This discussion summarizes the compliance issues related to the categorization of wineries in BC by the LDB as either "land-based" or "commercial". Significant topics covered include:
- Differences between LDB winery categories: "land-based" vs. "commercial"
- Land-Based winery criteria
- Business operations differences
Title: BC LDB Winery Categorization: Land-Based vs. Commercial
Date: June 16, 2020
Author: Mark Hicken, BA JD
This document contains a general discussion of the issues noted which was prepared on the date noted above. It does not constitute legal advice and was not prepared for you specifically. If you or your business needs a legal opinion, you should contact a lawyer for individual and updated advice.
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1. Land-Based vs. Commercial Categories
While the BC Liquor & Cannabis Regulation Branch issues manufacturing licenses to producers (wineries) in BC, each producer must also enter into a manufacturing agreement with the BC Liquor Distribution Branch (a different branch of government) in order for the winery to conduct business in BC. This is required because the LDB holds a statutory monopoly on the wholesale liquor distribution business within the province. The manufacturing agreement authorizes the winery to operate under the parameters set out in the agreement. The LDB has two types of winery manufacturing agreement: one for ‘commercial’ wineries, another for ‘land-based’ wineries.
Generally, it is easier to operate as a land-based winery (although the conditions for commercial wineries have improved in recent years). The current land-based winery criteria is located here: http://www.bcldb.com/doing-business-ldb/sales-agreements. The most important requirements are as follows:
- Must use 100% BC grapes or juice.
- Must have at least 2 acres of vineyards adjacent to the production facility. Must use the grapes from these vineyards in the winery’s production.
- Must own or lease vineyards that produce sufficient grapes for at least 25% of the winery’s total production. Please note that the LDB has certain "guidelines" for whether or not they consider a lease to qualify, some of which may not make business or legal sense in your circumstances. You may need to consult a lawyer if you are unsure whether or not your lease is satisfactory.
- Cannot use wine that has been purchased or transferred from a winery designated as commercial.
- A more recent requirement that is not set out in the criteria is that the vineyards adjacent to the production facility must produce at least 8 tonnes of grapes.
Commercial wineries do not have to comply with the criteria that the LDB has established to qualify as a land-based winery. Of particular interest are the following:
- Can use grapes or bulk wine sourced from outside BC.
- No minimum acreage adjacent to the production facility.
- No requirement for a particular percentage of grapes to come from land owned or leased by the winery.
Note that the use of non-BC grapes or juice may have pricing and economic implications. This is discussed further below. In addition, I note that the LDB prevents both cross-ownership and cross-management of commercial and land-based wineries (any such cross-ownership or management will result in both wineries being categorized as commercial).
2. Business Operations
Commercial wineries operate as agents of the LDB. Until recently, there was a requirement that all sales proceeds from the business be deposited into an LDB bank account each day, and then the winery was paid a “commission” each month following the filing of significant regulatory paperwork.
The administrative burden of operating a commercial winery has improved due to recent changes. Commercial wineries no longer have to wait to be paid by the LDB for their revenue and commissions. A new structure allows the creation of a bank account which the LDB can access in order to take their markup/fees. This means that the commercial winery can retain the remaining funds immediately, thus improving cash flow. Nevertheless, the filing and reporting requirements for commercial wineries are more onerous than those for land-based wineries (weekly vs monthly filing respectively and more detail required for commercial).
As noted above, a land-based winery cannot purchase or transfer wine from a commercial winery. As such, a commercial winery would be restricted in respect of other wineries to which it might wish to sell wine. In addition, due to the markup and pricing differences discussed below, most commercial wineries restrict themselves to making only certified VQA wine if they are using BC grapes. The BC VQA certification requires a taste test and imposes some constraints, e.g. that the wine is packaged in glass bottles.
3. Markups & Pricing
There are some differences in the application of LDB markups between land-based and commercial wineries. That discussion has now been moved to a separate article: Wholesale Pricing for BC Wineries