HomeoFCGThe Future With the Three-Tier System Jeff Siegel December 19, 2009 FCG, Features 13 Comments If someone in New York wants a bottle of Finger Lakes Riesling they can’t buy it in a grocery store. If someone in Pennsylvania wants to buy a bottle of Chambourcin they have to go to a state-owned retailer. A Texan who lives in Houston can buy wine anywhere in the city; a Texan who lives in Dallas is limited to less than half of the city. Welcome to the wonders of the three-tier system, which is the system by which beer, wine, and spirits are distributed in the United States. More broadly, “three-tier” is the shorthand description for the legal framework that has regulated alcohol sales in U.S. And if it seems odd, disjointed, frustrating, don’t worry. It does to most people. “One of the reasons why I enjoy my work so much is the affect alcohol has had on American history,” says Richard Blau, a Tampa-area attorney who is considered one of the country’s leading authorities on the subject. One of his favorite anecdotes: that the Pilgrims landed at Plymouth Rock because they had run out of beer. The cornerstone of the three-tier system is the 21st Amendment, which repealed Prohibition and specifically gave the states the authority to regulate alcohol sales any way the states wanted to do it. The 21st Amendment states, in Section Two: The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited. This has resulted in 50 laws in 50 states. Some states regulate pricing. Some states limit liquor licenses. Some states mandate dry areas unless voters petition for a change. Some states allow direct shipping, while others forbid it—even within the state. It’s so confusing that Wine.com, the leading Internet retailer, only sells wine in some three dozen states. The only consistency, really, is the three-tier system, which exists in some form in every state. In the three-tier system, consumers (with some exceptions) must buy wine from retailers (or restaurants), who must buy from wholesale distributors, who buy from the producers. Retailers can’t buy direct from the winery and consumers mostly can’t either. Say what you will about the system, says Blau, but in 1933, when state officials were looking for a way to regulate alcohol after Prohibition, it was the best thing they could find. And, since then, it has done what they wanted it to do—made it easier to collect taxes, to regulate alcohol sales, and to prevent the corruption and abuses that existed between manufacturers and retailers before and during Prohibition. (The ability of individual states to pass and enforce their own liquor laws was really a compromise negotiated into the language of the 21st Amendment, assuring temperant, or “dry,” states that they could remain so while allowing for the repeal of the 18th Amendment. The language was later used to defend the three-tier system, created for the reasons noted above, against Commerce Clause challenges.) But that was 75 years ago. Why are we still using the three-tier system today? Generally, you’ll hear three reasons: The states don’t want to give up the ability to collect taxes efficiently and easily. It would be much more difficult, says this argument, to get payment from out-of-state manufacturers. Alcohol still needs to be controlled, from both a moral and legal standpoint. In this view, Mothers Against Drunk Driving, which advocates tougher liquor laws, is the offspring of the Women’s Christian Temperance Union, which was influential in passing Prohibition. And state governments still see a need for three tiers, which offers them an extra tier in which to regulate alcohol. The system works best for those who have the greatest financial stake in it—independent retailers, the distributors who sell wine to all retailers, and the legislators who write the laws and get campaign contributions from the first two groups. So why would they want to change it? Is one of these reasons more true than the other? Or are there other reasons? It almost doesn’t matter. Even if the three-tier system seems antiquated by the standards of the 21st century, it’s a legally protected antique. Save for the Supreme Court’s Granholm decision in 2005, which loosened state regulation of direct shipping, the Court has consistently ruled in seven decades of cases that when the 21st Amendment says states can do whatever they want, it really means they can do whatever they want. As recently as 1966, in Seagram & Sons v. Hostetter, the Court said that the 21st Amendment “bestowed upon the States broad regulatory power over the liquor sales within their territories.” Even in Granholm, which was seen at the time as a great victory over the 21st Amendment and has seemed less so since, the ruling majority never disputed that the 21st Amendment’s grant of authority to the states. They just took exception to one small part of it. Not even Costco could change the system. The giant retailer sued the state of Washington in 2004, arguing that the state’s regulatory system, based on three-tier, was anti-competitive and violated federal law designed to limit monopolies. Costco won at the district court level, but a federal appeals court overturned that ruling, citing the 21st Amendment. So where does that leave the three-tier system today? Pretty much where it has always been, say a number of people on both sides of the issue. Groups like Free The Grapes are working at the state and federal levels to loosen three-tier in regards to direct shipping, but have had mixed success. One case working its way to the Supreme Court, in which retailers supported by The Specialty Wine Retailers Association want to use Granholm to allow them to sell across state lines, may not be as successful, says Blau. The states, stung by their loss in Granholm, have regrouped and refocused their efforts to protect their rights, and may even get the court to reverse part of Granholm. That puts the burden on state legislatures, which have been reluctant to change the status quo. New York, despite a multi-billion dollar fiscal crisis, this year again rejected wine and beer sales in grocery stores. In Tennessee, a panel formed to study the state’s alcohol control laws says it’s in no hurry to make changes. Which means we’ll just have to get used to buying wine the same way we always have. — Jeff Siegel writes the Wine Curmudgeon blog, is the wine writer for Advocate magazines in Dallas and the Star-Telegram newspaper in Fort Worth, Texas, and freelances about wine for a variety of regional and national magazines. His philosophy is simple: The wine industry tries to intimidate consumers instead of educating them—and nuts to that. Wine should be fun, not intimidating. Pingback: Tweets that mention The Future With the Three-Tier System : PALATE PRESS -- Topsy.com Pingback: uberVU - social comments http://www.1winedude.com 1WineDude Noooooooooooooooooooooooooooooooooooooooooo!!!!!!!!!!!!!!!!! Max I thought that Monopoly was illigal in this Country. At the end we consumers are being penalized, we have to pay at least 40% more than the actual price and not always we can find the wine we’re looking for. Also the industry is in the hands of those huge distributors (Souther, Glacier) that control the industry and they do not care about the wine, they only care about what brings more $$$$$ and not quality. The whole system has to be changed. http://www.palatepress.com David Honig Unfortunately, Max, “monopoly” under the Sherman Anti-Trust Act does not apply to industries, but individual businesses. In other words, while distributors have a monopoly, no individual distributor has a monopoly that would violate the act. http://www.alfonsocevola.com Alfonso Christopher Kimball (America’s test kitchen) recently said this and it is priceless,” The world needs fewer opinions and more thoughtful expertise”. Max, you really need to wrap your head around the scale of the wine business in America. It isn’t about Southern or Glazer’s and it isn’t about what little ‘ol you or me wants. It’s not something you can easily vilify and if you do that won’t move the argument forward. It is about how the politics of a democracy work, right or wrong. Whether it puts you in the winners circle or losers seat. Don’t like the law? Work to change it. But there are thousands of industry workers (I am one) who do love quality and wine and the wine business. And to demonize the industry (and all of us in it) is not an argument that will change legislation or wine the hearts and minds of the majority. Merry Christmas! wineshine Well put Alfonso. As a member of the industry, specifically, a supplier, I can also comment in support of the three-tier system with regard to product knowlegdge, and appreciation. I have been involved in the wine industry for over thirty years. In that time, I’ve seen consumer awareness of wine grow tremendously, but sadly, their knowledge of the process of winemaking, vineyard practices, and the fundamental substance of origin, and differnet grape varieties has lagged in proportion immensely. I’ve actually had a consumer engage me in conversation on winemaking by starting out with, “okay, you start with water, then what?”. What I’m saying is that, if all the consuming public wants is a good buzz from something that they can palate, it doesn’t matter how many hands touch the wine before point of sale. Witness the full-blown singles parties that most “wine festivals” have become. But if we truly want to educate the public regarding the amazing art of winemaking, and the bountiful choices they have, then the distributur tier plays an invaluable role in educating retailers and waitstaffs, which in turn is passed on to the public. We the producers can’t get to everyone, but the distributor tier can. The retail community has also done a great job of taking their wine knowledge “to the floor”. They’ve visited our vineyards, and taken certification courses, and have taken a much more proacitve role in advancing wine knowledge. I’d like to think that we suppliers have been helpful in that respect. http://www.mbbwl.org Tom Anyone who wants to help change the laws may want to start locally. Here in Maryland we have Marylanders for Better Beer and Wine Laws mbbwl.org as the local consumer, grass roots efforts to make a difference. Our top agenda item is to allow the consumer the right to buy wine on line and have it shipped to their homes. This change does not really threaten the existing 3-tier system here, it just allows a small group of wine lovers a chance to buy what that system can not and does not deliver, which is access to small producers. Yes, we can make a difference, but it will take time and persistence, money, and connection with local legislators. If you are willing to help us, if you are local, please consider donating your time to help us. If you are so inclined a small donation of the cost of a bottle ($20) via pay-pal would be greatly appreciated from anyone! By the way, other laws that we support for the upcoming session include the right for restaurants to allow corkage, and the right for farmers the right to sell their wine at farmers markets. Cheers! Pingback: Good Reads Wednesday « Artisan Family of Wines Pingback: Let the Wine Flow | Progressive Fix Pingback: The Best Fine Wines » The Future With the Three-Tier System : PALATE PRESS Tom Wark I think there is a vital question that needs to be answered, particularly where the legal dimensions of the three tier system are concerned: What is the “Three tier system” at its most basic? What do all systems have in common? I believe it amounts to two simple things: 1. Directly the flow of wine from producer, to wholesaler to retailer 2. Prohibiting Tied Houses (cross ownership between the tiers Everything else isn’t part of the “three tier system”. Everything else are simply state regulations that are subject to adherence to the federal laws and the Constitution. Are producer tasting rooms inherent in the three tier system? No. Is delivery of wine by producers and retailers to consumers inherent in the three tier system? No. Is price posting an inherent part of the three tier system? No. A state can’t just do whatever it wants, willy nilly and call it their privilege based on the 21st amendment. There are limits. The most obvious limitations occur when states use their supposed right to regulate alcohol to interfere with interstate commerce. Tom Wark Alfonso, It is fair to point out (demonize?…OK) that wholesalers work day and night to restrict how producers and retailers can get more of this great wine being produced to consumer. Currently they are spending millions to assure that wine retailers have no commerce clause protections against state based discrimination of interstate commerce. Millions! It moves the political debate to point this out. It’s part of the democratic process to point out who is doing what and to whom.