Shelly Dailey is busy. As one of the managing partners of the St. Paul small-batch whiskey maker, Studio Distilling, she’s planning for a new cocktail room, and keeping up with her new distributor, among her many daily tasks.
It made it all the more frustrating when she had to spend several hours on the phone explaining to an agent from the Alcohol and Tobacco Tax and Trade Bureau (or TTB, the federal agency charged with overseeing distilleries) how their whiskey is made.
However, it’s been Minnesota’s statutes on distilling that are causing serious headaches for Shelly and other local spirit makers.
Liquor laws in Minnesota have always been a little…quirky. You still can’t buy alcohol inside grocery stores, and after November 1 when Utah’s updated laws take effect, Minnesota will be the only state in the Union to sell 3.2 beer.
And yes, legislation like Surly Bill 2011 and Sunday sales have loosened some restrictions and removed some barriers for alcohol makers and consumers in the last decade.
But this relatively recent wave of progress has our state’s craft distilleries still feeling left in the dust.
After Prohibition ended in 1933, policymakers sought to keep alcohol production and consumption under control by implementing a three-tier distribution system. According to the Research Department of the Minnesota House of Representatives, “In a pure three-tier [system], manufacturers make spirits, beer and wine; wholesalers distribute across and within the state to retailers; and retailers sell to the consuming public.”
Since Prohibition was repealed 86 years ago, this system has applied to all alcohol manufacturers in the United States. However, over time Minnesota’s three-tier system has been “much-altered” with restrictions being lifted or eased for Minnesota craft brewers and winemakers, but not so much for micro-distillers.
First, distilleries are prohibited from self-distributing the way beer and winemakers can. Craft brewers in Minnesota producing under 25,000 barrels annually can apply for a wholesaler’s license through the state, which allows them to sell product directly to restaurants and liquor stores around town and maximizes the profit margin on those sales.
But in order for a bottle of Minnesota-made gin to end up at your local liquor store or the shelf of your favorite bar, it must go through the three-tier system, forfeiting to distributors a sizable chunk from the distillery’s already razor-thin profit margins in the process.
There’s also a growing disparity between the number of distilleries in Minnesota and the number of available distributors.
“Back when we started five years ago,” says Jon Kreidler, co-founder and chief executive of Tattersall Distilling, “the craft market wasn’t what it is today.” Craft spirits were a novelty and made up a smaller portion of a distributor’s roster. “Now there are 27 craft distillers in the state all fighting over that same number of distributors.”
When you factor in out-of-state craft distillers looking to grow their footprint here, it quickly becomes an incredibly competitive marketplace to stand out in.
Half the bottle, twice the headaches
Similar self-distribution restrictions affect over half the other states in the U.S., so Minnesota is hardly alone. But buried in Minnesota Statute Section 340A.22, the main statute that regulates distilleries, is a rule that’s really hampering the state’s spirit makers.
Subdivision 4 of the statute prohibits distilleries from selling more than one bottle of spirit per person per day and that bottle can’t be bigger than 375 milliliters. This aggressive cap has a significant impact on the trajectory of the business, especially early on when a new distillery is simply trying to get off the ground.
“No business is ever going to survive by selling one bottle to one person per day,” Dailey of Studio Distilling says. She jokes she’s been able to buy spirits with fewer stipulations in Utah.
In contrast to breweries, where consumers can purchase multiple bottles and growlers at a time, distillers must break it to customers that not only are they limited to one take-home bottle, but one that’s half the size of the standard 750-milliliter bottle they’re used to seeing at a liquor store.
“It breaks my heart to not be able to help someone,” Dailey shares. “But I’m also turning down business. It doesn’t seem like a smart business model for anyone.”
And since liquor stores don’t like to stock 375-milliliter bottles, small distilleries who are trying to distribute are having to carry significant inventory for two different-sized bottles, and even have to submit two separate labels for TTB approval.
“If it was not for that law,” Tattersall’s Jon Kreidler says, “most of us would not carry a 375-milliliter bottle.”
With such a hard cap on bottle revenue on-site, a cocktail room becomes almost a necessity despite the massive capital investment, becoming one of the distillers’ only path to fast cash for their budding business.
Are the times a-changin’?
Dailey believes regulatory change is needed, but she didn’t get into distilling for the politics.Minnesota Distillers Guild is made up of representatives of 20 Minnesota microdistilleries and serves as, among other things, the chief lobbying group for craft distilleries across the state. They’re working to get two specific laws changed as early as the upcoming legislative session in January.
“In the bill the Guild is putting together,” Kreidler, who serves on the Guild’s legislative committee, explains, “we’re asking for increased bottle sales, up to 4.5 liters per person per day,” which equals one case of six 750-milliliter bottles.
They’re also working to increase the limit of how much distillers can produce and still be categorized as a microdistillery (and be able to operate a cocktail room). Minnesota has the 11th lowest production cap for microdistilleries in the United States (40,000 proof gallons), another law that hinders the growth potential of craft distilling here in Minnesota. Tattersall, which has made a name for itself with its cocktail room, is the microdistillery that is closest to that production cap, expecting to reach that threshold in the next couple years, according to Kreidler.
Raise the roof
Giving room for microdistilleries to grow can be a boon for the state through the taxes collected on liquor sales, but it could also mean big gains for Minnesota agriculture.
Unlike barley, beer’s primary grain, the grains most common in spirits like corn and rye grow well in Minnesota. The Guild made that a focal point in a State Fair exhibit in 2017, bringing in a host of spirits. The Guild pointed out that in a year, local distilleries used 2.3 million pounds of grain, 10,000 pounds of apples, and a host of honey, herbs, and botanicals grown entirely in Minnesota.
These rules also just feel counter to the culture Minnesota wine, beer, and spirit enthusiasts have worked so hard to create. Minnesota has become an incubator for researching new cold-weather grape varieties for our cold-weather wineries. It’s become a destination for beer lovers all over the world. And yet, there are laws still on the books leaving many of our scrappiest small business owners hamstrung.
The lagging pace of change can certainly be chalked up (at least in part) to youth. Minnesota’s craft distilling industry is still a young one with Panther Distillery, our first legal post-Prohibition distillery, being only eight years old.
Dailey says “distilleries and the general public are mostly on the same page,” but she understands it’s legislative work that will really make a difference. The best way forward is a familiar one: the more voices, the bigger the impact.
Correction: Minnesota’s first legal post-Prohibition distillery is Panther Distillery, established in 2011, not Norseman Distillery as was stated in the original version of this story.