Election Day Alcohol Tremors?

By Dr. Angela Logomasini

If you live in Michigan, you can’t order online from wine retailers in other states, at least not if you want the wine shipped to your door. But action this Election Day far off in Washington State may send tremors across America by cracking open the anti-consumer, anti-competitive alcohol regulations there. Entrenched interests — particularly alcohol wholesalers — appear frightful that they will be the ones to suffer from government withdrawal from the industry. But if enthusiasm for such freedom becomes contagious and spreads to other states, consumers will reap the benefits.

Washington state’s initiative strikes at the heart of a government enforced three-tier system for distributing alcohol, which is common in most states. Such a system requires alcohol producers and importers to sell only to wholesalers, who in turn are the only source from which retailers may purchase their inventory. Most states also ban “vertical integration,” preventing any single company from owning and operating businesses in more than one tier. 

This system surely benefits the middlemen — alcohol wholesalers — by ensuring they get a cut in the profits on every sale. But it’s bad for everyone else. This arrangement puts small producers of beer, wine and spirits at a significant disadvantage because most distributors prefer to sell brands with large volume and name recognition. That means many don’t bother to include products from relatively small, less established producers in their portfolios or they don’t push them very hard when they do. In the end, it means less choice for consumers.

But cracks have emerged within the three-tier system during the past decade. A major blow came in 2005 with the Granholm v. Heald U.S. Supreme Court decision. This case addressed laws in Michigan and New York that applied different treatment to in-state and out-of-state wineries seeking to ship to state residents, which the Supreme Court ruled unconstitutional.

The court explained: “state laws violate the Commerce Clause if they mandate ‘differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.’ … States may not enact laws that burden out-of-state producers or shippers simply to give a competitive advantage to in-state businesses.” 

James Madison and other Constitutional Framers included the Commerce Clause to prohibit special interests from advancing protectionist state policies. In Granholm, the court ruled that the 21st Amendment, which includes a provision affirming states’ rights to regulate alcohol, did not override the Commerce Clause or other provisions of the Constitution.

The Granholm decision caused many states to open their doors to direct wine shipping, including Michigan. Alcohol wholesalers fear that these deregulatory trends could eventually break the government-enforced three-tier system.

But questions remained regarding how far the Granholm case reaches. Specifically: Does it apply to retailers who seek to ship wine (or other alcohol for that matter) across state lines?  Wholesalers might be willing to tolerate such sales from wineries to consumers as long as they remain relatively low, but retailer sales could be more substantial. For example, if California retailers — who are not subject to three-tier mandates — can buy their inventory directly from wineries and ship nationally, wholesalers could lose substantial business.

Since 2005, several district-level and lower courts have considered the question of retailer shipping, producing conflicting results. In a Texas case, the courts maintained that Granholm protects winery-to-consumer shipping only, allowing the state to discriminate against retailers located outside Texas. In Siesta Village Market, LLC v. Granholm, a district court came to a different conclusion, holding that the validity of the three-tier system does not justify discrimination against shipping from retailers located outside Michigan. The final verdict will only come when the Supreme Court decides to hear this case. 

In Michigan, the state Legislature found a distressing — and constitutionally questionable — loophole to prevent retailer shipping, banning in 2008 the shipping of wine from interstate commercial carriers like Federal Express and UPS. Wine retailers can only ship wine to Michigan residents in their own vehicles, effectively preventing any out-of-state retailers from shipping to Michigan residents. 

Come election day, the issue is yet again in contest, with Costco Wholesale Corp. leading the campaign for change. Costco’s primary interest in this case is not direct shipping per se.  Instead, a number of state laws that enforce the three-tier system prevent Costco from effectively implementing its wholesale model, which involves direct purchasing of  large volumes of product at discounted prices, central warehousing, and eventually delivering to its retail outlets where cost savings are passed on to members of its wholesale club.

Costco had already won the right in court to buy alcohol direct from both in-state and out-of-state wine producers, skipping wholesalers altogether. But laws barring them from buying direct from the spirits industry and against central warehousing of alcohol undermine their model. The initiative they support in Washington state would solve their problems by essentially breaking the three-tier system. Specifically, the initiative would do the following: sell off government-owned liquor stores to the private sector; allow private ownership of the former government stores; grant licenses to sell spirits in retail outlets with 10,000 or more square feet (i.e., large box stores and supermarkets); allow producers of spirits and wine (not beer) to sell directly to retailers; and allow retailers to centrally warehouse alcohol. It also imposes some hefty taxes on spirits to make the initiative revenue positive in a state that is suffering budgetary imbalances. Jason Mercier, offers more details in a publication for the Washington Policy Center.

These changes are a big step forward not only for Costco, but for consumers. No longer will Washington consumers need to make a separate trip to some government liquor store located off the beaten path. They will have the convenience of picking up their whiskey, wine and hamburger patties in one location and at potentially lower prices.

Of course, political considerations mean the initiative isn’t perfect. First, the excessive taxes on spirits are hard to swallow. And the limitation of spirit sales to only big box stores and privatized formerly government stores limits the number of liquor retailers. Perhaps most egregious is the fact that the initiative doesn’t cover beer. Because of the very strong beer distributors' lobby, beer producers must sell all their products through the three-tier system.  If the initiative is successful, it could build pressure for change on that in the future.

The first two of these drawbacks were introduced to help make the initiative more appealing to voters. A similar 2010 initiative failed because it posed a negative cost to government coffers and because of arguably unfounded social/temperance concerns about allowing mini-marts to sell alcohol. With these changes, polling suggests that Costco may eventually win. 

If so, might Washington state produce a domino effect? The prospects for change elsewhere are better if they do, especially if Costco decides to take their battle to other states. Joe Gilliam of the Northwest Grocery Association and Costco’s representative in Washington told the press that if the initiative succeeds, "I think there will be an initiative in Oregon" to attack its liquor monopoly. 

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Angela Logomasini has a Ph.D. in American Government and is a Senior Fellow at the Competitive Enterprise Institute and blogger at winepolicy.com. She is author of A CARE-less Rush to Regulate Alcohol: Wholesalers Attempt to Secure Regulatory Fiefdoms (2011), available on cei.org.

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See also:

Present Day Prohibition

200-Proof Readings to Accompany Ken Burns’ ‘Prohibition’

Liquored Up: Michigan Government Should Exit Its Liquor Wholesale Business