It is a common misconception that alcoholic beverage licensees need only renew their licenses every year to stay in good standing. Mistake number one is assuming that once your state and federal licenses are issued you've reached the end of your licensing red tape.
The unfortunate truth is that licensing is with us to stay—at least as long as we're in the alcoholic beverage industry. But taking a few minutes to familiarize yourself with the changes you may encounter can help you avoid the stress, time, and expense of unwinding red tape tangles later on. Although the consequences of missed maintenance on your licenses can be heavy, keeping up with the requirements is not hard once you understand them.
The most important and most overlooked type of license maintenance is the reporting of various types of changes in your business. Changes that require reporting happen more commonly than you might expect. They include the following:
You don't have to report new financing arrangements such as loans and lines of credit, but you do need to report new equity holders: new shareholders, partners, or limited liability company (LLC) members. And here's a tricky twist: if one of your owners transfers his or her interest into a trust or some other form of asset ownership, the new trust or other entity is considered a new owner and must be reported. In some states, you can skip reporting owners holding 10% or less in your company; in other states, more complete reporting is required.
Changes in personnel
Changes in business structure
This seemingly innocent modification of your business has a huge impact on your licensing. If you change your type of business organization—for example, incorporate a sole proprietorship or partnership, or go from a general partnership to a limited partnership—your licenses must actually be transferred to the new entity. ATF will allow your winery to keep operating while your transfer application is being processed, but in some states the ABC lacks a corresponding provision for continuity. In such places, you must plan ahead and submit your paperwork with enough lead time to be approved before the change takes place.
Changes in control
Another type of reportable change occurs when you keep the same business structure, but your business undergoes a change in control. "Change in control" is defined variously by different agencies, but the most common changes in control happen when 50% or more of a corporation's stock changes hands or when a limited partnership changes general partners. The entity goes on, but the controlling interest changes.
Beware: this kind of change can sneak up on you. For example, if an existing 30% stockholder buys the shares of another 30% stockholder, there is no new investor to qualify, but a shift in power has occurred. In another scenario, if a father gives two children each 10% of the winery's stock each year, the father's ownership goes from 100% to less than 50% over the course of three years. Even though the change occurring in the third year involves only 20% of the stock, the cumulative effect of that change, on of the previous ones, finally produces a change in control.
Premise changes (for ATF Permittees)
Of course, if you move your bonded premises from one address to another, establish a non-contiguous extension of your premise, or open an additional facility, you must file applications on the federal and state levels. But what if you stay at the same place, but expand your bonded area or make other changes in the layout or use of your facility? By now, if you've been getting my drift, you can probably guess it: yes, you have to report those changes, in advance.
Changes in operations or privileges
This is a catch all category, whose contents vary from locality to locality. A prime example of this type of change—and this one would matter no matter where you are located—would be setting up reverse osmosis equipment to reduce or remove alcohol from your wine. Another example would be entering into an agreement to market another winery's wine as well as your own. Whenever you significantly change your operations or privileges, it's a good idea to ask a knowledgeable person whether the change is legal and whether any notice or approval is required before doing it.
Consequences of not reporting
What happens to licensees who fail to report changes of the types listed above?
The worst-case scenario would be to lose your license! Such a devastating consequence is quite rare, and is reserved for the most egregious cases. An example would be a licensee who fails to comply after repeated requests to report a change discovered by a regulator after it occurred. Another example would be a licensee with a very poor compliance record whose unreported change is the straw that broke the camel's back. We can all stay out of those categories.
The second-worst scenario is much less severe, but still hurts a lot: to be punished with a suspension in operations. I'll tell you a real life story about this one: A winery client of mine had assured me, after a change in ownership, that they were taking care of the reporting requirements. Little did I suspect that, although they had bravely begun the required applications, they never got around to finishing and submitting them! Finally, almost two years after the change occurred, the ABC lost patience and informed them that their tasting room would be shut down before the weekend if the applications weren't immediately turned in.
Fortunately, we were able to keep the tasting room open, but it took a lot more effort than prompt compliance would have and required that many other responsibilities be temporarily ignored while we worked around the clock to avoid the temporary, but costly and embarrassing closure.
Sometimes licensees are able to avoid a suspension's potential loss of face and clientele by paying a fine in lieu of suspension. ATF and most state jurisdictions have provisions for this type of discipline. While the fines are generally calculated to approximate the same loss of revenue that a suspension would produce, most winery operators would rather work a couple of days without pay, in effect, than confront their customers with a locked door and darkened window.
Building up a violation history
The heavy consequences I just described do happen, but more often—especially on first offenses—licensees simply get "written up." A note is put in the file to record a willful or unwitting failure to comply. If this sounds like getting away with your lapse scot free, think again: The next time you need a special approval, or expedited processing, or permission for a variance, the regulators are less likely to hop to if your compliance history is blemished. Especially if you have more than one blotch on your record, you may find your requests take more effort or time to get approved in the future—or they may even be denied.
The longer you wait, the harder it is
The best case scenario is the one where you discover the lapse yourself before an investigator does. It is always better to voluntarily report a change, even if you are late, than to be caught red handed.
This lucky coincidence happens more frequently than you might think. Sometimes the discovery is precipitated by a change of staff or internal audit. Frequently it comes when a past unreported change is discovered while preparing to report a current change. At times like this, you may escape regulatory discipline, but there's still a price to pay. You'll invariably find that the more time that has elapsed since the change, the harder it is to gather the documents and information you need to report the change.
How to keep your red tape untangled
Depending on the jurisdiction, you may be allowed to report certain types of changes after the fact. ATF and many states will give you 30 days (and often a little more leeway) to report changes in company principals or ownership. But in some places, you are literally expected to report even these changes before they happen! Also, premise moves and alterations frequently always need advance approval.
Your best bet is to check with a compliance expert or local regulator for details specific to your location. And the best time to check is, of course, while your changes are still on the drawing board. That way, you have time to learn what's required, time to adjust your plans if necessary—and the icing on the cake is the extra time you save that would otherwise be wasted untangling yourself from a compliance problem down the road.