. postal service no later than the next postal business day; and

     (d) Filed separately for each liquor license held.

     (2) For reporting purposes, production is the distillation of spirits from mash, wort, wash or any other distilling material. After the production process is completed, a production gauge shall be made to establish the quantity and proof of the spirits produced. The designation as to the kind of spirits shall also be made at the time of the production gauge. A record of the production gauge shall be maintained by the distiller. The completion of the production process is when the product is packaged for distribution. Production quantities are reportable within thirty days of the completion of the production process.

     (3) ((Payments to the board. A distillery must pay the difference between the cost of the alcohol purchased by the board and the sale of alcohol at the established retail price, less the established commission rate during the preceding calendar month, including samples at no charge.)) On sales on or after March 1, 2012, a distillery or craft distillery must pay ten percent of their gross spirits revenue to the board on sales to a licensee allowed to sell spirits for on- or off-premises consumption during the first two years of licensure and five percent of their gross spirits revenues to the board in year three and thereafter.

     (a) ((Any on-premises sale or sample provided to a customer is considered a sale reportable to the board.)) On sales after June 1, 2012, a distillery or craft distillery must pay seventeen percent of their gross spirits revenue to the board on sales to customers for off-premises consumption.

     (b) ((Samples provided to retailers are considered sales reportable to the board.

     (c))) Payments must be submitted, with monthly reports, to the board on or before the twentieth day of each month, for the previous month. (For example, payment for a report listing transactions for the month of January is due by February 20th.) When the twentieth day of the month falls on a Saturday, Sunday, or a legal holiday, payment must be postmarked by the U.S. postal service no later than the next postal business day.

[Statutory Authority: RCW 66.24.145 and 66.08.030. 10-19-066, § 314-28-070, filed 9/15/10, effective 10/16/10; 09-02-011, § 314-28-070, filed 12/29/08, effective 1/29/09.]

     (((1))) Penalties. A penalty of two percent per month will be assessed on any payments postmarked after the twentieth day of the month following the month of sale. When the twentieth day of the month falls on a Saturday, Sunday, or a legal holiday, the filing must be postmarked by the U.S. postal service no later than the next postal business day.

     (((2) Surety bonds. A "surety bond" is a type of insurance policy that guarantees payment to the state, and is executed by a surety company authorized to do business in the state of Washington. Surety bond requirements are as follows:

     (a) Must be on a surety bond form and in an amount acceptable to the board;

     (b) Payable to the "Washington state liquor control board"; and

     (c) Conditioned that the licensee will pay the taxes and penalties levied by RCW 66.28.040 and by all applicable WACs.

     (3) The board may require a craft distillery to obtain a surety bond or assignment of savings account, within twenty-one days after a notification by mail, if any of the following occur:

     (a) A report or payment is missing more than thirty days past the required filing date, for two or more consecutive months;

     (b) A report or payment is missing more than thirty days past the required filing date, for two or more times within a two-year period; or

     (c) Return of payment for nonsufficient funds.

     (4) As an option to obtaining a surety bond, a licensee may create an assignment of savings account for the board in the same amount as required for a surety bond. Requests for this option must be submitted in writing to the board's financial division.

     (5) The amount of a surety bond or savings account required by this chapter must be either three thousand dollars, or the total of the highest four months' worth of liability for the previous twelve month period, whichever is greater. The licensee must maintain the bond for at least two years.

     (6) Surety bond and savings account amounts may be reviewed annually and compared to the last twelve months' tax liability of the licensee. If the current bond or savings account amount does not meet the requirements outlined in this section, the licensee will be required to increase the bond amount or amount on deposit within twenty-one days.

     (7) If a licensee holds a surety bond or savings account, the board will immediately start the process to collect overdue payments from the surety company or assigned account. If the exact amount of payment due is not known because of missing reports, the board will estimate the payment due based on previous production, receipts, and/or sales.))

[Statutory Authority: RCW 66.08.030, 66.24.145. 09-02-011, § 314-28-080, filed 12/29/08, effective 1/29/09.]

     (2))) What are the requirements for a craft distillery licensee to sell its spirits product outside the state of Washington?

     (((a))) (1) A distillery or craft distillery licensee shall include, in its monthly report to the board, information on the product it produces in-state and sells out-of-state. Information includes, but is not limited to, the amount of proof gallons sold, and for a craft distillery, the composition of raw materials used in production of the product.

     (((b))) (2) Product produced in-state and sold out-of-state counts toward a craft distillery licensee's sixty thousand proof gallons per calendar year production limit (see WAC 314-28-050).

     (((c))) (3) Product produced in-state and sold out-of-state is subject to the fifty percent Washington grown raw materials requirement for a craft distillery.

     (((d) Product sold out-of-state is not subject to retail pricing by the board.

     (e))) (4) A distillery or craft distillery licensee is not subject to Washington state liquor taxes on any product the licensee sells out-of-state.

[Statutory Authority: RCW 66.24.145 and 66.08.030. 10-19-066, § 314-28-090, filed 9/15/10, effective 10/16/10; 09-02-011, § 314-28-090, filed 12/29/08, effective 1/29/09.]

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