Rytas Vilgalys discovered the recipe for Krupnikas in an old cookbook a generation after his family fled Soviet-occupied Lithuania following World War II. In their home in Durham, where the family settled after Rytas became a Duke biology professor, his son Rim remembers watching him hunched over a pot on the stove, stirring herbs into a sweet syrup, a thick aroma of honey, nutmeg, and cinnamon flooding the kitchen.  

Then Rytas would add Everclear—Rim’s mother’s cue to leave the room.

The liqueur became a family holiday tradition. Rim took the recipe with him to college at the University of California at Santa Barbara. It became a hit at parties. When he graduated and returned to Durham in 2008 and friends kept asking for it, he had an idea. He took business classes, got permits, and opened The Brothers Vilgalys distillery out of a windowless warehouse on the outskirts of downtown with some money from family and friends.

Krupnikas hit the shelves at Triangle ABC stores at the end of 2012, selling about nine thousand bottles the first year. The brand slowly spread across the state, and over the next few years, Vilgalys expanded to six products lines: different blends of the Lithuanian concoction, like Zaphod, a fruit and herbal liqueur, and Beatnik, a savory, beet-flavored drink.

Despite his early success, Vilgalys struggled to get his products shelved in Charlotte, Winston-Salem, and Asheville. He spent three years driving all over the state to pitch the 168 local ABC boards to invest in his product, often without luck. It was a chicken-and-egg problem, he says. If he couldn’t demonstrate big sales numbers, the boards wouldn’t stock his products unless bars and restaurants demanded them. But bars and restaurants wouldn’t order them unless they were already on ABC shelves.

What he needed, Vilgalys says, was a way to reach customers directly—to sell cocktails directly out of his distillery, just as breweries have their beers on draft. But North Carolina law doesn’t allow that. Unable to turn a profit, Vilgalys took a second job in software development two years ago.

“Until there’s regulatory change or reform, we’re not going to be able to really find a good growth curve,” Vilgalys says.

Now he’s staring down another hurdle.

In June, the Alcoholic Beverage Control Commission will begin enforcing a longstanding rule that could knock all of his blends except Krupnikas out of the state’s warehouses. That would make local ABC boards even less likely to pick them up. And if he can’t sell them in stores, that leaves just two options: convincing his customers to order by the case through a convoluted process, or trying to sell out of his distillery at a maximum of five bottles per person per year.

Neither is a viable business model.

The rule, which has been on the books for at least a decade but has never been enforced, requires all products in stock to net the ABC system at least $5,000 a year in profit. Once it goes into effect, a third of North Carolina distillers could see their access to the market diminish, and nearly a quarter of North Carolina–made spirits—about fifty of 209—could soon be out of stock.

For small distillers—and new ones—this threshold could make it nearly impossible to get their products in front of consumers. And that could stunt the industry’s burgeoning growth, advocates say. Since 2010, North Carolina’s market has grown from seven distillers to eighty-one, echoing a national trend that has seen the number of distillers nearly triple since 2013 to more than eighteen hundred, according to the American Craft Spirits Association.

Any change will have to come from the General Assembly. Scott Maitland, the founder of Top of the Hill’s brewery (in 1996) and TOPO Organic Spirits (in 2012), is gearing up for a fight. He was instrumental in the Pop the Cap legislation that kicked off the craft beer movement in 2005, and in 2017, as president of the Distillers Association of North Carolina, he led the effort to pass the so-called Brunch Bill, which allowed liquor sales before noon on Sundays at restaurants and let distillers sell five bottles per person per year, as opposed to one, from their distilleries.

“Everyone sees the success of craft brewing,” Maitland says. “Memories are short, so they don’t know the history, that it took us twenty years to get the laws to [this] point. The raising of the distribution cap, the Pop the Cap effort—I don’t think that people truly appreciate the blocking and tackling that happened by earlier pioneers of the industry.”

He adds, “We have a long, long way to go.”

‘Whiskey is the devil’

Once, Mystic Farm & Distilling co-owner Jonathan Blitz says, he asked an ABC official why the state treats liquor so differently from other alcoholic beverages.

The official’s response: “Beer is food, wine is sacrament, and whiskey is the devil.”

“Spirituous liquor is treated as this extreme evil, when in reality, it’s the same product,” Blitz says. “Wine and beer are in every gas station and Quickie Mart. Spirits are in this parallel universe, where, gosh, you may not be responsible for yourself if you have a drop of this devil juice.”

In 1909, North Carolina became the first Southern state to go dry, a decade before the Nineteenth Amendment took Prohibition nationwide. Like everywhere else, government-enforced temperance didn’t always go over well. By the 1920s, North Carolina’s chief enforcement official bemoaned the underground epidemic of moonshiners: “We have more illicit distilleries than any other State in the Union, and the number is increasing.”

Four years after the Prohibition ended in 1933, the General Assembly created the Alcoholic Beverage Control Commission, a state-run monopoly on the sale and distribution of alcohol. Nationally, seventeen states (as well as Montgomery County, Maryland) use some version of this model. 

North Carolina’s system generates more than $430 million a year—just under 2 percent of the state’s $24 billion budget—on more than $1 billion in sales a year. On every bottle, the state collects a 30 percent excise tax, a 7 percent sales tax, and fees, as well as a mixed beverage tax if the bottle is sold to a restaurant or bar.

To get onto a store shelf, a product has to pass through two gatekeepers: the Commission, a three-person body appointed by the governor to oversee permits, distribution, enforcement, and set policy; and the 168 local boards, appointed by county or municipal officials, which act as franchises and sell to customers, bars, and restaurants.

After obtaining permits from the state, distillers produce a pallet of their product for storage in one of two ABC warehouses. Then, they need a local ABC board to order it. Once a spirit reaches the store, North Carolina products are typically relegated to a “local” shelf in the store, sometimes referred to as the moonshine section. (They can be placed alongside national brands, but that’s up to the local board.)

The ABC Commission says it decided to enforce the profitability threshold for two reasons: to provide local boards with “the most appealing product options,” and, more important, because its warehouses are running out of room.

But this isn’t accurate, distillers say: A state audit last year found that LB&B, the company with which the Commission contracts to operate warehouses in Raleigh and Clayton, was utilizing less than a quarter of the space in its Clayton warehouse. The audit also found that poor contract negotiations and a lack of monitoring have cost taxpayers $14 million.

The Commission disputed the auditor’s findings, arguing that the Clayton warehouse reaches capacity in spring and summer, and the auditors showed up in December. Still, it plans to seek bids for a new contractor when LB&B’s contract expires in 2021.

The ABC announced its decision in November, and the rule was scheduled to go into effect at the end of 2018. It was delayed until June following pushback from the Distillers Association and its new president, Southern Distilling Company owner Pete Barger. 

Once the rule takes hold, Vilgalys will have to sell 1,320 bottles of Krupnikas a year to hit that mark, which shouldn’t be an issue. Last year, that product netted the state about $22,000, he says. But his other five blends, which come in smaller bottles, have to sell a lot more, and they’re not even close.

And while the new rule is particularly problematic for small distilleries, even the big guys are concerned. Maitland says not all of TOPO’s products may make the cut. The same goes for Barger. 

“Not all of our [products] meet that threshold,” Barger says. “So yeah, we’re impacted, and frankly, the five-thousand-dollar requirement is a pretty high bar for a small brand, for [a product] that we’re just trying to get set up and develop.”

In principle, they say, earning one’s keep makes sense, and having to store products no one wants would drain the state’s resources. But they also see the threshold as arbitrary and argue that the Commission should make exceptions for North Carolina distillers.

Negotiations between the Distillers Association and the Commission are ongoing, says Agnes Stevens, the Commission’s staff administrator.

“We want nothing but success for them, and I think they know that,” Stevens says. “We are trying to work cooperatively to do what we can to make sure that their businesses have every chance for success.”

While Barger convinced the ABC Commission to delay its enforcement, he acknowledges that’s a temporary victory.

“We may have won the point but lost the war,” Barger says, “because no one is going to order the product because it is going to be too difficult for them to get.”

‘It was a disaster’

While distillers hope the ABC Commission will find ways to accommodate them, Chuck McGrady just wants to get rid of the damn thing.

McGrady, a Republican state representative from Henderson County, sees the state’s monopoly as anathema to his free-market principles. “Getting government out of the sale and distribution of distilled spirits is the best thing, I think,” McGrady says. “I think the private sector can handle it better than we can.”

He says he’ll introduce a bill this session to privatize the sale and distribution of liquor, though he doesn’t like the term privatize, nor does he offer many specifics. In short, though, the state would oversee enforcement of liquor laws like most states do, through a licensee system in which retailers and distributors would apply for a permit from the state.

To McGrady, part of the problem is the lack of parity between how the state treats spirits, wine, and beer. The latter you can buy in grocery stores and gas stations, even on Sundays. But not booze. Why not treat all alcohol the same? he asks. And if you got rid of the red tape, McGrady says, craft distillers would be better able to compete.

You might think the Distillers Association would be his biggest champion. But that’s not the case. Barger likes being in a control state. His group just wants the Commission to make things easier for them.

In North Carolina, Barger says, a product at least has a chance at exposure. Even with the profitability threshold in place, products will still have a year to prove their viability. In a private system, craft distillers have to compete against the handful of companies that manufacture most major brands and have massive marketing budgets, and they wouldn’t get the state-mandated local shelf. 

In fact, craft distillers tend to fair better in control states, according to the National Alcohol Beverage Control Association, because the state opens up broader access to the market than do private retailers, marketers, or wholesalers.

“It’s not a surprise craft producers have done well in a control jurisdiction,” says Steven Schmidt, vice president of the NABCA. “One of the values to those systems is that with one phone call or one contact, you have the ability to interact with a much larger jurisdiction than you may if you have to go through individual retailers.”

“The free market doesn’t necessarily benefit the little guy, because when you go private, the guy with the biggest marketing budget is the guy that wins the shelf space,” Barger says. “It’s counterintuitive, but the system we have today, as challenging and frustrating as it is, does give us access to the market that we would not necessarily get in a true private system.”

Previous attempts to privatize liquor sales in North Carolina have been unsuccessful, in part due to moralistic concerns, and also because legislators are worried about losing revenue. 

It’s unclear whether McGrady’s latest initiative will fare any better. But the General Assembly is considering its options—including what privatization would look like. 

A report from the Program Evaluation Division, released Monday, found that, while most North Carolinians want to abolish the ABC system, privatization would lead to lost revenue (unless the state raised liquor taxes), more liquor stores, and more booze consumption. The report also argued that the existing regime is working: Of Southeastern states, North Carolina takes in the most money per gallon of liquor, has the lowest number of liquor stores per population density, and is second to last in its consumption rate. 

The report looked at what happened in Washington State, which, in 2012, switched from a control to a licensure system, as McGrady is proposing. There, the number of liquor stores quadrupled, but craft distillers took a big hit. 

“It was a disaster,” Maitland says. “Washington State very unwisely did away with being a control state, then just allowed the Wild West to come in, and it wasn’t good. When you go from being totally regulated to free, the pendulum swings all the way the other way, and so what does the free market, the unfettered free market, do? Well, the eight-hundred-pound gorillas in the free market set up the distribution systems, and what you end up getting is lots more alcohol but much fewer selections because they’re selling their stuff, and they’re selling their most cost-effective stuff, and because of the scale of the operations, the idea of creating actors that could provide true choice gets squeezed out.”

‘Burn it all down’

The distillers may not want to throw the ABC Commission baby out with the bathwater, but they do want what they consider a few simple fixes.

“The real issue with our existing ABC system is the act of omission—the failure to understand what an economic powerhouse the distilling industry in North Carolina could be,” Maitland says.

For starters, they argue, the state could let them sell more of their bottles and cocktails at their distilleries. Currently, they can give out quarter-ounce samples of raw spirits—not always the best sales pitch for, say, gin. They can’t mix it with anything. They can’t serve food. And those restrictions, they say, don’t allow them to create the ambiance or customer experience that would help build their brands.

Removing the cap on direct sales to consumers out of distilleries would also pad profit margins. And surely, distillers say, the Commission could take a cut and put it toward warehouse space.

The Distillers Association is still finalizing its agenda for the legislative session, but it will likely focus on creating equity with breweries, including lifting the five-bottle cap and allowing for limited self-distribution. 

Right now, the distillers say, the system is preventing them from growing. Their products comprise less than 1 percent of all liquor sales in the state. After the Pop the Cap and other reforms, they point out, craft breweries claimed more than 10 percent of the state’s beer sales. 

They might get some of what they want. 

On Monday, a joint legislative oversight committee backed a bill—supported by the authors of the report from the Program Evaluation Division—that would permit distillers to hold tastings in ABC stores and allow customers to place special orders for a single bottle rather than an entire case. 

The bill would also require the ABC Commission to seek bids for a new warehouse contractor this year instead of 2021, force counties with multiple ABC boards to consolidate them, and enable Sunday liquor sales with local approval. 

Whether the bill can win over the rest of the General Assembly—or whether legislative leaders choose to make it a priority—remains to be seen. 

While all of this plays out, uncertainty abounds for Vilgalys. Come June, the new rule could cut into a third of his sales, he says, and he’s not sure how he’ll recoup those losses. 

For now, he’s waiting it out—and hoping reforms are on the way.

“I want to hang on to it because, like, our customers love it. I am optimistic we’ll improve,” Vilgalys says. “If I’m in a bad mood, I’m just like, burn it all down. But most the time, I’m seeing the whole picture.”

Contact staff writer Leigh Tauss by email at ltauss@indyweek.com, by phone at 919-832-8774, or on Twitter @leightauss.