A large still is a centerpiece in the tasting room at the Amalga Distillery at Franklin and Second Streets on Thursday, Sept. 14, 2017. (Michael Penn | Juneau Empire)

A large still is a centerpiece in the tasting room at the Amalga Distillery at Franklin and Second Streets on Thursday, Sept. 14, 2017. (Michael Penn | Juneau Empire)

Bar Wars: Alcohol board bans distilleries from selling cocktails

Amalga Distillery got some sobering news from the Alaska Alcoholic Beverage Control Board on Wednesday: distilleries may no longer serve cocktails, effective immediately.

It was written on the cocktail menu Wednesday night: “The Last Last Word. Literally. At least in this tasting room. An appropriate drink for the day.”

Since it opened this spring, Amalga has been an extraordinarily popular downtown destination. On the same day the alcohol board made its ruling, it was presented with the Empire’s Readers’ Choice Award for “Best New Business.”

The board’s 3-1 decision came after an anonymous complaint alleged Amalga was violating state law by mixing its locally made gin with alcohol and other things not made on site. Mixing drinks is not specifically allowed by state law, but the practice has been allowed for the past three years under the Alaska Marijuana and Alcohol Control Office’s interpretation of the law.

That interpretation changed in August, and the change was confirmed Wednesday by the alcohol board.

“I wanted to be surprised, but I was not particularly surprised,” said Brandon Howard, one of the owners of Amalga. “People’s tastes and preferences change, and I think we’re waiting on regulations to catch up with what consumers want and what the public wants.”

When the Empire visited Amalga on Thursday afternoon, the distillery was still serving cocktails. Howard said the business will continue operating as usual until it gets an official notice from the state. Other distilleries, such as Port Chilkoot in Haines, are doing the same.

The alcohol board’s decision applies to Amalga and the state’s other eight distilleries.

Anyone who comes into a distillery tasting room can no longer drink a cocktail. They can only drink alcoholic shots. Even ice is questionable.

“I don’t think you could outlaw ice cubes, but once you get beyond ice cubes, it’s a closer call,” Assistant Attorney General Harriet Milks told the alcohol board.

The reason for the sudden change is an oversight by the Alaska Legislature that combined with an emerging conflict over what distinguishes a distillery from a bar.

In 2014, the Legislature passed House Bill 309, which allows distilleries to operate “tasting rooms.” Wineries and breweries already had that right under Alaska law, and backers of the proposal said tasting rooms would allow customers to try liquor before buying a bottle.

HB 309 says in part: “a holder of a distillery license may sell not more than three ounces a day of the distillery’s product to a person for consumption on the premises.”

The key phrase is “the distillery’s product.” Before Aug. 2, the state Alcohol and Marijuana Control Office interpreted that phrase as including cocktails made with the distillery’s liquor. On Aug. 2, AMCO sent a new interpretation to the state’s distillers. “AMCO Enforcement identifies this as a violation,” the memo stated in part.

“All of us were surprised to get the letter from enforcement,” Howard told the Empire.

Assistant Attorney General Harriet Milks told members of the alcohol board that they don’t have a choice. They can only enforce the law as it is written.

“The words are just not there. Cocktail is not there, mixer is not there,” she said.

[Alaskans are drinking more liquor and less beer]

Eight lawmakers, including the sponsor of HB 309, wrote the board to say they did not intend to forbid cocktails, but Milks said an after-the-fact message doesn’t count.

Dale Fox, executive director of the trade group Alaska CHARR, participated in the drafting of HB 309 and said it was not intended to allow cocktails.

“I can assure you, CHARR would not have supported this bill if we thought distilleries would become de facto bars,” he told the alcohol board shortly before it confirmed the Aug. 2 interpretation.

Board chairman Bob Klein is CEO of Anchorage Distillery and recused himself from the vote. Afterward, he didn’t hold back.

“It’s really unfortunate. I’m really sorry you guys came to this conclusion,” he told his fellow board members. “Basically, we’re not going to get any business in the tasting rooms anymore.”

If he were advising his fellow distillers on what to do next, he has a suggestion: “Close your tasting rooms and bring suit.”

Heather Shade founded Haines’ Port Chilkoot Distillery in 2013 and has operated a tasting room (with cocktails) since 2014.

“I’ve been inspected by a past ABC director, and there was no indication we were operating in any other way than intended by the law,” Shade told the alcohol board and reiterated her comments to the Empire on Thursday.

Distilleries, including Amalga, have based their business models around the idea that they can sell cocktails.

“We’re trying to build up this new industry, and many of them went in with a business plan that included a tasting room with mixed drinks. I think that we can’t handicap them now by changing that,” said board member Ellen Ganley.

She was outvoted by Rex Leath of Wasilla, Robert Evans of Nome and Thomas Manning of Juneau.

What changed?

If the state’s alcohol regulator previously interpreted the law to allow cocktails, why did it it change?

From Sept. 22, 2014 until early this year, the state’s alcohol and marijuana regulator was directed by former Anchorage prosecutor Cynthia Franklin. Earlier this year, Franklin was replaced by Erika McConnell, also of Anchorage.

According to a memo signed by McConnell, “In June of this year, AMCO’s Enforcement Section received a complaint that a distillery was both serving mixed drinks and providing entertainment.”

James Hoelscher, the head of AMCO’s enforcers, said the complaint came in Juneau. He added that inspectors across the state observed similar violations at other distilleries.

That prompted the department to re-examine how it was enforcing the law, and that re-examination prompted the August memo that barred cocktails.

“I believe this is just quarreling between businesses in Juneau that is now affecting all of us,” Shade told the Empire.

Leeann Thomas of Juneau’s Triangle Club told the alcohol board that manufacturers like distilleries should not be able to mix other companies’ alcohol into their drinks.

“It’s not their product,” she testified. “I believe the advisory notice … should stand as it was explained.”

“We need to make sure the manufacturing license and the (bar license) remain separate,” said Ray Kaiser of Squirez in Juneau.

For bar owners, hundreds of thousands of dollars and the future of their business is at stake.

In Alaska, the number of bars is artificially limited by regulation, and demand is much higher than the regulated supply. Even in cities like Juneau, which has many grandfathered alcohol licenses, demand for the few licenses that come on the market is extraordinarily high. A “beverage dispensary license” used by a bar is worth at least $250,000 in Juneau, according to several people familiar with recent and upcoming sales.

Licenses for distilleries and breweries, on the other hand, are widely available directly from the state. Few places have hit their regulatory limit.

If distilleries are allowed to do what bars can do, bar owners worry that their investment will be worthless or worth less, much in the same way that taxi licenses have become less valuable with the rise of Lyft and Uber.

Jared Curé of The Narrows in Juneau told the Empire and the alcohol board that he has no problem with distilleries. He’d love the chance to serve cocktails using liquor from Amalga, just a block away on Franklin Street.

Curé said he did not lodge the complaint that started AMCO’s reconsideration.

“I think allowing them to operate as de-facto bars and have access to … bulk pricing gives them an unfair advantage,” he told the alcohol board.

Howard, responding by phone, told the Empire that the only bulk access his distillery has is for raw materials, and Curé is incorrect.

“We’re just comfortable accepting lower margins on our drinks, and our novel presentation and prep allows us to cut costs by saving time and we also cut costs by avoiding garnish unless it’s absolutely necessary for the drink. That’s how we keep our prices down on the drink,” Howard said.

He added that he might not have had to pay a quarter-million dollars for a state license, but he did have to purchase a still and manufacturing equipment that a bar doesn’t have to buy.

What comes next

Howard and Shade each said they are considering their options and the exact implications of Wednesday’s ruling.

Shade said she believes the alcohol board is acting illegally and attempting to regulate non-alcoholic mixers. She intends to defy the order and continue serving cocktails.

“If AMCO is going to show they are willing to hold jurisdiction over soda water and lime juice and ice cubes, then I guess I am willing to challenge that,” she said.

In Juneau, Howard said his distillery makes its own tonic water and ginger beer — could it use those mixers in cocktails? He’ll find out. Distillers may appeal the board’s decision or, as Klein said, take the issue to court.

“It’s wildly complicated,” Howard said.

He and other distillers said they expect the Alaska Legislature will eventually step in, but that isn’t likely until early next year.

On Wednesday night, hours after the alcohol board’s vote, drinkers crowded the Amalga tasting room, sipping cocktails.

On the bar was a menu listing the Last Last Word, which contains maraschino liquor. Shortly after 5 o’clock, Howard took a pen and crossed out the listing with a large black X.

It was sold out.

Editor’s note: A previous version of this story said Amalga Distillery gin is not yet available wholesale. That statement relied on an older interview with Amalga owner Brandon Howard. The gin has since become available beyond the tasting room.

• Contact reporter James Brooks at james.k.brooks@juneauempire.com or call 523-2258.

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