Support for Three-tier System

The introduction of the Comprehensive Alcohol Regulatory Effectiveness Act of 2010 (H.R. 5034) last week, also known as the CARE Act, was lauded by beer, wine and spirits wholesalers as a reinforcement of the 21st Amendment. Executives from both the National Beer Wholesalers Association (NBWA) and the Wine & Spirits Wholesalers of America (WSWA) applauded the bill, which clarifies the validity of the state’s rights in regulating alcohol sale and distribution.

The proposed bill comes on the heels of a letter signed by the attorneys general of 39 states and sent to Congress in March asserting concern over a recent rash of litigation brought by retailers and special interests seeking to “deregulate alcohol in favor of the very ‘one size fits all’ structure that the 21st Amendment rejected.” When imploring Congress to introduce the letter into the House Judiciary Committee hearing on Legal Issues Concerning State Alcohol Regulation, the attorneys general referenced the $1.5 million settlement paid by Washington State to Costco as a ruling that may cause other states to refrain from defending the three-tier system in hopes of avoiding such a settlement. They also cited the negative impact deregulation of alcohol has had on the United Kingdom.

While the Distilled Spirits Council of the U.S. stated its support for the three-tier system, the organization is questioning the value of a proposal it calls “fraught with unintended consequences.” According to a letter sent from DISCUS executives to members of Congress today, among the consequences of the proposed legislation are:
•    Each state could set their own labeling and formulation requirements so that a product sold in one state may end up significantly different from the same brand sold in a neighboring state.  This could lead to different formulations across the country greatly impeding interstate commerce.
•    A state could alter the longstanding Federal standards for Bourbon, a distinctive product of the United States, thereby obliterating 200 years of carefully crafted production quality and American heritage.
•    Beverage alcohol produced in one state could be given a tax advantage over products from other states even though the Supreme Court previously has ruled that such laws are unconstitutional.
•    A state also would be free to enact discriminatory laws, for example, by only allowing in-state products to have Sunday sales, tastings and other consumer convenience measures.

The letter goes on to state: “Claims that a supposed threat of ‘deregulation’ is endangering our states’ abilities to control the sale and distribution of beverage alcohol lacks any credibility in light of over 4,000 alcohol-related laws currently in force among the 50 states.  Decades of Supreme Court decisions enforcing the Commerce Clause and the 21st Amendment have actually strengthened the balance between state and federal oversight and have not led to the “deregulation” of alcohol at the state level.”

While these two tiers are apparently at odds regarding this legislation and Congress debates the future of the three-tier system, several of the 18 control states – in which the state acts as wholesaler and in some cases retailer of alcohol – are examining whether to move toward privatization. Washington, Virginia, North Carolina and Mississippi are each assessing plans to reform their respective systems, and New Hampshire is examining the possibility of leasing the state’s alcohol operation to a private firm. Maine took a similar route six years ago, leasing its operation to the Martignetti Companies.

Editor’s Note: As various government entities and courts examine the relevance and results yielded from the current distribution and regulatory systems in place, one thing is sure: the times they are a’changing. While these may seem like “out there” issues that don’t really affect you, how this all plays out will affect how you run your business, who you deal with to procure product and the level of taxation applied to spirits, wine and beer. So, stay tuned in to what’s happening in your state and at the federal level and get involved as you see fit.


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