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Adapt & Survive…Or Not

During the “Great Pandemic” of 2020 many people had to adapt their lifestyle to fit the requirements impossed upon them.  This same requirement was placed upon small business.  The COVID-19-related closure of tasting rooms at distilleries and bars, loss of tourism, and inability to offer in-store sampling slashed their sales revenue and cut them off from their customers. Then this week, just as it seemed they’d made it through the worst of a terrible year, the Food and Drug Administration (FDA) had one more surprise in store: The agency delivered notice to distilleries that had produced hand sanitizer in the early days of the pandemic that they now owe an unexpected fee to the government of more than $14,000.  The surprise fee caught distillers completely off guard, throwing the already suffering industry into confusion.

When the onset of the pandemic led to a massive increase in demand for hand sanitizer this spring, many distilleries stepped up to alleviate the sudden shortage. More than 800 distilleries pivoted from spirits to sanitizer, offering it for sale or in many cases donating it to their communities free of charge. Their prompt action helped ensure supplies of sanitizer when it was otherwise unobtainable.  Producing sanitizer is viewed as a point of pride in the distilling business, a way that they were able to help their communities in a fearful time of crisis.

At issue is a provision of the CARES Act that reformed regulation of non-prescription drugs. Under the revised law, distilleries that produced sanitizer have been classified as “over-the-counter drug monograph facilities.” The CARES Act also enacted user fees on these facilities to fund the FDA’s regulatory activities. For small distillers, that means ending the year with a surprise bill for $14,060 due on February 11.

Bergh’s CalWise Spirits is a typical example. He says that his distillery produced 5,000 gallons of hand sanitizer, with distribution prioritized to medical workers and others on the frontlines of the pandemic response. “Some of my hand sanitizer was donated,” he said in a statement today. “The rest was sold at a fraction of the market price. My goal was to get as much out as I could, at as low of a price as I could, while being able to bring my furloughed employees back to work. The hand sanitizer business saved me from bankruptcy—but I didn’t make an enormous profit.”

Potentially compounding the impact of the fee is that it is determined by registration as an OTC (over-the-counter) monograph drug production facility in the previous calendar year. That means that distilleries not only have to contend with this year’s fee; if they fail to update their status with the FDA, they may be liable for an additional fee in 2022 as well.

Paying a surprise $14,000 bill would be a challenge for small businesses in any year, but it’s a particular challenge for craft distilleries in 2020. An industry survey conducted earlier this year by the Distilled Spirits Council of the United States and the American Distilling Institute projected that sales revenue at craft distilleries would decline by more than $700 million this year, amounting to approximately 40 percent of their sales.

Unfortunately, situations like these are not a rarity in our lives or businesses.  Unexpected obstacles routinely occur to each of us.  That is the importance of having a great team of people to support you at home and at the office.  As we face obstacles throughout 2021, please keep Goldfinch Winslow in mind to assist you through them.  It is our job to help alleviate those legal concerns, so that you can focus on what you know.  It is our job find the solution, so you don’t have to stress about the problem

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