This is the second half of my review on the NCSLA 2018 Northern/Southern Regional Conference in Atlantic City.

Previously, I reviewed the constitutional law issues.

Greetings from Atlantic City: Constitutional Law Liquor Panel

Today I’m going to cover the other two crucial sessions: 1. TTB trade practice investigations; and 2. Emerging technology and how it will effect the state regulatory environment.

We had some great sessions at the conference and the topics were fantastic. Thank you to the New Jersey ABC, President Jeff Kelly, and our wonderful leader Pam Frantz for a great conference.


What the TTB is going on?

This panel focused on the TTB’s investigative activities within the liquor industry, mainly with its investigations into industry trade practice violations.

Susan Evans, a Director in the Office of Industry and State Outreach represented the TTB.


TTB Trade Practice Investigations

Ms. Evans first presented some statistics pertaining to the TTB’s trade practice investigations.

The TTB has put a major emphasis on the trade practice investigations buoyed by the $5 million appropriations dedicated to this cause.

According to Ms. Evans, 30% of the TTB’s investigators are dedicated to trade practice investigations.

Since May 2017, 57 trade practice investigations have been initiated.

These investigations can result in serious punishment for the violators. Some of these punishments include; criminal charges; injunction or consent decrees; revocation of basic permits; suspension of basic permits; and an offer in compromise.

The potential fine for each offense is up to $1,000.


Two major TTB announcements and the results

Ms. Evans mentioned two specific investigations where the TTB issued press releases.

On August 21, 2018, it issued a press release that Modus Operandi Cellars served a one-day suspension of its basic permit because it engaged in consignment sales with wholesalers.

On August 29, 2018, it issued a press release that Skokie Valley Beverage Company operated without a valid wholesaler permit, because it did not report changes of ownership and control and continued to operate without reporting these changes.


Wholesalers that never reported a change in ownership and control

Ms. Evans answered an interesting but important question for the wholesalers that failed to report changes in ownership and control: are these wholesalers subject to sanction and is there a method for mitigating their damages?

According to Ms. Evans, the TTB is going to start a voluntary disclosure program for wholesalers to come forward and report these changes. Although participating in the voluntary disclosure program may not give a wholesaler a clean slate, it may mitigate their damages.

The TTB will issue information on this program soon. Additionally, TTB Circular 2004-5 deals with the general requirements of the TTB’s voluntary disclosure program.


The Cannabis issue, what the TTB allows for label approval

Ms. Evans transitioned to speaking about the TTB’s policy pertaining to cannabis and hemp and what are the boundaries for acceptable practices.

The general principle is that TTB will not approve any formulas or labels for alcoholic beverage products that contain a controlled substance including marijuana.

Substances such as CBD or terpenes that are derived from any part of the cannabis plant that is not excluded from the CSA definition of marijuana are controlled substances, regardless of whether such substances are lawful under state law.

The Industry may be able to use ingredients derived from exempt parts of the plant but formula approval from the TTB is required before a hemp ingredient may be used.

The TTB is still working through the policy on how it will treat a wholesaler that engages in cannabis distribution under their own state laws. She does not have a definitive answer from the TTB on this issue.  But I am sure this will become a major development.


TTB wants to partner with states, what a state regulator needs to consider

Matt Botting from the California ABC discussed issues that a state regulator may want to consider when partnering with the TTB.

Interestingly, Mr. Botting discussed how partnering with the TTB may be difficult because there are distinct differences in their laws and methods.

For example, TTB issued a press release that they would be teaming with the California ABC in an investigation, California ABC does not issue press releases until after the investigation. Second, TTB issued a press release on how Modus Operandi was suspended one-day for selling wine on consignment, although illegal under federal law, this is a completely legal practice under California law.

Which raises an interesting question: are the different agencies looking for different things and different violations?

These differences although not so crucial on the surface, may become an issue and cause complications.

For example, in California there is a one year statute of limitations on slotting fees violations, where for TTB the statute of limitations is for three years. So while the TTB may want to take its time, the state may want to expedite the investigation.

Further, the TTB is very concerned and delves into tax issues, since the California ABC is not a taxing body, TTB is less apt to share records, which may hinder investigations.

So with different laws, methods, and objectives, the state and the TTB  must be clear who is taking the lead on the investigations and how records will be shared.

However, Mr. Botting noted that no major differences or issues exist with the joint trade practice investigations and that cooperation has been fantastic.



In concluding, the TTB takes their trade practice investigations very seriously. For a long time, the theory was that major wholesalers looked at the trade practice sanctions as a cost of doing business. However, if they receive a strong punishment in this round with a stern warning about future violations, may be the TTB will be changing how everything is viewed.

Cooperation between the state and the TTB is crucial for successful resolution of investigations. Whereas in the past TTB had differences with states on different issues, it seems that TTB is taking a very disciplined approach and developing a great and effective relationship with the states.



The Tech Factor

This panel dealt with technology and the foreseeable changes it will bring to an unprepared regulatory environment.

Technology is changing and the big question is, are state regulators up to date with these changes or are they behind the times?

As the economy changes,  the medium of exchange for payment has changed and each year more people are doing peer to peer exchanges. They are converting from hard currency to cryptocurrency as a means for perfecting their transactions.

This trend is here to stay and is growing with each year. Problematically for governments, cryptocurrencies are not governed by a formal exchange or are not regulated by a central bank or government.

So their ambiguity raises two major questions: 1. What is cryptocurrency? and 2. How do governments regulate this new concept?

Cryptocurrency is a digital currency shared and spent electronically on the blockchain.

Susan Dworak actually broke down in understandable terms what blockchain actually means. A term many hear but few comprehend. Blockchains are chains of information blocked together like a train.

She utilized the example of peer to peer dealings. For example, if Bob wants to buy a pizza from Joe and Jane owes Bob for babysitting services, and Pete owes Jane for football tickets, all the parties post the IOUs on a bulletin board and they become part of one system.  Once the bulletin board is on the train car, it remains until the doors close and it becomes part of one system. A group consensus is confirmed and everyone is paid, the door closes and the transaction closes forever. The money exchange on the bulletin board, called a ledger, is immutable and not changeable. Every operates by a code name and the IOUs are code name to code name.

Information can be edited going forward but can’t be changed. The blockchain provided a password for that day and the day before and links back to day one. For example, day four links back to day one, two, and three.  Blocks of digital information are linked together from the days and that is how the blockchain is formed.

This set of circumstances is unique and also poses some interesting questions!

The ledger where the series of transactions are posted are not governed by an exchange and there is no central party. Further, there is no government over the blockchain or cryptocurrency.

So legally who owns the blockchain and where do these cryptocurrency derive from?

Cyrptocurrency is a medium of exchange, created shared and spent on the blockchain. The digital medium of exchange will be used as a means of payment.

As you can see this phenomenon has more questions than answers! But also this phenomenon is growing and will be coming into the liquor space.

An app named QYKbar allows users to purchase alcohol in the cloud and store it there. For example, you could purchase a bottle of Grey Goose and have it available each time you visit a participating bar. Instead of paying money for each separate transaction in the bar, you buy the bottle with cryptocurrency and pay for a shot at a time. So if there are fifty shots in a bottle, you purchase the whole bottle which allows you to obtain 50 shots at participating bars.

So how do regulators stop these transactions from occurring? In certain circumstances such as when a supplier and a distributor interact, the method of payments are regulated and restricted by law. When a retailer sells to a customer, the means of payment are often times not specifically regulated, although sales tax must be collected in certain states.

But these transactions will leave open further questions,  for example, how do we tax these sales when the currency involved is not within the regulated marketplace?

In concluding, these peer to peer transactions will grow and cryptocurrency is here to stay. What is certain is that the government is behind the curve and what is also certain is that these issues leave a lot of tough and unanswered questions.

Interesting panel that made you think and yet left you scratching your head at the same time!


“Dad, I thought you said they wouldn’t grant cert in the Byrd case.”
– Brendan O’Leary, Head Baby of O’Leary Law & Policy Group