State by State - Control, Three Tier, De-regulation

[stevenstone]

In Washington currently, the state controls the distribution and retail sale of spirits (sells from the distillery are also allowed as long as local ingredients are used in the manufacturing). For a small craft distiller, the state will fill special orders (products not carried on the store shelves) as long as he/she can generate demand. Any bar, restaurant, or citizen can order a case of a distiller's product and the state will call and ask them to bring the necessary amounts to the distribution center.

With only 500 or so state stores that have limited hours, the public loses a little on efficiency and availability, but we the small distillers gain in terms of a level playing field and guaranteed distribution.

But, this might all be changing. We're facing two initiatives on the ballot this fall. Both will privatize the sale of liquor. However, the first I-1100 would also deregulate distribution such that manufacturers could sale directly to licensed retailers. The second initiative I-1105 is just like the first except that it maintains the three system. As you would imagine, there is big money at play. Costco is backing the 1st and big distribution companies are backing the 2nd.

The change to the Washington laws has the potential to cause a large amount of disruption and chaos to those of us that are operating in Washington. We are trying to understand how the changes will affect us. It would help to know how other states operate.

If you operate in state that allows you to self distribute, would you make a post or send me a message. I'd be interested to hear your impressions.

Alternatively, for those of you with far reaching distribution, which state do you think has the best laws with regards to the small distiller?

Regards,

Steven Stone

Sound Spirits

Seattle, WA

[Ralph at Tuthilltown]

Steve,

We've been doing a fair amount of work in NYS on this topic. Self distribution is permitted in NY for certain license classes, wineries, distilleries and brewers holding certain permits. We see this as a complete contradiction of the three tiered system. Furthermore, we can find no mention of the phrase "three tier system" in either Federal or New York State law. Not a single reference. Perhaps I'm missing it and someone will point me in the correct direction.

We've let our distributor manage interstate sales, relying on the distributor in each of the States to which we ship to deal with the State to State differences.

It is unlikely changes at the Federal level will affect individual States, since each has control of their own distribution laws and the call "States Right!" is quick to surface3 when the notion of Fed vs State control pops up.

We focus on the facts when lobbying, stressing the need for update of laws, the economic impact (get numbers), tourism development, small business support, agricultural development. Make the point this is NOT solely about alcohol. These other categories represent the full picture of the impact of small alcohol industry development on the State.

Ralph

[Denver Distiller]

What's in the fine print? The biggest issue in WA is the ungodly mandatory markup. What will the State excise tax be if either initiative passes? That's where I'd focus some attention.

Self distribution is key for two reasons. 1st, it's great for the start up phase. You can get your ducks in a row, and get the attention of a distributor by doing the heavy lifting for them. When you've established accounts, it's a no-brainer to pick you up as they don't have to expend any manpower, and boom, the distributor has added several hundred thousand dollars to their annual sales.

2nd, it gives you an out if you have a bad relationship with your distributor. Franchise States have laws that make it nearly impossible to switch distributors.

Hope you can find time to answer my question about excise tax.

Cheers.

[stevenstone]

What's in the fine print? The biggest issue in WA is the ungodly mandatory markup. What will the State excise tax be if either initiative passes? That's where I'd focus some attention.

The way I understand it, I-1100 would leave the "liquor tax" the same but eliminate the "mark-up" portion.

For I-1105, taxes are a big question mark. Basically, it will have the board recommend to the legislature by the end of next year a tax rate that will project to generate at least as much revenue as the current system.

[delaware_phoenix]

has added several hundred thousand dollars to their annual sales

Wow! I can only imagine what sales like this would mean!

But on topic, I'm a firm believer in direct sales. I'd like to be able to do that across state lines too, but that means that BT, FR, JB and all the biggies would get the same chance and that might not be as much fun nor as profitable.

[Denver Distiller]

The way I understand it, I-1100 would leave the "liquor tax" the same but eliminate the "mark-up" portion.

For I-1105, taxes are a big question mark. Basically, it will have the board recommend to the legislature by the end of next year a tax rate that will project to generate at least as much revenue as the current system.

I'd keep a very close eye on this portion of the program. In the current economic environment (i.e., States are going broke ) Legislators will go for as much money as they can get out of this change. As you know, your prices are out of this world in Wash. State. The worst thing that could happen to Wash. Distillers is for the markup and taxes to stay the same (or go up), and the level playing field is pulled out from under you.

In other words, you're currently getting the stuff on the shelf without giving away points or swag or FG's. If the big distributors get a hold of this system, that particular party is over, and you'll have to pay distributors for placements/sales in one manner or another. You may not have any room left to do this effectively without driving up your shelf price.

Correct me if I'm wrong, and the payola already occurs..... as it does in certain other control States.

IMHO, Costco will win big if either initiative passes. It's going to take a while for the mega-liquor stores set up shop. They'll be the only volume game in the State.

And they'll have 28 locations. Small wonder they're pushing this, eh? A small distiller would be able to keep the lights on by directly shipping to Costco, and only Costco.

One last thought: if it's not too late, push like hell to allow for in-store tastings.

Cheers.

[Ralph at Tuthilltown]

I'm conducting a very informal survey about States' regulation of alcohol. Love to hear from anyone with experience dealing with their State Legislature and/or regulators. If you are so inclined, please give your opinions on the following questions:

1. In your opinion, do you believe your State agency can be effective at regulating the production and distribution of alcohol in its current form (the "agency" form that is, whatever the form)?
   
2. How is your State Alcohol Control agency funded? (General fund, self-funded, etc.,?)
   
3. Do you believe individual States serve the public and promote alcohol safety effectively?
   
4. Is it properly funded and staffed sufficiently to meet the needs of the consumer and the industry in a timely fashion?
   
5. Are State agency personnel knowledgeable and helpful? And in that regard, are they consistent in their decisions and administration?
   
6. Are your State laws clear and current? ("Current" meaning current to 20th or 21st standard business, practices and the markets?)
   
7. Are the State laws consistent with Federal laws where the two overlap?
   
8. Can you identify any instances where States' laws would better serve the consumer and the industry if the States yielded, or relied upon Federal Standards rather than the variety of "standards" set by individual States? (For instance: All States basing their tax and reporting on a single agreed method such as all amounts of distilled spirits measured either as percentage of alcohol or as "Proof Gallons", or Liters, or Wine Gallons, etc.)
   

Not looking for lengthy answers. This is mainly to get a handle on your opinions of those who regulate your business and how their work, or lack thereof, meets the mandates set out by different States. I have limited experience with individual State agencies other than New York, and the experiences of those on the front lines dealing with the States in which they are attempting or have successfully opened and are marketing their spirits.

Ralph

[cowdery]

Beverage alcohol is unlike any other business in that the United States is not a single market with regard to alcohol sales, because the states have unusual control over how alcohol is sold within their borders. Although the three-tier system is not mandated by federal law, every state has chosen to impose it and opportunities for direct sales are very limited. That's why distributors are so enthusiastic about HR 5034. On the other side, the biggest producers and the biggest national retailers, both on and off premise, would love to cut out the middle man and do business directly.

There are distributors in other businesses, of course, but alcohol is the only business in which (with very limited exceptions) you are prohibited from selling directly either to retailers or consumers and must use a distributor. Cross-ownership is also supposed to be prohibited, but there are ways around that. Because the present system is so good for distributors they are very close to the state political leadership and will spend money by the boatloads to make sure they don't lose their monopoly.

One thing this means for small distilleries is 'think local.' Develop a business plan that concentrates on the state in which you are located. If you become successful enough to get the attention of a major distributor, they will help you walk across the state lines since most big distributors are now regional if not national. Ralph and others have done it but I'm sure they can tell you how difficult it was.