• Justin Hein

Virtual Wineries

Entering the Wine Industry can be hard and expensive. Learn more about how one can get started in the industry by way of Custom Crush

California is one of a handful of states that permit individuals and entrepreneurs entry into the heavily-regulated Wine Industry by way of a Custom Crush arrangement. In a typical Custom Crush arrangement, a grape grower or any person with wine-making materials enters into a contract with a bonded winery proprietor to have the grapes processed into wine. The client retains title to the grapes, and the wine is made to the client’s specifications. The finished wine is returned to the client for sale to other dealers, or the winery sometimes sells the wine on behalf of the client.

The Custom Crush client can provide some guidance and specifications regarding how it wants its wine made, and is able to avoid a lot of the costly and time consuming activities of a licensed winery, such as owning equipment, maintaining the physical premises, and obtaining land use permits for production facilities. Equally as beneficial, a Custom Crush client has minimal record-keeping requirements relative to wineries. Rather, those chores land with the winery in this relationship: wine produced for Custom Crush clients carries the same regulatory requirements for record-keeping, reporting, labeling and taxation as wine made for the winery itself. This includes but is not limited to being responsible for obtaining an appropriate Certificate of Label Approval, as well as the payment of Federal excise tax.

As one can see, there is nothing “virtual" about this arrangement. Nor is there in the alcohol beverage regulatory world overseen by local, state, and the federal government. In the Custom Crush arrangement, a winery still retains a key role. A “winery” is a business that holds the necessary state and federal licenses and permits to produce wine, is responsible for the production activities that take place on the bonded premises, and takes care of all record keeping and reporting to the Alcohol and Tobacco Tax and Trade Bureau (“TTB”). Under California law, wineries are called “winegrowers, and are defined as “any person who has facilities and equipment for the conversion of grapes, berries, or other fruit into wine and is engaged in the production of wine.”

A Custom Crush client does not hold a federal bonded winery permit, nor do they hold a state winegrowers license. Therefore, they are not wineries in the eyes of state and federal regulators. However, if the Custom Crush client wants to do anything with the wine--other than drink it--it must obtain the necessary alcohol beverage permits, namely a federal basic wholesaler’s permit as well as any necessary state licenses. In California, Custom Crush clients who want the most expansive rights--to sell as a retailer or wholesaler--they would need to obtain nd hold a Type 17 (Wholesaler) and Type 20 (Off-Premise Retailer) license. This is typically referred to as a “17/20” license. However, if they have no intention of selling wine at wholesale to other licenses, but instead wish only to sell direct to consumers, they can obtain a Type 85 Limited Off-Sale retail license. Type 85 license holders are allowed to sell wine directly to California consumers via direct mail, telephone or the internet, and can also ship wine to a limited number of states that allow for direct-to-consumer sales by alcohol beverage retailers.

The winery does have unique benefits that cannot be extended to Custom Crush clients. Chief among them is the ability to sell wine directly to consumers in a number of states. Because a custom crush client is not a wine producer, it is treated as a wholesaler or retailer in many states. The number of states that allow retail direct-to-consumer sales is more limited than states that allow winery direct-to-consumer sales. Moreover, in California, custom crush clients are not allowed to have their own tasting rooms, but a winery can.

That being said, the barriers-to-enter the Wine Industry as a winery may be too steep for many, just getting started "winepreneurs." Custom Crush is a way to wade yourself into the industry in order to learn how to swim without drowning.

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