Story by Eric J. Wallace | Illustration by Wes Watson
Virginia’s spirits laws may be stifling a craft distilling revolution and leading some to consider moving out of state.
it’s a blistering Saturday evening in June, and the Silverback Distillery tasting room is packed. Visitors from across the state crowd two 10-seat soapstone bars and a room-centering island.
At a corner table, co-owner Denver Riggleman, a Republican candidate for the U.S. House of Representatives, is pouring half-ounce samples of Blackback Bourbon. Distilled by his wife and daughter — Christine and Lauren, respectively — the offering was named the Best Bourbon Under Four Years at the 2018 New Orleans Bourbon Festival.
Behind the bar, Lauren is guiding Alexandria native Brandon Jones through a tasting:
The Blackback features 100 percent Virginia-sourced ingredients, is aged for a minimum of two years and released in single-barrel batches. She describes its flavor profile as, “the ultimate butterscotch bomb, with notes of vanilla and oak.”
Silverback is one of two distilleries situated along Nelson County’s Highway 151, a 15-mile stretch of road known among craft connoisseurs as “Alcohol Alley.” Gauging by the foot traffic, you’d think business was booming. But compared to neighboring cideries, wineries, and breweries, that’s simply not the case.
For Virginia’s craft distillers, “a tasting room is essentially a break-even business,” says Scott Harris, owner of Catoctin Creek Distilling Company. Harris says Virginia’s hyper-regulatory spirits laws make it difficult to operate in the state. For instance, about 55 percent of the sale price from every bottle Catoctin sells goes to the Virginia Alcoholic Beverage Control Authority and state coffers.
And while craft brewers and vintners can lawfully serve patrons to the point of visible intoxication, distillers are allowed to pour just 3 ounces of product per customer, per day. Exacerbating the problem are the drastically different tax structures. Excise taxes on spirits are presently $19.93 per gallon (the third highest rate in the nation). Beer is taxed at $.26 and wine at $1.51.
“Right now, if someone asks me about opening a distillery in Virginia, I have to tell them the truth — I say, ‘Don’t do it,’” says Christine Riggleman, Silverback’s CEO and master distiller. Otherwise quick to laugh and joke, when she talks about the state’s laws her tone waxes grim.
She says the state’s restrictive environment is so discouraging that it has forced the family to open a new facility in spirits-friendly Pennsylvania, where excise taxes are $7.27 per gallon and distillers keep their tasting room profits. “We’ve tried talking to legislators and they don’t want to listen.”
Riggleman says that if something doesn’t change quickly, the company will shutter its Virginia location and move its headquarters north.
“Name another business that has to give away more than half of the money it makes?” she says. “I sell a bottle of vodka in my tasting room for $29.89, but, after the ABC takes their cut, and I pay [packaging, materials costs, labor, and so on] we profit just $2!”
Comparatively, the ABC pockets around $16.44. “And does nothing,” she says.
“That makes it tough to get a new operation off the ground,” says Randy Thomas, the owner of Vanguard Brewpub & Distillery in Hampton. Thomas says it’s worse if you’re making whisky or bourbon. “Then, the turnaround from production to sale can take years. And the way things are structured, when the wait is followed by such a slow return – if you’re not careful, it can put you out of business.”
The Rigglemans have spent considerable time lobbying to change the laws and raise public awareness. In 2017, Denver went so far as to launch a brief gubernatorial campaign dubbed the “Whisky Rebellion.”
The problems facing Virginia’s craft distilleries can be traced to a regulatory model adopted nearly 100 years ago.
“When Virginia came out of Prohibition in 1934, legislators decided to treat spirits differently than wine and beer,” explains Curtis Coleburn, formerly the CEO of the Virginia ABC. Coleburn is now head of government relations at the Virginia Distillers Association. “Based on a study commissioned by John D. Rockefeller,” – a teetotaler and supporter of prohibition – “two regulatory models were recommended to states and the federal government.”
Along with 33 other states, Virginia chose what is now referred to as the control method (and is one of 17 that have retained it). While Coleburn says beer and wine were considered less intoxicating beverages, spirits were to be monitored more closely. “In these models, the state takes ownership of the product at some point in the distribution process,” he says.
Subsequently, liquor can only be sold in state stores, but beer and wine can be sold by licensed retailers just about anywhere.
This led to the establishment of the ABC and its network of 371 retail storefronts. Though rates have changed, things worked then much as they do now: The authority purchases bottles wholesale from producers, marks them up by a mandatory 69 percent, applies an additional 20 percent excise tax, then sells the product to consumers in its stores. Profits and tax revenues are then transferred to the state’s general fund.
Because there were no distillers to speak of in Virginia – and certainly none with a tasting room – the system remained more-or-less uncontested for 72 years. What’s more, it became a cash cow: According to an annual report, the ABC has experienced record-breaking sales for 19 straight years. In 2017 alone, it recorded nearly $1 billion in gross sales and generated more than $448 million in profits and tax revenues.
The first seeds for unrest emerged in the early 1980s, when innovations in viticulture led to the establishment of Virginia wine. Despite conservative leanings, legislators saw vineyards as an agricultural substitute for tobacco, which was fast on the wane. When the new ventures asked to open tasting rooms to introduce their products to consumers and generate income, lawmakers passed the Farm Winery Act.
“It encouraged wineries by giving them the ability to wholesale and retail at both the winery and remote locations,” says Coleburn. Profiting from on-site events and wine served in tasting rooms, the farm winery business blossomed.
Meanwhile, consumers began to enjoy alcoholic beverages served by Virginia producers. In the late ’90s and early 2000s, the trend led to the establishment of the state’s first craft breweries.
“But in truth, they didn’t really get anywhere until 2010,” says Coleburn. That year, then-Governor Bob McDonnell pushed legislation allowing craft breweries to sell beer without a restaurant. “At that point, there were around 40 breweries in the state,” Coleburn says.
Spurred by the law and additional supportive measures, Virginia now has more than 200 licensed breweries, a $9 billion industry. And as Coleburn is quick to remind, “most of them wouldn’t survive if they couldn’t sell beer on-site.”
In turn, the public’s embrace of local beer and wine opened the door for artisan spirits.
“In 2006, Belmont Farms became Virginia’s first craft distiller,” Coleburn says. That year, owner Chuck Miller asked legislators to grant him the same privileges as farm wineries. “People would come to tour the facility, but they couldn’t taste the product,” adds Coleburn. “And if they wanted to buy a bottle, they had to drive to an ABC store that stocked it.”
While seemingly innocuous, Miller’s request raised problematic questions.
“The problem in dealing with the issue is, wineries and breweries are allowed to sell directly to consumers,” says Coleburn. “There are no government middlemen … and they get to keep the proceeds from what they sell [in their tasting rooms].” But Virginia doesn’t allow the private sale of spirits.
The workaround was to setup tasting rooms as ABC stores in miniature. Because distilled spirits were still viewed in the light of Rockefeller’s biased 1933 study, consumption was limited to three half-ounce samples per person, per day. In terms of total alcohol content, the amount equated to about one 12-ounce glass of beer, or 6-ounce glass of wine.
How does it work?
“If you want to have bottle sales at a distillery, you have to enter into a contract to be an ABC store,” explains Coleburn. That means, “you sell the bottle to them wholesale, then for them at the retail price.” Though distillery-stores handle every aspect of the sales process – and have to pay tasting room workers – they are awarded just 8 percent of the markup.
At present, 62 distilleries have opened in the commonwealth. Forty-one have tasting rooms and many more are in the works.
Though prior attempts to lobby legislators for greater parity with craft beer and wine have led to few major changes, Harris, of Catoctin Creek, says distillers shouldn’t despair: With the creation of the VDA in 2016, they now have a voice to combat political rivals and better negotiate with lawmakers.
“[The] beer and wine interests are among those pushing hardest to keep local distillers legislatively handcuffed,” writes C. Jarrett Dieterle, director of commercial freedom for the nonpartisan, public policy research organization R Street Institute. Combined, he says the industries make as much as $1.7 million in political donations each year. “[They] dress up their concerns in the language of prudence, but in reality, are most interested in handicapping a distilled spirits industry that could siphon off their business.”
For its part, the Virginia Beer Wholesalers Association openly opposes changing laws that regulate distillery tasting rooms. In The Washington Post the association’s CEO Philip Boykin said, “We as an industry are vested in making sure [that system] stays in place and grows. … Because if those profits aren’t coming out of ABC, [state legislators are] going to be looking to other alcohol interests for those tax dollars.”
In that same story, the Virginia Restaurant Lodging and Travel Association outlined its opposition to relaxing the laws on distilleries, saying that to do so would give such businesses an unfair advantage over restaurants. Restaurants have to serve food. Distilleries do not.
It should also be noted that the ABC takes numerous steps to support and market Virginia distilleries, including making sure all Virginia-made spirits are available online through its website. The agency also makes sure all are given a chance, through taste testing and sales track records, to earn much-desired shelf space throughout the ABC’s network of 370 stores. But the VDA contends that with more support, the industry could grow much larger, much faster.
“The craft spirits industry generated $165 million last year,” says Amy Ciarametaro, executive director of the VDA. “In that same period, our peers in Kentucky generated $8.5 billion. Given our history, climate, know-how, and ability to grow all of the agricultural products necessary for spirits production in-state, we see tremendous potential for growth.”
If Virginia’s distilled spirits industry grew to
$1 billion – a number Ciarametaro says is more than reasonable – it would generate about $250 million in excise and sales taxes alone. But for that kind of growth to occur, distillers say the rules will have to change.
It bodes well that officials at the ABC are signaling they’re ready to listen.
Though decisions are ultimately up to legislators, ABC CEO Travis Hill says the authority plans “to work with the [VDA] and individual distilleries to solicit and explore ideas that make it easier to do business with Virginia ABC.” He hopes the dialogue will lead to collaborative solutions that increase revenues for everyone and help grow Virginia’s burgeoning spirits industry.