Distill THIS! (or: How The State Gives Small-Scale Distilleries Nightmares)

A friend shares the following story:

I was talking with a buddy of mine last night: a lawyer currently working for the state, getting his MBA on the side. He’s been researching the possibility of setting up a distillery firm, and we talked about it for close to an hour. Very interesting stuff, and he’s got some great ideas for how to break into the market and his unique angle.

But the funny part is that probably 45 minutes of that hour was spent talking about his strategy in light of the manifold regulatory hoops and tax laws he has to navigate. Between licensing and taxes, which as you can imagine for hard liquor are absurd, his business model is 100% dominated by meeting the requirements of the state. Some examples: before you can boil an ounce of alcohol, you need local, state, and federal licensing in place. You can’t get the federal until you have the state and local in place, and getting all three takes anywhere from 8-24 months. The problem is that to fill out the paperwork you have to have the facility, equipment, stock, etc. all in place and ready to go; you can’t fill out paperwork for a nonexistent distillery. So he’s looking at having to hold a facility with the equipment for two years while the feds sit around.

You can’t just put up or rent any building, either. Your firm’s place of business has to be in a Class 3 piece of land, which basically means you have to set up out in the middle of nowhere or in a really depressed part of a city. (He lives very close to Baltimore, so he’ll be going for the latter.)

Another problem: once again, before you can boil an ounce of alcohol, the ATF assesses your distillery’s capacity of production, estimates how much you’ll have to pay in taxes, and then you are required to put up a bond for that amount. If they don’t like you, they can look at your equipment and estimate that it will be running at full capacity, 24/7, and hit you with the corresponding bill.

But let’s say you get beyond all of that. So now you’ve put together your first small batch of alcohol. How to sell it? Well, in MD there are rules: you can’t just go around to liquor stores to try to sell your product, and you certainly can’t go directly to consumers. First, you’ve gotta find a wholesaler, and then they will go through a preferred distributor who will get the product to retail and finally to consumers. That’s three middlemen who have a legal right to force you to pay for their services. He can’t just put up a website and ship it out to purchasers, because he’d be shut down and thrown in prison within weeks.

While he’s got some good ideas for recipes and techniques, he’s never actually distilled liquor himself because that’s also very illegal in MD. Here’s the one place where he will probably have to break the law, though, because if he’s not allowed to distill until he’s got a permit, and if he can’t get a permit unless he’s got everything ready to go (and is thus paying for it), just when is he supposed to get the knowhow to produce a decent batch of alcohol? So I think he’s going to get some equipment, put it in his basement, and during the two years it takes to get official approval get a few recipes and techniques perfected.

Anyway, this is basically just an outline of what he has to deal with. He’s very well-versed in this stuff by now and is just about at the point where he’s ready to take the leap. He’s got a few things going for him that will hopefully get him in good graces with the government: For example, his business idea is to create liquors that tap into the long and rich history of alcohol production in Baltimore, and to use local ingredients, historical recipes, and all that stuff. He’ll be trying to set up shop in some trashy part of Baltimore, which can be seen as an effort to rejuvenate part of town. And so on. He’s hoping those aspects of his business, which seem community-and-history driven, will ease the regulatory pain and help him get past the assholes.

But as you can probably tell, he’s put a ton of thought and effort into this business, and almost none of it has had to do with how to create a great product that consumers will like (and figuring out how to get it to them in the most efficient manner possible). Maryland is so bad on this stuff, but I suspect it’s not much better in other places in the country, since a lot of the heartaches are federal laws. My friend says CA is a great place to try to get a liquor company started.