Rocky Wirtz Files Suit, Aims to Overthrow Illinois Tax Hike

FILED AUGUST 1, 2009

Dear Client:

Rocky Wirtz of Wirtz Beverage Group filed a lawsuit against Illinois officials questioning the legality of the Capital Bill, which calls for an increase in alcohol taxes and the privatization of the state lottery among other things. The lawsuit was filed yesterday in the Circuit Court of Cook County and seeks “to enjoin the unlawful disbursement of public monies by the Defendant public officials and to enjoin the imposition of unlawful taxes, rules and programs found in challenged legislation.”

QUICK BACKGROUND. You’ll recall that in the spring the Illinois General Assembly passed four pieces of legislation that comprises the “2009 Capital Program.” It then gained Gov Quinn’s signature and is set to go into effect September 1. In the suit, Rocky alleges that “the challenged legislation violate the Illinois Constitution and is unlawful,” and seeks “to stop the use of state funds and resources in the operation, administration and regulation of the programs created in the unconstitutional legislation.”

The legislation essentially expands gambling by making video gaming legal “in thousands of sites across Illinois,” and also seeks to privatize the state lottery. As a result, the lawsuit contends both programs “violate federal gaming laws” because they would be privately held.

The legislation also “imposes non-uniform, disparate taxes on beer, wine and spirits.”

Lastly, “it improperly combines numerous unrelated matters into a single legislative scheme,” which violates the Single Subject Rule and is therefore unconstitutional, according to the complaint. The lawsuit says this is a problem because the Governor is forced to pass all the pieces of legislation by signing the bill.

“Tying the legislation together in this fashion represents an unconstitutional effort by the legislative branch of the government, the General Assembly, to control or deprive another branch of the government, the Executive, of its veto powers,” the lawsuit states.

SPIRITS TAX. The Omnibus Bill, which is a section of the Capital Program, is set to impose an additional gallonage tax on beer, wine and spirits, although Wirtz argues wine and especially spirits is disproportionally affected. Under the law, distributors are required to pay an additional $0.185 to $0.231 on beer; $0.73 to $1.39 on wine; and $4.50 to $8.55 on spirits. Wow, there’s no arguing – that’s a huge difference.

“This is a roughly 22% increase in the tax on beer -- and a 90% increase in the tax on wines and spirits,” says the lawsuit. Furthermore, Rocky contends that the Ominibus Bill doesn’t “offer any coherent rationale for the increase overall,” or “justification for the vastly disproportionate increase in the tax on wine and spirits as compared to beer.” All proceeds of the additional tax will go into the Capital Projects Fund.

“The liquor gallonage tax is a revenue raising measure, as the Supreme Court has recognized...Taxing identical products at different rates fails the ‘real and substantial difference test’ imposed by the Uniformity Clause.”

“The tax increase is unreasonable as a general matter. It is neither necessary for nor appropriate to any public purpose. It strikes out at a small group of business enterprises without justification or principle.”

In addition, Wirtz alleges that the Omnibus Bill violates the Single Subject Rule as we mentioned before. Not only does it cover alcohol taxes, video gaming and the Illinois Lottery Law, but it also increases the tax on candy and increases bridge and road weight standards.

COMMENTS FROM ROCKY. Understandably, Rocky was unavailable for comment but we were able to obtain a memo he sent to Illinois employees yesterday. Here are some highlights:

“There is no question that Illinois, like many of the states we do business in, has great infrastructure needs. The question is at what cost? Illinois is our corporate home and it is where more than 1,200 of our employees work and raise their families. When our political leaders put forth initiatives that negatively affect our business, our communities and our quality of life, we must act. That is why today we have asked the Circuit Court of Cook County for permission to challenge the capital bill’s funding mechanisms through litigation. Our goal is to force elected leaders to revisit these issues and find solutions responsible and true to sound public policy.

“First and foremost is the liquor tax: it is regressive, hitting the working person the hardest. We are not naïve to the role taxes play, however this approach is arbitrary and inequitable.

“We recognize our state’s infrastructure needs but, we hope that through the success of this challenge, we lead our elected leaders to work on a revised program designed with integrity, transparency and responsible public policy.

“The gravity of this action is not lost on us. You will no doubt hear more about it as we move forward.”

VINTNER AND RESTAURATEUR CHARGED FOR VIOLATING TIED HOUSE RULES

Vintner and San Francisco restaurateur Pat Kuleto was fined $80,000 by the California ABC for violating “tied-house” laws, which brings to the forefront a larger issue. An article in Wines & Vines contends that tied-house laws are often “confusing and make little sense in today’s context,” but others in the industry (including regulators) might disagree.

TIED-HOUSE BACKGROUND. The “tied house” rules were originally erected after prohibition to protect the three-tier system and prevent vertical ownership. They also protect brands from being squeezed out by on-premise establishments owned by a competing supplier. Most importantly, they make it illegal for suppliers and wholesalers to own on- and off-premise retailers in the state of California with a few exceptions.

In California, a winery can own up to two restaurants as long as the winery supplies no more than 15% of the alcoholic served there. If the winery sells more than 125,000 gallons of wine annually in California, it must use a licensed distributor to supply wine to their own restaurant. If the winery owns more than two restaurants, they cannot sell their wine in the additional establishments.

CA ABC MOVES IN. That is where Pat made his mistake as he was eventually cited for selling his wines in more than two restaurants. The ABC first required him to close Farallon, Boulevard and Nick's Cove for three months, or not serve alcoholic beverages for 3 months. He was also ordered to pay a $300,000 fine. After negotiations, the fine was dropped to $80,000 and the three restaurants were put on probation for 30 months. Kuleto wines are now sold at his Waterbar and Epic Roadhouse restaurants only.

[Ed. Note: Recall that Pat recently sold 70% of Kuleto Estate Winery in Napa Valley to Foley Estates this year. He’s also a significant and managing partner in seven restaurants in San Francisco.]

Pat told the article that the law “could easily be made reasonable” if it required a winery owner not to sell more than 15% of their wines at their restaurant and sell through a distributor. He says the intent is not to bypass distributors.

There’s no question that members of the three tier system need to understand tied-house laws in their state since there are a number of exceptions that can make them confusing. Whether they’re useful or not is a matter of opinion. It remains to be seen if Pat Kuleto’s experience could eventually prompt California legislator’s to amend the tied-house law, though. The end of Wine and Vine’s article says people in the California wine industry are warning that “the ABC is being increasingly aggressive in enforcing the laws.”

FOSTER’S STAYS MUM ON WINE DEMERGER

In its earning call yesterday Foster’s didn’t provide an update on the demerger of its beer and wine divisions, which is really the million dollar question right now. When they announced the results of their strategic wine review in February, Foster’s chairman David Crawford said it was “not the appropriate time to sell or demerge wine business,” but announced they would be creating a separate sales team for beer and wine. However, the beer and wine business still share logistics (i.e. they are delivered on the same trucks), which their customers like, said ceo Ian Johnston yesterday.

An article in Business Day raised the question of whether Foster’s should keep its Australian wine business and sell its California wines. “The US division of Foster's helps to distribute its Australian wines, but that could be done without owning vineyards in California,” said the report. It notes that demerging Beringer would be difficult, but a private equity group or Constellation Brands could make the acquisition assuming they could get the debt or cash, respectively.

Recall that Foster’s purchased Beringer from private equity group TPG in 2000 for $1.2 billion. Interestingly, a group of former Beringer execs (including former Foster’s cfo Pete Scott) formed a winery investment group backed by TPG in May to create a portfolio of boutique California labels. It’s not clear if they have any interest in Beringer, but it remains noteworthy nonetheless.

IRI AND NIELSEN TO CREATE J-V TO RUN HOUSEHOLD PANELS

Competitive scan aggregators Information Resources (IRI) and Nielsen have formed a U.S. joint venture to recruit and maintain their consumer household panels, which are groups of paid consumers who agree to scan all their purchases to get an understanding of what people are buying, even from unscanned stores (like Wal-Mart). The panel households will support the Nielsen Homescan and IRI Consumer Network panels, which will continue to be operated by their respective companies. While the pool of households will be owned by the joint venture, the "techniques used for projecting, analyzing and delivering insights will remain proprietary to each company," the companies said in a release.

The joint venture, owned 50-50, will be established using the existing Nielsen household sample and data acquisition infrastructure and will begin operation during the first quarter of 2010. The joint venture will draw from a subset of existing IRI households to replace panelists as they naturally drop from the original sample. A complete history of data (five years of back data) will be available to both Nielsen and IRI, and each company will use its own unique intellectual property (data reference, projections, technology, etc.) to produce delivery of its respective consumer panel. Under the joint venture agreement, Nielsen receives 100 percent of the targeted 100,000-plus households and IRI has access to 86 percent, with the right to acquire up to 100 percent after two years. The joint venture will be governed by a Board, equally represented by IRI and Nielsen officers and an independent chief executive officer to be recruited from outside both companies, the company said.

WSD BRIEFS:

MORGAN STANLEY RAISES RATING ON DIAGEO. Ahead of Diageo’s earning announcement tomorrow, Morgan Stanley raised its rating to overweight from equal-weight. After speaking to U.S. wholesalers they now believe most of the bad news resulting from de-stocking is over. It added that while it doesn't expect any immediate re-stocking in the U.S., it believes its 2010 sales estimates are now too low, particularly as the outlook for emerging markets improves.

JAGERMEISTER 6-BOTTLE SHOT COOLER. Sidney Frank is launching a new Jägermeister 6-Bottle Shot Cooler, which it claims is the first cooler/tap combination in the industry and first 6-bottle value-added-pack for spirits. The shot cooler comes with six 750ml bottles and 50 shot cups, available September 1.


“We are born charming, fresh and spontaneous and must be civilized before we are fit to participate in society.”
Judith Martin

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