On Dec. 6, 2023, Assembly Bill 304 (Act 73) was enacted via 2023 Wis. Act 73, representing one of the biggest single overhauls of Wisconsin’s alcohol-regulation laws, Wis. Stat. chapter 125, and ushering in a new and exciting reality for the state’s entire alcohol industry. If you read my partner Jeff Glazer’s article from March 1, 2016 (Starting a Brewery: A Web of Regulations), you’ll know that many of the main points Glazer raised remain the same (starting a brewery is still complicated!) but a sea change is underway in Wisconsin. This article focuses on four major categories of changes that Act 73 will bring¹ to Wis. Stat. chapter 125 – 1) relaxation of three-tier restrictions, 2) changes to contract manufacturing, 3) full-service retail privileges, and 4) regulation of wedding venues (sometimes referred to as “wedding barns”).

Thanks are owed to the industry groups and other members of the community who worked for yearsto get this new legislation passed. Changing the law is rarely easy, and bringing diverse industry members to the negotiating table is even harder. If not for the work of the Wisconsin Brewers’ Guild, the Wisconsin Winery Association, and many others, Act 73 would have been nothing more than vaporware. Changes like the ones the new law is set to implement have been talked about since 2018, and as recently as summer 2023 many people thought the legislation would never pass. Act 73 represents not only a model for what can be done when people with diverse viewpoints come together to negotiate in good faith and get work done but also an immense opportunity for every alcohol business in Wisconsin.

1) Relaxation of Three-Tier Restrictions

The three-tier system is a statutory framework that prohibits any entity in any one tier from undertaking the functions of the other tiers. The three tiers are producer (manufacturer), distributor (wholesaler), and retailer (liquor store or taproom). Under a strict interpretation of the framework, manufacturers cannot distribute or sell at retail, distributors cannot manufacture or sell at retail, and retailers cannot manufacture or distribute. There are well-known exceptions, such as a brewery, winery, or distillery running a tasting room; a brewery self-distributing to liquor stores; and a winery shipping wine to consumers’ homes. That said, the general framework was otherwise strictly interpreted in Wisconsin and largely remains that way today, with some notable changes thanks to Act 73.

For example, under the pre-Act 73 language of Wis. Stat. chapter 125 (most of which remains in effect until May 1, 2024) and the Wisconsin Department of Revenue’s interpretation of that language, an owner of a brewery (production tier) could not own shares (a direct interest) in a bar or restaurant that holds a municipal liquor license (retail tier). Likewise, a commercial landlord who rented space to bars and restaurants could not later own shares in a brewery because the landlord held an interest in the tenant-bar retail tier by way of collecting rent (in that case, called an “indirect interest”).

These restrictions caused headaches for industry members and a lot of work for transactional lawyers trying to reshape corporate ownership structures that unwittingly included investor-shareholders from more than one tier of the system. Who is most likely to invest in a friend’s startup brewery or liquor store? Probably someone in the alcohol industry already. Who is often thrust into the operation of a brewery against better judgment? A landlord who leases space to other bars and whose tenant-brewer just went out of business, leaving a space that will never return to “white box” no matter how much paint the landlord throws at it.

Under the new language adopted by Act 73, these two major hurdles are largely taken care of. In the case of “cross-tier” ownership, so long as the individual (or entity) with an interest in a different tier 1) owns 10% or less of the outstanding stock of the business in the other tier² and 2) is not involved in the day-to-day operation of the other business (that is, is an investor only), then the ownership arrangement is not a violation of the three-tier system and the person is not considered a “restricted investor.”³ Additionally, a landlord operating in one tier is permitted to lease space to a business in another tier if the landlord is not involved in the day-to-day operation of the tenant business and the lease explicitly states the same.⁴

2) Changes to Contract Manufacturing

Historically, only breweries were able to engage in contract manufacturing for other breweries in Wisconsin. In practice, this meant that a brewery with excess capacity could contract with another brewery in need of product and produce it for them. That is not to say that there were not wineries and distilleries engaged in contract manufacturing, but the business transactions operated in a gray area that was not explicitly allowed by the statute nor blessed by the DOR.

As much as lawyers might miss the creative lawyering that it took to provide a colorable basis for some of the contract-manufacturing relationships to exist in the first place, they can acknowledge that clarity and dependability are great for business. Under the new language adopted by Act 73, producers of all types are explicitly allowed to engage in contract manufacturing under three different frameworks: 1) alternating proprietorship, 2) recipe brewer, or 3) licensing agreement.

This change presents an opportunity for all alcohol producers in Wisconsin. I have never met a brewer, winemaker, or distiller who was operating at 100% capacity 100% of the time. As an example, more than half the new breweries that Ogden Glazer + Schaefer brought online in 2022 and 2023 were “guests” who had the majority (if not all) of their beer produced by a “host” brewer in a host-guest relationship that took the form of either an alternating proprietorship or a recipe brewer. Not to mention that several states still restrict contract-manufacturing privileges for distilleries and wineries, as Wisconsin once did. It is possible there will be a massive increase in contract production by host distilleries and wineries starting in May 2024.

Under Act 73, the only way a brewery, winery, or distillery can sell product produced by anyone else is if the brewery, winery, or distillery qualifies for full-service retail (FSR) privileges.

3) Full-Service Retail Privileges

Under pre-Act 73 Wis. Stat. chapter 125, the ability of breweries, wineries, and distilleries to sell in their taprooms and tasting rooms other products they did not produce was not unified. Depending on the specific type of beverage they were producing, the rules and requirements to sell “other products” varied and were difficult for almost everyone (lawyers included) to understand. Under the new language adopted by Act 73, it’s a brave new world.

First and foremost, the existing statutory authority for sales of “other products” not manufactured on the premises is largely eliminated. (The only industry member left unscathed by the coming changes are brewpubs, chimeras of the three-tier system that are not being addressed here.) The days of upstart breweries and wineries selling beer and wine, respectively, produced by other industry members are a thing of the past. Under Act 73, the only way⁵ a brewery, winery, or distillery can sell product produced by anyone else is if the brewery, winery, or distillery qualifies for full-service retail (FSR) privileges.

This is what FSR means: Provided that a manufacturer produces enough of its own product, whether beer, wine, or spirits, the manufacturer can apply to the DOR for the right to sell any product (that is, a full bar’s worth of product) at the manufacturing premises and an offsite FSR outlet (more on that below). The FSR permission is not subject to a municipal liquor license or subject to the quota system that otherwise limits Combination Class B liquor licenses based on the population of the municipality. Now, assuming a brewery brewed at least 250 barrels⁶ of beer annually in any of the prior three years, customers may be able to purchase beer, wine, and spirits at that location.

However, with all good things legal, there are some major caveats to keep in mind. 1) To obtain FSR privileges, the brewery, winery, or distillery must produce a specified amount of its own product on an annual basis (with a three-year buffer-lookback period). 2) Although the producer is not subject to municipal liquor-licensing requirements, the municipality can still pass an ordinance to restrict FSR flexibility (think, an ordinance restricting all breweries in town to only selling beer and wine, not spirits). 3) The DOR will still ask the specific municipality whether it “approves” of a producer engaging in FSR activities (although, at this point, no one is sure exactly what that “approval” process will look like). Additionally, all producers will be limited to sales of their own product only, until they reach the production minimums for FSR privileges (or at least that’s the understanding at this point).⁷

Here is a breakdown of the respective production thresholds and other important information for each commodity producer:

Brewery⁸

Production Minimum: Breweries must produce a minimum of 250 barrels annually in at least one of the prior three years of operation to qualify for FSR privileges.

OffsiteFSR Location Limits:

• Breweries producing 250-2,499 barrels annually can establish a single offsite FSR location.

• Breweries producing 2,500-7,499 barrels annually can establish two offsite FSR locations.

• Breweries producing 7,500 or more barrels annually can establish up to three offsite FSR locations.

Distillery⁹

Production Minimum: Distilleries must produce a minimum of 1,500 liters annually in at least one of the prior three years to qualify for FSR privileges.

OffsiteLocation Limits:

• Distilleries producing 1,500-4,999 liters annually can establish one offsite FSR location.

• Distilleries producing 5,000-34,999 liters annually can establish two offsite FSR locations.

• Distilleries producing 35,000 or more liters per year can establish up to three offsite FSR locations.

Winery¹⁰

Production Minimum: Wineries must produce a minimum of 1,000 gallons annually in at least one of the prior three years to qualify for FSR privileges.

OffsiteLocation Limits:

• Wineries producing 1,000-4,999 gallons annually can establish one offsite FSR location.

• Wineries producing 5,000-24,999 gallons annually can establish two offsite FSR locations.

• Wineries producing 25,000 gallons or more annually can establish up to three offsite FSR locations.

Assuming a producer meets the minimum production threshold (250bbls annually for a brewer), the producer can engage in FSR sales at its production location andestablish one offsite FSR location. That is, FSR privileges are tied to the initial production minimum, but the location limits are offsitelocations where no production is taking place, not the production location itself.

Under the language adopted by Act 73, however, wedding barns will be considered “public” places and therefore subject to municipal licensing requirements, with one very limited exception.

4) Regulation of Wedding Barns and Other Venues

This final section could be called “all good things must come to an end.” Historically, wedding barns and other venues that leased space for events and allowed customers to bring their own alcohol operated under the auspices of being “private” and, therefore, not subject to the same municipal licensing requirements other retail establishments (like bars) must comply with. This was essentially the same type of model that Airbnb and Uber operated under. Airbnb was not a hotel or motel, just a friend allowing another friend to sleep on a couch for one night. Uber was not a taxi service, just friends who met each other over a phone application agreeing to drive each other for a fee. Of course, that is no longer the reality – Airbnb is regulated and taxed like a hotel, and Uber is regulated and taxed like a taxi service. The same will be true, for better or worse, for wedding barns and other venues in Wisconsin under Act 73 – albeit, not until 2026 rather than starting in May 2024.

Using a wedding barn was akin to getting married or having the reception (or both) in a friend’s very clean, very fancy barn for a small fee; it was a private event on private property. Under the language adopted by Act 73, however, wedding barns will be considered “public” places and therefore subject to municipal licensing requirements, with one very limited exception. To allow the consumption of beer, wine, and spirits at their venues, owners must apply for a municipal Combination Class B license. Combination Class B licenses, however, are subject to quotas and if all a municipality has available is a reserve license, a $10,000 fee. If a license is not available or the $10,000 reserve fee is not feasible, there are four potential options to allow at least some type of alcohol to be consumed during events.

The first option is to seek the new exemption from the Combination Class B quota by having the venue certified as a “qualifying event venue.” Under Act 73, provided that a venue held at least five events hosting 50 people or more during the previous 12-month period, and the venue owner received at least $20,000 for hosting those events (and complies with various other requirements, including applying for the exemption by the applicable deadline), the municipality can issue the venue a Combination Class B license despite being at quota. This option sounds great, but its availability is time limited (the proposed deadline for seeking “qualification” is Aug. 1, 2026) and is only available if a municipality is at quota.¹¹

The second option is to seek an available Reserve Combination Class B license from another municipality. Under Act 73, municipalities within the same county can transfer reserve licenses between them. This is a big change because under pre-Act 73 Wis. Stat. chapter 125, reserve license transfers were only allowed between abutting municipalities or those within two miles of each other. However, the municipality with the license to spare must agree to the transfer and can dictate the price, which may be above $10,000.

The third option is to obtain a municipal Class B Beer and Class C Wine license. Class B Beer and Class C Wine licenses are inexpensive and are not subject to quotas. The tradeoff is that spirits will be unavailable, and this might be a dealbreaker for many venues. But if a Combination Class B License is unavailable, at least some kind of alcohol can be offered.

The fourth option is to obtain a No-Sale Event Venue permit¹² and allow guests to bring their own beer and wine to the venue, free of charge, but be limited to a total of six days of events per year and no more than one day of events per month. As with the second option, spirits will be unavailable under the third option. Given the severe limitation on the number of events that can be held under the No-Sale Event Venue permit and the realities of the spring and summer wedding season in Wisconsin, it’s hard to imagine that it will be a viable solution for many venues.

The good news is that legislators understood that weddings are booked two years in advance. So, rather than upend the business model of many small venues, the legislature decided that these changes will not be implemented for at least two years.

Conclusion

This article highlights only four categories of the many changes that Act 73 (156 pages in total) is making to Wis. Stat. chapter 125. Additionally, the DOR is knee-deep in the rulemaking process, which includes not only developing guidance on the new text of the statute but also hiring staff and revamping application procedures. Things are changing, and more change is coming. That said, the skies look bigger and brighter for Wisconsin’s alcohol industry.

Endnotes

1 Changes 1-3 will be implemented by May 1, 2024, while change 4 has a 24-month implementation timeline.

2 Maximum “restricted-investor” ownership in any entity is capped at a maximum of 49% of the outstanding stock. Wis. Stat. § 125.20 (created by 2023 Wis. Act 73).

3 Wis. Stat. § 125.20(1)(g) (created by 2023 Wis. Act 73).

4 Wis. Stat. § 125.20(6)(a)(4) (created by 2023 Wis. Act 73).

5 This is mostly, but not entirely, true. Breweries that held a Combination Class B license before June 1, 2011, will retain the ability to sell wine and spirits at their formerly licensed locations.

6 To put this number in perspective, a barrel of beer is 2 kegs; therefore, 250 bbls is 500 kegs, or a little over 10 kegs of beer per week.

7 The language of AB304 seems clear on this point, but the practical implications of requiring a producer to “hurry up and produce” to reach the production minimums may be less than ideal. It will be interesting to see how the DOR rules are developed around this and whether FSR privileges could be granted on a probationary basis for new producers (although, probationary FSR is not explicitly allowed under the language of AB304).

8 Wis. Stat. § 125.29(7) (created by 2023 Wis. Act 73).

9 Wis. Stat. § 125.52(4) (created by 2023 Wis. Act 73).

10 Wis. Stat. § 125.53(3) (created by 2023 Wis. Act 73).

11 Wis. Stat. § 125.24(5) (created by 2023 Wis. Act 73); see also https://www.revenue.wi.gov/Pages/FAQS/alc-event-venue.aspx#4st5.

12 Wis. Stat. § 125.24 (created by 2023 Wis. Act 73). More helpful information directly from the Wisconsin DOR is at https://www.revenue.wi.gov/DORNews/DORonTapAIU019.pdf.