Turning the Tide on Corruption in Wine, Beer and Spirit Sales

Posted by Tom Wark on Jul 9, 2018

An amazing thing happened recently in, of all places, Texas. Both the Texas Democratic Party and the Texas Republican Party, at their annual state platform conventions, called for the elimination or complete reform of the Three Tier System of Alcohol distribution in Texas in their individual party platforms.

Credit for this rather remarkable political (and popular) victory goes to CraftPac, the political action committee of the Texas Craft Brewers Guild, whose members have been denied direct access to the consumer market.

At its most basic level, the Three Tier System of alcohol distribution is a state-based regulatory regime that creates separate licenses for producers, wholesalers and retailers. In general, no entity may hold a license in more than one of the tiers. So, a producer may not be a wholesaler and a retailer may not be a producer. When originally created in the 1930s after Prohibition ended, this separation of the tiers was put in place to promote two policy goals: 1) prevent producers from exerting controlling influence over retailers as occurred prior to Prohibition and which led to socially harmful retail marketing practices and 2) make the collection of state excise and sales taxes more efficient.

In addition to prohibiting a single business from holding licenses in more than one tier, states also generally prohibited producers from selling directly to retailers and consumers. Producers were required to only sell their products to wholesalers, retailers were required to only buy their inventory from wholesalers and consumers were only able to purchase directly from retailers (including restaurants and bars).

While this system may have worked back in the day when the number of producers was relatively few and wholesalers were relatively many, in today’s marketplace where the number of producers of alcohol has exploded, these strict requirements have resulted in a system of regulation that gives wholesalers the ability to dominate the marketplace and decide winners and losers. 

Put another way, the same corrupt system that existed prior to Prohibition and which the Three Tier System of developed to prevent, is now guaranteed by that very system.

Preventing any one entity to hold licenses in more than one tier isn’t the worst idea in the world. At the very least it results in a more efficient way to collect the important taxes that result from alcohol sales. However, the continued legal prohibition on producers selling directly to the consumer either for take-home sales or for on-premise consumption and prohibiting retailers from purchasing directly from producers around the country no longer serves a reasonable policy goal. 

Occasionally, a state will entertain legislation that breaks down these prohibitions to whom producers may sell to and from whom retailers may purchase their inventory. When that happens, wholesalsers—the middleman in the traditional Three-Tier System, argue that any such change would be allowing producers to act as both producers and wholesalers. But of course, this isn’t true. Producers don’t sell multiple brands as wholesalers do. They only sell their own brands. And allowing producers to sell directly to the public for on-premise or off-premise consumption doesn’t make them retailers because, again, they are not selling multiple brands. They are only selling their own.

In fact, the only possible policy goal that would justify a legal mandate that producers sell only to wholesalers and retailers only buy from wholesalers is to protect the economic stability of the middleman. There is another word for this kind of policy goal: Corruption.

Over the past five election cycles, Texas wholesalers have given more than $15 million to state politicians. As a result, In Texas, manufacturing brewers may not sell directly to consumers for take-home sales. Additionally, Texas brewers making more than 225,000 barrels of beer must sell their beer to wholesalers, then buy it back from them, before they can sell it to consumers for on-premise consumption. It’s understandable why the Texas Craft Brewers Guild has chosen to spend money on an all-out lobbying campaign to change the laws.

In New York, consumers may not purchase wine, beer or spirits from out-of-state retailers and have it shipped to them.  In Michigan, retailers may not buy wine, beer or spirits from out-of-state producers. In most states, a consumer may not have a bottle of spirits shipped to them from a distiller in their own state or from outside their state.

As the platform adoptions in Texas demonstrate, politicians understand the benefits of free trade and a regulatory structure that does not support rent-seeking and protectionism. Yet something happens to these same lawmakers and political activists when money for campaigning comes into play. All sense of right and wrong goes by the wayside. Wholesalers understand this dynamic and with the protected status they have purchases they are able to entice lawmakers to keep in place that protected status and you get a terribly corrupt wheel of protectionism that goes round and round.

The only solution to this problem of political corruption and out-dated alcohol regulatory schemes that currently deform the alcohol market and consumers alike is lobbying, litigation and consumer involvement. Activism. In a country that is not desperately split into camps that pursue “resistance” and “Swamp Draining” it can be difficult to get lawmakers and consumers to focus on what is seemingly the insignificant issue of “alcohol law reform”.

However, despite this challenge, there is the CraftPac in Texas. There is WineFreedom. There is Free the Grapes. There is the National Association of Wine Retailers. There are lawsuits in various states challenging severely archaic, anti-consumer and market-demeaning laws. And now there are two important political parties in Texas that have called from the dismantling and reform of the state’s Three Tier System.