Three-tier system

The Supreme Court Just Struck a Blow for Alcohol Freedom

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The Supreme Court finally released its long-awaited decision in Tennessee Wine v. Thomas this week. The case involved a challenge to Tennessee’s “durational residency requirement” law, which said that in order to operate a retail alcohol store in Tennessee, the store owner must have been a resident of the state for 2 years. And in order to renew the license, which was required annually, the owner needed to be a resident of the state for 10 years. The law even required that all officers and directors of companies that ran alcohol retail stores—as well as 100% of all stockholders—to be state residents.

The Court, in a 7-2 decision, struck down the Tennessee law for violating the U.S. Constitution’s so-called Dormant Commerce Clause. To put it simply, this doctrine holds that states cannot discriminate against out-of-state economic interests while favoring in-state economic interests. The Tennessee residency requirement obviously favored in-staters over out-of-staters, but the law’s defenders argued that the 21st Amendment to the U.S. Constitution (which repealed Prohibition but granted broad powers to state governments to regulate alcohol) immunized laws like Tennessee’s from constitutional scrutiny. While the Court emphatically rejected that argument, its holding also could have broader implications:

Before Americans can enjoy a nationally cohesive alcohol shipping marketplace, however, much work remains. Many states still discriminate against out-of-state retailers interested in shipping alcohol—laws which will almost certainly be challenged in light of the Court’s decision. And nearly every state still labors under a three-tier system of alcohol distribution, which mandates a role for wholesalers when it comes to most alcohol sales. Furthermore, the U.S. Post Office forbids the shipment of alcohol entirely (although some private carriers permit it).

Therefore, governments around the country will have to take proactive steps to liberalize their alcohol shipping laws and streamline them in a way that makes interstate alcohol shipping more achievable. But for now, the Supreme Court’s decision in Tennessee Wine can be seen as an early step toward a more robust interstate shipping market for booze.

DrinksReform.org will have more coverage of the Tennessee Wine case and its aftermath in the weeks ahead!

Prohibition was Repealed Almost 90 Years Ago, but Congress is Still Praising its Progeny

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Written by R Street’s Jarrett Dieterle and cross-posted from R Street Institute.

At a time when confidence in Congress—and really all of Washington, D.C.—remains at an all-time low, congressional representatives seem more determined than ever to make Americans cynical. Perhaps nothing illustrates this more than a recent resolution concerning alcohol regulation that several legislators recently introduced. The resolution, which is ultimately toothless, seeks to “recognize … 85 years of successful State-based alcohol regulation.” Not only is the resolution a complete waste of time, it also fundamentally misunderstands the role regulation has played in the modern evolution of the alcohol industry.

As far as one can divine from its fluffy language, the resolution appears to operate primarily as a cheerleading vehicle for the three-tiered system of alcohol regulation. The system, which traces its heritage to the immediate aftermath of Prohibition, requires that each link in the alcohol distribution chain—producers, wholesalers and retailers—remain legally separate entities.

This mandate may seem unremarkable at first blush, but its importance cannot be overstated. Consider that everyday conveniences such as Apple Stores—in which Apple acts as both the producer and retailer of its goods in stores nationwide—are impossible in the alcohol space. The three-tiered system also lies at the heart of many antiquated and nonsensical alcohol laws that remain on our books today. For instance, notoriously silly laws like Indiana’s warm beer law (which forbids gas stations from selling refrigerated beer) and laws prohibiting the shipment of spirits to consumers are vestiges of the three-tiered system that have never been cleared away.

The theory behind the three-tiered system, as the congressional resolution itself notes, is to prevent vertical integration in alcohol markets. In other words, the aim is to thwart large producers from exercising direct control over distribution in a way that could lead to monopoly behavior. While fears about monopolies are hardly unsurprising—after all, several 2020 presidential candidates have already claimed they want to “make antitrust cool again”—these concerns are totally unsubstantiated in the modern alcohol marketplace.

We live in an unprecedented time in modern history when it comes to what we drink. The array of different spirits, beers, wines and ciders is seemingly endless—and only grows by the day. Consumers are also becoming more locally focused and selective, meaning that the chances of a few large industry players cornering the drinks market are less realistic than ever. Simply put, consumers want more options, not fewer. Such a fragmented marketplace makes monopolistic behavior tricky, if not impossible.

Instead of waxing poetic about the supposed virtues of an anachronistic system of regulation, politicians should be focusing on how to modernize and overhaul alcohol laws across the board. Some laws surrounding alcohol are certainly necessary—no one wants to legalize driving under the influence, for example—but the vast majority of alcohol rules have no connection to health and safety. Citizens are not made safer by laws that prohibit the sale of cold beer in gas stations or forbid them from having booze shipped to their door. (After all, if we can find a way to send prescriptions via mail, we can do the same for alcohol.)

To be fair, politicians frequently spend much of their time grandstanding. But if they’re going to do so, they should at least grandstand for something that makes sense.

C. Jarrett Dieterle is the director of commercial freedom at R Street Institute and the editor of DrinksReform.org.


As Beer Market Matures, Many Regulatory Obstacles Remain

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As the craft beer movement has continued to explode in recent years, some analysts have warned that the market is becoming over-saturated. R Street’s Jarrett Dieterle has argued that in the context of a saturated market, it’s even more important to eliminate restrictive government-imposed barriers that hurt producers; after all, the market providers enough pressure without harmful (and needless) external hurdles being layered on. Food policy expert Baylen Linnekin recently sounded a similar warning in an article for Reason.com:

While the market for craft beer is still growing, the rate of growth has slowed considerably in recent years. Brewers Association chief economist Bart Watson last year said the craft beer industry his group represents is showing signs of "deceleration."

I'm confident the industry's growth can continue. But here's a caveat: craft brewers also continue to face their share of outside obstacles, chiefly in the form of state laws that hinder growth and profitability…

 I'm generally optimistic about both the industry and trends in state laws in the decade or so I've been writing about the industry. But I'm also frustrated by the slow pace of change and by seeing the same tired arguments…

Craft beer is a highly competitive, innovative, and important industry with boundless potential. In the end, though, the industry can only go as far as lawmakers will allow.

Linnekin’s whole article is well worth a read.

The DrinksReform.org team has also previously interviewed Linnekin on the absurdity of America’s alcohol laws.

Agreement Reached to Lift North Carolina's Self-Distribution Cap

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As our team has previously covered, North Carolina caps the number of barrels that breweries in the state can self-distribute at 25,000 annually. This means that once a brewery exceeds that barrel limit, it is forced to work with middlemen distributors in order to sell its beer in stores and restaurants in the state. Unsurprisingly, this creates a whole host of problems for growing breweries. While previous attempts to lift the self-distribution cap have failed in the state legislature, the AP reports that a deal to lift the cap has been reached (although the cap still remains in place at a higher level, rather than being scrapped entirely):

Small North Carolina brewers and alcohol wholesalers raised glasses on Thursday to what they call a legislative compromise that allows the breweries to keep control of their products longer as they grow.

Legislators from both political parties and industry representatives announced an agreement in General Assembly bills filed this week to let these craft breweries sell double the amount of their beer annually on their own compared to what current law allows…

The legislation would allow the creation of a new classification of brewers that can self-distribute up to 50,000 barrels a year. While these mid-sized brewers would still be able to sell up to 100,000 barrels, distributions above the first 50,000 barrels would have to be performed by a wholesaler.

Read the rest here.

Will Direct-to-Consumer Shipping Expand for Distilled Spirits?

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As R Street’s Jarrett Dieterle has previously discussed, it’s very difficult for the alcohol industry—especially distilled spirits and beer—to participate in the direct-to-consumer (DtC) shipping boom. Most states restrict the ability of brewers and distillers to ship their products directly to customers, although Kentucky recently passed a DtC law that could spread to other states. An article for RaboResearch lays out the current state of play:

In a world where consumers can get anything they want, however they want, the spirits industry is at a real disadvantage. Direct-to-consumer (DtC) shipments and e-commerce have driven growth in the wine category, but spirits face restrictive rules around shipping and retail that limit distillers’ ability to operate online. As we approach the holiday season – the most important time of year for wine and spirits sales – we want to highlight the structural challenges facing spirits in a world increasingly defined by e-commerce.

In 2018, wine shipped DtC will represent 7 percent of the total US wine market – more than USD 3 bn. About 95 percent of US consumers can go online to buy and ship wine DtC across state lines. The laws for shipping spirits DtC are, however, much more restrictive: Only five states allow DtC spirits shipments, with 5 percent of the US population having access to the channel. In fact, shipping laws are so complex and the market so small that common carriers won’t even ship spirits in states that do permit distilleries to ship DtC.

If the spirits industry had the same access to consumers as wine, they could build a market worth billions of dollars. Recognizing the opportunity, distillers are pushing state legislatures to change their shipping laws, and believe it or not, they are making progress. Kentucky, perhaps aspiring to its state slogan 'unbridled spirit', passed a law to legalize DtC spirit shipping in 2018. Other states will likely follow. As Eric Gregory, president of the Kentucky Distiller’s Association, told Insider Louisville “... once other states realize Kentucky has broken the ice... we’re going to see a lot of movement with other states coming on board.”…

Read the rest here.

NEW: America's Dumbest Drinks Laws

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In honor of Repeal Day, we released a new drinks report! Earlier this year, our DrinksReform team put out a call for readers to send us examples of the craziest, whackiest, most nonsensical alcohol laws they could find. We scoured the Internet, interviewed industry players, and combed through state legal codes to find the “worst of” when it came to booze laws across the country. Today, we debut the culmination of that effort, a new report titled “America’s Dumbest Drinks Laws.”

That’s right, we picked the 12 dumbest drinks laws in America and ranked them. We’ll let you read the report for the full rankings, but we wanted to pass along one happy note: The “winner” of the #1 worst alcohol law—a 1834 federal law that banned Native Americans from distilling on tribal grounds—was recently relegated to the dustbin of history. A bill repealing this outdated and offensive law passed both the U.S. House of Representatives and Senate and is headed to the President’s desk.

R Street’s Kevin Kosar and Jarrett Dieterle wrote the first article in any mainstream outlet about the Native American distilling ban when they penned an op-ed earlier this year in the New York Times calling for the law’s repeal. We like think to think that we get results at the R Street Institute, and we’re proud that the law we targeted as the #1 worst alcohol law in the country has officially been eliminated.

Now, onward to #2 and #3! (Looking at you, North Carolina and Indiana …)

Check out the full report here—and prepare to be outraged! For a more condensed summary of the report, Dieterle wrote a Repeal Day piece for the Washington Examiner about it.

Additional media coverage for the report:

Wisconsin Alcohol Study Committee Avoids the Hard Questions

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Facing pressure to reform the state’s three-tier system of alcohol distribution, Wisconsin lawmakers appointed a study committee to review the state’s alcohol regulations. As the committee completes its work, it looks like it largely avoided delving into the most contested and controversial issues, according to The Cap Times:

Disputes over how Wisconsin's alcohol beverage industry is regulated and enforced are set to continue as a legislative study committee winds down this month, and questions remain about how Democrat Gov.-elect Tony Evers' administration will approach the issue.

The legislative study committee was assembled earlier this year to examine how the state's alcohol beverage laws are enforced, or not. But the committee never dealt with the primary gripe of the state's growing craft beverage industry: that the state's alcohol laws, known as the three-tier system, should be altered and modernized to accommodate a changing business landscape.

The committee instead focused on the interpretation of current alcohol laws by the state Department of Justice, and the degree to which they are enforced by the state Department of Revenue - both of which are ostensibly more unclear with the election of Democrat Evers than they were when the committee convened…

Read more here.

TTB Signals Enhanced Enforcement Efforts

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The U.S. Tax and Trade Bureau is the primary agency at the federal level that regulates alcohol and enforces trade practice violations. According to Beer Business Daily, the TTB appears to be ramping up its enforcement efforts:

The U.S. Tax and Trade Bureau (TTB), which is the federal agency charged with regulating and taxing interstate bev-alc sales and distributors, issued an industry circular last week basically saying, in our words, "Hey guys, after 75 years, we woke up and are shocked, shocked to find that there are a lot of trade practice violations going on out there …”

The circular goes on to chronicle the most common offenses, mostly tied-house stuff regarding the prohibition of giving stuff of value to retailers, no consignment sales, no slotting fees, and the like…

We've seen a flurry of increased enforcement actions by the TTB in recent months, and this circular seems to point to more aggressive enforcement…

Read more here.

How the Tennessee Wine v. Byrd SCOTUS Case Could Impact Wine Shipments

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As previously highlighted, the Supreme Court is considering a challenge to Tennessee’s residency requirement, which mandates that state liquor retailers must be residents of the state for 2-9 years before opening a store. As Liza Zimmerman recounts for Forbes, the case could have profound implications on interstate wine shipments:

For the first time in more than a decade, the U.S. government has shown a willingness to reevaluate how wine and spirits are sold, both within and between various states in the country.

In fact, the case of Tennessee Wine and Spirits Retailers Association v. Clayton Byrd (Tenn. v. Byrd) represents only the second such move by the high court since the repeal of Prohibition in 1933.

When Prohibition was repealed, the U.S. government decided that the safest way to regulate alcohol sales was by giving each state the right to decide how wine and spirits were sold within its borders. That resulted in a fractured legal arrangement in which almost every state handled the sale and shipment of drinks differently…

The biggest issue about the case is how the court may reevaluate the legal intricacies of interstate shipping. Retailers, with brick-and-mortar locations in distant states, had long been allowed to ship into other states. This was a right that most store owners thought had been set in stone by the 2005 Supreme Court case of Granholm v Heald.

However, as retailers in certain states and wholesalers began to worry losing a share of their revenue to out-of-state players, they put more pressure on shipping services such as UPS and FedEx to follow the letter of the law to the finest degree. As of a year ago, the bulk of major interstate shippers have been shipping into only 14 states and the District of Columbia….

Read the whole article here.